With the COVID-19 pandemic in our midst, our government has yet again made another hurried and fishy pronouncement which has re-enabled the use of the United States dollar which they had banned only 9 (nine) months ago.
The re-introduction of US$ into the economy has mainly been reactionary as the government gets into a panic mode because of various reasons including the fact that the major source of forex which is diaspora remittances will be heavily affected during the lockdowns being imposed by various countries.
Even though it is common knowledge that in any functional economy, policy consistency is the key to success, our government seems to think otherwise as they have been making confusing policy pronouncements over the past two years, driven by corruption and greed.
I am going to outline what the press statement by the Reserve Bank of Zimbabwe means and the implications that it has on the wider economy as well as to businesses and the general public.
Below are the 4 major sticky points for me:
- THE GOVERNMENT HAS ALLOWED THE USE OF FREE FUNDS FOR LOCAL PAYMENTS
My first question to them is: Can someone walk into the bank and withdraw USD from their Nostro Account? Personally, I don’t think that the government will allow people to withdraw USD because they know people will clean up their Nostro accounts. However, this would have been the major boost of confidence for people to trust that the policy above is genuine. Another question which they need to address is: Will they be allowing cash purchases or its just free funds? If the measure is only for Nostro, it makes the whole process another heist of the Nostro accounts.
By allowing the use of USD as a currency, there will be a lot of implications for the economy. Firstly, the economy is going to slowly transition from being a cashless economy to being a cash (USD) economy as long as this policy is in place and by end of the year, the economy would have fully re-dollarised. The thorn in the flesh for the government when the economy becomes a cash economy is that a cash economy is difficult to monitor and to earn revenue from compared to a cashless economy. Such a development will lead to the shrinking of government revenue because there is a potential for a lot of unrecorded/unaccounted transactions in the economy as people and businesses try to evade tax.
This, therefore, means that at one point the government is going to revert back to banning the USD and letting the already dead RTGS become the main currency or the unlikely option of making the USD the sole functional currency again.
Given the lack of trust that people and businesses have on our government, customer deposits into banks will be very low and this will mean that the government has a few USDs to play around with. Most businesses will either store value in hard cash or offshore accounts. Also bear in mind that the amount of free funds currently in banks is a very small fraction of the total cash (USD) in circulation on the parallel market
The solution to this huge problem is customer confidence which is currently almost nonexistent. Unfortunately, the solution to the customer confidence problem is political will and good governance of which our political masters have for a long time dismally failed to show forth.
- GOVERNMENT HAS SUSPENDED THE “MANAGED FLOATING EXCHANGE RATE” AND FIXED THE EXCHANGE RATE AT 1:25
In my previous article on this platform, I contested that there is nothing such as a “managed floating exchange rate”. I predicted that the black market will continue to thrive and this has been the case. The government had to give in and remove such a policy because it showed a lack of understanding of economic fundamentals.
Now that the government has explicitly fixed the exchange rate between the USD and the RTGS while allowing the use of the USD, it marks the beginning of the death of the RTGS. We are going to see businesses demanding USD and the black market thriving until the USD becomes the official currency again.
Fixing the USD to RTGS rate will also see those in higher powers who can get USD at interbank rates benefiting heavily and feeding the black market with forex at a huge premium.
The solution to this problem is the same as that of Point 1 (One) above, which is customer confidence.
- REDUCING OF STATUTORY RESERVE RATION FROM 5% TO 4.5%.
The RBZ has also reduced the amount of deposits banks are supposed to keep as reserves in order to increase the lending capacity of banks to corporates. This would have been a noble idea in a transparent functional economy. It is a public secret that the majority of businesses with access to such facilities from banks are those owned by or linked to corrupt politicians. This then provides another opportunity for looters to loot through loans.
As such, a proper framework and a robust vetting system should thus be put in place in order to enable banks to thoroughly review businesses that they want to lend money to and then the priority should be given to key economic drivers without favour.
- THE ISSUANCE OF OPEN MARKET OPERATIONS (OMO) CORPORATE BILLS.
These bills have been used to steal from companies quite a number of times and I hope companies are now wiser. Currently, no wise company will buy bills from the government given the current world economic status.
After the COVID-19, most economies including first world counties are going to require bailouts and because of that, it is important to understand that a bailout can only succeed with a strong currency and we all know that the RTGS is not a currency at all.
That is the reason why the government has made this panicky policy which is half-backed and rather too late.
If our nation is hit by this virus very hard like what’s happing in Europe and recently in the United States of America, our economy will collapse and need resuscitation.
Unfortunately, the RTGS will not be able to do that job since it is not bankable anywhere in the world and this means that we will need a stronger currency like the USD, which is the reason why there has been this sudden shift in policy by our government.
In conclusion, our economy is like an ailing human body whose organs are failing one by one until the body shuts down. We are nearing the shutdown and as such, immediate genuine attention is required to save the little that’s left to talk about in our economy.
By Gilbert Kamusasa
Tony Elumelu Foundation Alumni
Young African Leaders Initiative Alumni
SEED STARS Alumni