OFFICIAL VS CITIZEN ECONOMY IN ZIMBABWE - reading the crystal ball by looking into the rear view mirror

As a student of policy making in Africa for nearly 40 years, I have learnt to apply a two-step process when giving policy advice.  One: can I accurately predict the cause-and-effect six steps from the time a policy decision is made?  Two: if the answer is yes, then I recommend to implement the policy; but I recommend to revisit the policy measure if the answer is no.

In the last week, I have watched the queues grow inside Banks and at ATMs, and then they vanished by the ATMs – they had ran out of cash and everyone who needed cash in Harare has had to either join long queues inside the banks or resort to a few emerging informal means.  This has taken me back to 2006-08 during the hyper-inflationary days in Zimbabwe – and the citizens seem to be falling back into the very Zimbabwean strategy of “making a plan”.

It is always difficult to prepare for the future by looking in the rear view mirror to predict tomorrow; but as we are in unchartered waters, I have only the past to help me read the crystal ball on the future evolution of the Zimbabwe economy. 

On 4 May 2016, the Governor of the Reserve Bank of Zimbabwe (RBZ) in a press conference announced a set of measures meant to address emerging economic problems in the multi-currency monetary system (nearly 100% dominated by the US$) in Zimbabwe.  Two days earlier, the International Monetary Fund (IMF) in Washington DC had just completed a Board meeting where the decision was made to continue the constructive engagement that has been under way for over six years towards a debt clearance program.  In spite of the usually close collaboration between IMF and Central Banks, the decision of May 4 was apparently not communicated to the IMF (a bad strategy when trying to maintain trust between “partners in development”).

After the hyperinflation period that ended in 2008 and Zimbabwe abandoned the Z$, confidence in the banking system (including the RBZ) was the major casualty.  Since February 2009, a major conversation guaranteed to leave Zimbabweans terrified about their economic future has been any discussion of re-introducing the Z$; and Government has consistently reassured the population that the Z$ will only return when the economy is sufficiently recovered and confidence restored.  So when the RBZ Governor on 4 May 2016 promised to introduce Bond Notes (backed by a loan of US$200 million) and reassured the citizens that a Bond would be at par with the US$, nervousness gripped the market.  Once the Governor explained that half of export proceeds would be channelled through the Reserve Bank, the citizens recalled a similar practice in 2008 – and nervousness turned into panic; made worse by an announcement that cash withdrawal limits would be severely curtailed in order to stop outward US$ cash flows out of Zimbabwe.

On 5 May 2016, commercial banks started dealing with irate citizens wishing to close their accounts and empty all the cash they had; but could not if the account had more than US$1,000 (maximum daily withdrawal limit).  Queues for cash at banks started building up slowly, but grew longer as Banks failed to even meet the daily withdrawal limit allowed by the RBZ.  By 31 May 2016, one international commercial bank had closed most of its ATMs and set a US$300 daily withdrawal limit for individuals and was even suggesting that a weekly limit of US$500 be put in place; while a second international bank had introduced a US$500 daily limit and a new rule that customers would have their identity documents inspected before they could withdraw money from the ATM.  My three-day attempts to withdraw cash from the ATM ceased after realizing that the ATMs were always out of cash whenever I went there.

So how did we end up with low reserves of US$?  First, the country imports twice what it exports; so the banking system has experienced short-term cash shortages while waiting for remittances and other inflows to build up.  Secondly, Government has resorted to issuing Treasury Bills - a promissory note while available cash is used to meet expenditure needs – only to make the cash shortage worse.  Thirdly, the fifteen-year economic decline has left the economy poorly placed to cope with declining global commodity prices. 

The market had over time adjusted and worked around this steadily deteriorating cash shortage – until unusually long bank queues towards the end of April 2016 convinced the Government that action was needed: and the press conference of 4 May was held.  With Treasury bills sucking the limited US$ out of the system, the electronic money transfer system operated by the RBZ to facilitate external payments found itself without the resources needed to fulfil customer requests, and importers of raw materials found themselves in trouble; and shortages of some commodities are re-appearing – a pre-2008 phenomenon.

Low exports have resulted in low US$ inflows, high imports have led to high US$ outflows, and the demand for US$ around the region has put more pressure on available cash as traders and other travellers come to Zimbabwe to collect US$ from their international accounts or from the sale of goods.  Commercial banks, suffering as a result of low economic activities in the country cannot bring fresh US$ fast enough to meet the demand, but the market had until 4 May adjusted to this strange equilibrium.

As citizens watch the bank queues and empty ATMs while they are unable to access cash in the bank, they have resorted to electronic transfers using credit cards and mobile money transfers for local payments.  The RBZ has in the past been trying to promote increased use of electronic payments (“plastic money”) without success, but now it seems to be succeeding.  The policy is working, but firstly, it is estimated that Banks were early this year holding deposits worth US$4 billion and although there are no figures of how much has been withdrawn from Banks this last month, it is small on account of limits set for daily withdrawals.  Nevertheless, there is evidence that inflows are lower than outflows – leaving fewer resources to cover local electronic payments; and certainly inadequate for foreign payments.  Secondly, electronic payments will continue to have a positive impact until customers try to turn the transfers into cash and they find out that they cannot – and the downward trend will set in.

As long as daily withdrawal limits are low and exporters continue to bring US$ into the economy through the RBZ, some resources will remain available to cover local electronic transfers.  This is the economy the RBZ can keep an eye on and regulate, but it is bound to be a declining economy as outflows continually exceed inflows.  With the Bond Note promised for October 2016, the theory is that this local money will stabilize the official economy by fuelling it with money that cannot be converted into external US$.  This scenario assumes that those selling goods will continue to accept the Bond Notes and will not devalue it to the extent of the currency becoming a liability.

The prognosis does not look good.  Already, the market is charging anything up to 15% on US$ cash for those wishing to lay their hands on hard cash in exchange for bank electronic transfers.  With the Rand having suffered a similar fate since it hit the skids and depreciated, it is difficult to see how a Bond Note backed by US$200 million in a US$12 billion economy can avoid the fate of a Rand backed by a US$330 billion economy or even the US$ backed by an US$18 trillion economy.  Back in 2008 when there was a local cash shortage in the market, the cash premium was so high that an electronic transfer of Z$ for US$100 at the parallel market rate was enough to purchase a new pick-up truck worth $20,000 from the RBZ at the official Z$ exchange rate.  It would be prudent to assume that the official economy will decrease rapidly during the remainder of 2016 unless new market-driven monetary policy measures are put in place; and bureaucratic-driven policies could even accelerate the decline in the official economy.

This leaves us with the real economy – where goods are exchanged for hard US$ cash; and in some instances for the Rand when dealing in consumer goods from South Africa (even though the story is that South African traders also prefer to be paid using the US$).  It is estimated that the real economy – which is citizen-managed – is worth about US$7 billion; and this can only grow if remittances, money withdrawn from the banks, and incomes from unofficial trading all flow into this economy

It is unrealistic to expect a shrinking official economy (driven by the dwindling bank deposits of US$4 billion) to match or even overtake a growing citizens economy of US$7 billion).  Any resistance to or rejection of the Bond Note by the market risks it going the way of the Z$ in 2008, and would put bank deposits at risk of becoming unusable – and put the official economy at risk.

In the short-term, the “pre-May 4 situation” can be restored by policy measures, but a “future scenario” would have to wait until production in the economy, local investor confidence, and an enabling business environment are restored.   While waiting for the restoration of these economic production measures, the continued integration of Citizens’ Economy into the regional and global economy is like to continue.  This is likely to push more Zimbabweans into the international labour and trade markets to earn the required hard currency incomes.

The idea of a predictable six-step cause-and-effect approach to policy making should give the policy implementer a chance to make adjustments if by step 3 the policy is not working; or to even consider abandoning or radically altering it if poor performance persists by step 4. With the policies of 4 May 2016, I would say we are at step 2 and the results are mixed.  The next step will be critical and I am not sure what predictions policy-makers made during the period they formulated the policy.