In a report by the Sunday News, Eddie Cross a member of the Monetary Policy Committee (MPC) has said that Zimbabwe we will be getting ZWL$50, 100 and 200 banknotes.

“The only new note which is due to come in shortly is the $50 note and I’m not certain when that is going to be available but it is in the process of preparation. There are already plans to introduce some higher denomination notes this year.

Some time ago we made a decision in the MPC to introduce new $200, $100 and $50 dollar notes. I understand that this is being dealt with by the Governor working with the President because the President has to approve the designs and everything else.

But I understand that the $50 note will be available early in the New Year.”

Eddie Cross via Sunday News

So why is this finally happening…

The RBZ’s hand was forced because of the runaway inflation that has caused prices to increase which quickly diminished the utility of the ZWL$2, 5, 10 and 20 notes. To say quickly diminish is a little bit of an understatement because if you wanted to buy anything in ZWL$ banknotes you would need to carry a bag full of them.

Higher domination notes are also being introduced in order to reduce bank queues. However, Edgar Muhoyi, a lecturer in the Department of Economics at the University of Zimbabwe says that the RBZ should look into increasing withdrawal limits:

“The other thing the RBZ should look at when they introduce these higher denomination notes is to increase the individual withdrawal limits so that one does not need to go to the bank regularly.”

He also went on to remark on the cash shortages saying that it isn’t all to do with higher demonination notes but more about the physical cash in the economy.

“Money supply in the market has not been adequate and this will not be addressed by injecting higher denomination notes. This can only be addressed by the quantity of money in the economy.

The RBZ should inject a proportion of money which is equivalent to a certain percentage of the country’s Gross Domestic Product into the economy and this will be a better way of addressing the cash shortages.”

A little too late?

As mentioned before, if you wanted to buy in ZWL$ cash then you would have to carry a lot of money to do so. The inconvenience of that forced many Zimbabweans to use electronic money (local currency accounts and mobile money) or US$ to transact. Even with the introduction of higher denomination banknotes, I don’t see many departing from using electronic money or US$.

This is made worse because we are reportedly being drip-fed these notes starting with the ZWL$50.00. Looking at the price of bread, for example (ZWL$77.49), that banknote is far below its value. And by the time the rest come out, they may have missed the window where they could have been useful.

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The Reserve Bank of Zimbabwe (RBZ) has announced that it will be selling forex to registered Bureaux de Change operators to increase access of funds through the formal channels.

The statement reads as follows:

PRESS STATEMENT

ENHANCEMENT OF ACCESS TO FOREIGN EXCHANGE BY SMALL-SCALE

Pursuant to the resolution of the Monetary Policy Committee directing bureaux de change to actively participate in the foreign exchange market to meet the foreign currency needs of small-scale enterprises and individuals, the Bank shall, with effect from 21 April 2021, sell foreign currency to registered bureaux de change for on-selling to their customers.

The bureaux de change must comply with the agreed terms of engagement which include supporting small transactions up to a maximum value of US$500 per transaction. All transactions by participating bureaux de change will be monitored through the Bureau de Change Transaction Reporting System put in place by the Bank.

This arrangement is expected to improve the efficacy of the foreign exchange market in the country and enhance the accessibility of foreign currency by the small-scale enterprises and Individuals through formal channels

John. P. Mangudya

RBZ via Twitter

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We get it, the days when cryptocurrency was the preserve of nerds are now long gone. Even though the number of people involved in the trade of cryptocurrencies is still very small in my estimation (a few thousand maybe) these days cryptocurrencies are pretty much mainstream.

Despite their growing familiarity with the subject of cryptocurrencies, most people are still bystanders and have questions. The most popular question I often hear many people asking is how do I buy Bitcoin? Where do you get it? Is there a place where you walk in, swipe and they give you Bitcoin?

The RBZ tore it all down

Unfortunately, that is no longer possible and we have the RBZ to thank for that little predicament. There was a time when buying Bitcoin was easy in Zimbabwe. We had a thriving and well-established exchange called Golix. Several startups were on their way to join the sector when the RBZ tore it all down.

They didn’t explicitly ban Bitcoin, they just instructed banks to stop processing transactions associated with cryptocurrency exchanges. The distinction is important as I will explain later on but that order effectively killed Golix and other budding cryptocurrency exchanges that were beginning to put down their roots.

During the pre-ban era buying Bitcoin was simple, you just joined an exchange, link your wallet, load funds using Ecocash or bank transfer and start trading. You only had to find someone selling Bitcoin and put in your offer rate, if the seller accepted, your trade was executed, the seller got their ZWL and you got your Bitcoin or whatever cryptocurrency you had bought sent to your wallet.

Now it’s just peer transactions

All trades on an exchange take place under the watchful gaze of the exchange. The exchange acts as a trust which holds both the Bitcoin and ZWL/USD funds in escrow. Funds are only sent to each party once both have been satisfied with the transaction. That was a relatively safe way to deal to buy and sell Bitcoin.

These days if you want to buy or sell Bitcoin you are restricted to peer transactions only. This means if you want to buy Bitcoin you have to actually find someone who has Bitcoin to sell and negotiate with them. The trouble with such transactions is that there is always room for scammers to get the better of you.

At first, that sounds a bit daunting especially during COVID-19 where our movement is restricted. This means that people are sometimes conducting Bitcoin purchases and sales online without ever seeing the face of the person that they are dealing with. WhatsApp groups are full of stories of people who get scammed.

How to buy Bitcoin and other cryptocurrencies in Zimbabwe the right way

Again you can forget about buying Bitcoin from exchanges if you are a Zimbabwean. Most exchanges are located in territories where central banks and other financial authorities have placed restrictions on their operations and usually these restrictions prevent them from selling to Zimbabweans.

Remember what I said about the RBZ not banning crypto-currencies? It’s important because it means while we no longer have exchanges you can still legally buy or sell Bitcoin.

The only easy way to buy crypto is from local dealers and other people who may be disposing of their Bitcoin for whatever reason. That sounds daunting and discouraging at first but believe me. There are plenty of such people, I know people who sell tens of thousands of Bitcoin on a regular basis.

You just need to follow these steps if you want to buy Bitcoin:

• First of all, familiarise yourself with the basics first. Learn what is involved in Bitcoin/cryptocurrency transactions and watch videos if you have to.
• Create a wallet that you will use to store your crypto I would recommend something like Coinbase, it’s a beginner-friendly wallet
• Find a crypto-currency exchange group. Be careful here and only join a group with well-known dealers. Ask in Techzim WhatsApp groups and someone will point you in the right direction.
• Once you have entered a group, establish trust. The very same way you do not want to be scammed is the same way other people are afraid of being scammed by you. Do a few face-to-face deals first so that you will have people that can vouch for you.
• When you post and advert e.g. I want to buy US$300 of Bitcoin using Ecocash, people might inbox you with offers, in that case, make sure to publicly ask members of the group if there is anyone who can vouch for the person making the offer.
• If no one can vouch for a given individual do not go through with the exchange
• Also, make sure you give people the right wallet address to which they can send a given crypto-currency. Sending the wrong crypto to the wrong wallet will result in that crypto getting lost forever.

It’s sad that this is what it has come to when one wants to buy cryptocurrency, all this low-level functionality is what exchanges were made for especially the trust part, but unfortunately, if you want to buy or sell Bitcoin and other cryptocurrencies in Zimbabwe this is the kind of legwork you have to do. One wrong step and you risk getting scammed.

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The government has published Statutory Instrument 127 of 2021 (SI 127 of 2021), which details civil penalties for those who infringe the Foreign Exchange Act (22:05) and the Banking and Use Promotion Act (24:24).

The penalties are as follows:

Pricing goods and services only in forex

In line with the prevailing multicurrency environment, any business according to SI 127 of 2021 that refuses to take local currency at the official exchange rate for goods or services priced in USD may face a fine of up to ZWL$50,000. Business can not price or charge goods and services exclusively in USD.

Use of auction funds

“One will be guilty, if he or she without Exchange Control authority, uses the foreign currency obtained directly or indirectly from a foreign exchange auction or an authorised dealer for a purpose other than that specified in the application to partake in the auction or in the application for foreign currency.”

SI 127 of 2021

If you participate in the forex auction you will now be fined for not using that money for its intended purpose. According to a report by newZWire, the fine is pegged at ZWL$1 million or the equivalent amount to the value of the foreign currency taken from the auction. In this case, whichever is higher, is one that you’ll have to pay.

Pricing goods above the auction rate

Anyone who puts a premium on goods and services in local currency to induce a buyer to purchase in foreign currency will now face a ZWL$50,000 fine. In short, there should be no discount for customers paying in foreign currency.

Issuing a local currency receipt for a foreign currency purchase

If your customer pays for something in USD and you give them a receipt in local currency (ZWL$) or record that the sale was in ZWL$ then you will be facing a ZWL$50,000 fine or the equivalent amount in forex.

Banks will be penalised for their clients

Banks are now liable for the information submitted by their clients should they make an application for forex. If a client submits false information and the bank does not do its due diligence then the financial institution will face a ZWL$5 million fine.

Appeals process

If you are found guilty of any of the new regulations according to SI 127 of 2021, you will have 48 hours to submit your appeal. The submission will have to show evidence that the fine was a mistake, and if the situation is not reversed then you must pay the stipulated amount. If you do not pay the fine in time you will be charged an additional 5% a day of the sum over a period of 90 days.

If the 90-day elapses without the fine being paid, you will be facing a six-month to a year prison sentence.

You should also read:

• RBZ’s planned deposit incentives won’t stop mattress banking
• Does CBZ hold the key for crypto inclusion in RBZ’s Sandbox?
• EcoCash cancelling promo: a sign that war with RBZ & Banks is far from over
• RBZ to start selling forex to registered Bureaux de Change

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It has been a couple of weeks since the government/RBZ introduced its latest shock grenade in the form of Statutory Instrument 127 of 2021. They riled the entire economy by trying to dictate what exchange rate businesses use when conducting operations. They also banned USD cash discounts and any incentives to induce USD payments. This was all done to shore up the faltering official foreign currency auction whose rate has remained suspiciously low over the course of a year.

The Statutory Instrument also included a set of punitive measures to be meted upon those found to be violating this law and its provisions. Now, the central bank’s Financial Intelligence Unit (FIU) has publicly named and shamed a list of so-called abusers. The following companies were included on the list:

1. National Foods (Pvt) Ltd
2. Georgia Petroleum (Pvt) Ltd
3. Tettola Investments (Pvt) Ltd
4. Africa Steel (Pvt) Ltd
5. Westville Investments (Pvt) Ltd Trading as Omni Africa
6. Flicknik Enterprises (Pvt) Ltd
7. Duo Valley Commodity Brokers
8. Faircclot Investments
9. GlenuLas Trading
10. Natural Stone Export Company
11. Nuvert Trading
12. Phirebrook Investments
13. Classic Energy
14. Clorex Energy
15. Explochem
16. Mutare Mart and Exchange
17. Souzcre Fuels
18. Kimya Investments

Is that it?

The RBZ’s press statement goes on to make it sound like these entities (auction abusers) are somehow solely responsible for wrecking the entire economy. While I am forced to concede that it was wrong of these companies to participate in the foreign exchange auction and then go on to violate the rules of the auction I do sympathise with them too. Businesses in Zimbabwe are operating in a very tough economic environment and need every leg they can stand upon.

Also, after the lots of noise that has been made by the authorities about how entities were abusing the auction, I sort of expected a bigger list with more recognised companies on it. I barely recognise just under half of these companies. The rest are mysteries to me. It’s kind of underwhelming if you ask me.

Lopsided rules

I especially take issue with how rules are being made by the authorities as we go with some companies granted seeming concessions. For example, some well-known entities continue to only demand foreign currency in payment and yet nothing is happening to them. For some, it turns out they are allowed to do so because of certain laws that have already been passed. For example, fuel companies are already allowed to sell fuel in USD only if they import that fuel using free funds.

Why are informal businesses not allowed to sell their own products in foreign currency only if they have imported these goods using free funds? What possible justification can the government have for perpetuating such discrimination?

Also, it turns out a lot of well-known entities are no longer allowed to access foreign currency on the auction. Of note is a qualifying statement from Delta Corporations released as part of its financial statements. They seem to imply that they are no longer getting foreign currency from the auction. In fact, quick calculations show that about two-thirds of the economy does not get its foreign currency from the auction. I am still struggling to understand the logic behind forcing everyone to use the official rate.

Talking about the official rate. It makes little sense to use it anyway! Yes I mean even if you are getting your foreign currency from the auction it will be in violation of business principles and accounting standards for you to use the official exchange rate in your costing operations. Why? Because no one is getting their foreign currency at the official rate anyway. You are reading this right. It’s almost improbable that any business is getting its foreign currency at the official rate.

That is because the so-called official rate is an average mean. Each business bids in the RBZ Auction and gets foreign currency at a different rate. Certain blessed entities are getting their foreign currency at rates as low as $82 ZWL because the RBZ in their esteemed wisdom deems these businesses more important than others. Others at the same auction are actually getting their foreign currency at a rate of $89 ZWL.

At the heart of Finance is a simple rule that underpins each accouning operation:

Revenue must be matched with expenditure incurred in generating that revenue.

In other words, you must only ever use the cost you incurred and not makeup costs. This means by forcing everyone on that auction to use the official rate the RBZ is erring again. Each business must use the actual rate at which it acquired the foreign currency to do its costing operations including arriving at the price. That would be the magic solution that will clear everything up.

Preaching to stones

I am just preaching to stones here. Nobody will listen to this. The mighty bank and powers be have made up their minds. The thing though is that the fundamentals of Economics have a way of always prevailing even in the face of legislation.

You should check out:

Finance Minister Mthuli Ncube said that the government had a budget surplus of ZWL$9.8 billion in Q1 2021. Now, that’s just over US$100 million (by the RBZ auction rate) and that’s a lot of money. So we discussed what a budget surplus is, if it is a good or bad thing in the Zimbabwean context, and how the government could possibly use all that money.

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Yesterday, EcoCash celebrated its 10th anniversary. Only 10? It feels like we’ve had the mobile money solution for longer than that. That’s because of just how much impact the service has had in our lives.

Granted, the last few years have been tough for the mobile money services provider. But there is no denying we cannot talk about the payment industry in Zimbabwe without talking about the service.

As we celebrate with Cassava and Econet, let us look back on a very eventful first decade in business for EcoCash.

2011: Launch of EcoCash

I was a broke young adult then when I heard about EcoCash. I had no idea what mobile money meant but they were promising a dollar for every signee, so obviously I was in.

I wasn’t alone, many signed up for the free dollar. As we understood the service better, even more signed up. So quick was the uptake that in only 14 months, EcoCash had reached 2 million subscribers.

The mobile money puzzle needed three main pieces – subscribers, agents and merchants.

Therefore, agents and merchants were also incentivized to sign up. Econet paid out 80% of revenue in agent commissions and agents signed up in droves. With that move, domestic remittance was conquered.

Merchants were promised no service charges and with nothing to lose, they signed up. With that, EcoCash users were able to pay for almost everything they needed using the mobile money service.

Strategic brilliance was observed with the acquisition of TN Bank just six months after launch.

Realising that they needed to partner a deposit-holding bank and yet their service would be competition to the same bank, an acquisition was planned. That would safeguard against bank retaliation to EcoCash success and my goodness, was that prophetic.

All in all, that was quite the launch. 10/10. Flawless. Users loved the service, agents and merchants were happy and the regulators were on board with it all.

2013-2018: The growth, maturity and dominance of EcoCash

• Bill payments were introduced, from DStv to electricity. This being Zimbabwe, it took a little fight to get ZETDC payments on EcoCash. Initially, the parastatal exclusively accepted payments using fellow parastatal NetOne’s mobile money solution. EcoCash users were not amused and they pressured ZETDC into accepting EcoCash.

• Payroll and bulk payments were introduced to make EcoCash usable as a business solution.
• Zinara e-toll payments were introduced for motorists.
• Duties and taxes – this was the moment. When citizens can pay their taxes and duties using a currency or platform, at that moment the currency or platform becomes officially accepted. EcoCash was a bonafide payment method at this point.

At that point, one could pay for almost any product or service in Zimbabwe using EcoCash. That was in addition to being able to send even micro amounts of money to almost anyone, anywhere in the country.

International aspirations

Diasporans were not forgotten, the millions of Zimbabweans living outside the country. For them International Remittances were introduced. An example being the EcoCash Home Wallet for Zimbos in the UK. This allowed them to pay for services in Zimbabwe for family.

For locally based Zimbos, a partnership with Mastercard brought the global market to their doorstep. A virtual prefunded debit card allowed purchasing from anywhere Mastercard is accepted.

Retention

With dominance established, attention moved to retention and monetisation of the huge subscriber base. Several features were introduced to make the service even more popular.

• EcoCash loans – were wildly popular and saw 500,000 new account openings in just 2 weeks. In the process, Steward bank (TN) became the largest bank by number of accounts.

• EcoCash Save and Savings Clubs – essentially made EcoCash a savings account. One with no monthly service fees at that.

• Swipe into EcoCash – some banks were still resisting integration with EcoCash so this was the solution for users to be able to get their money out of their bank accounts and into EcoCash.

All these moves cemented EcoCash’s dominant position in the mobile money industry. The next step naturally was to unshackle EcoCash from Econet.

EcoCash beyond Econet

The Econet Global group was restructured and a new Cassava Fintech was introduced. EcoCash would fall under this parent, which would be listed separately on the Zimbabwe Stock Exchange.

Having integrated with all commercial banks around this time, the last hurdle was other mobile network operators (MNOs) – NetOne and Telecel.

Swiftly, the doors were opened. Subscribers to the rival MNOs were welcomed into the fold. EcoCash had essentially become a bank.

All one needed to open this bank account was an ID, proof of residence and a phone number, any phone number.

Cash crisis in the country

As if EcoCash needed help in it’s rapid ascension, a cash crisis broke out in the country which improved the service’s fortunes exponentially. Zimbabweans had no choice but to use electronic methods for payment, hard cash was simply not available.

Banks could have capitalized on this but the KYC requirements for commercial banks remains stricter than for mobile money operators.

Therefore, mobile money services benefitted most from citizens having to exclusively use electronic forms of payment.

In 2017-18, they consistently had:

• Over 80% of ALL financial transactions by volume

• Over 95% of all mobile money transactions

• Over 95% of mobile money subscribers

• Over 90% of mobile money agents

These are monopoly level figures and the government started to worry a bit. After all, EcoCash was not a government run platform and yet it had that much power.

Government intervention

In hindsight, they should not have allowed their dominant position to get that far. That was the beginning of their regulatory troubles.

Then ICT minister was on record saying EcoCash’s dominance could be disastrous if not curtailed. So, curtailing had to commence.

It may be a commercial success but it’s a disaster if we look at it from a public sector point of view. What happens if that system fails at a critical moment? That means we have disrupted the entire nation because we have relied on one supplier.

Then ICT Minister, Supa Mandiwanzira

It was a valid point. As the months rolled by, the government’s attitude towards EcoCash continued to sour.

We almost have a monopoly so they think they can do whatever they want

Then ICT Minister Supa Mandiwanzira

When a sitting minister is saying that about your company, just know you are in for a bumpy ride. EcoCash was in the cross hairs then.

2019-present: EcoCash stagnates

It was almost poetic that the cash crisis which led to EcoCash dominance was the same that turned around to bite them where it hurts.

By the end of 2018, their agents were abusing the system and charging a premium to users cashing out their money.

The agents were responding to the prevailing economic conditions caused by the government’s monetary policies. However, it was EcoCash which suffered the tarnished reputation.

Perfect storm

When it rains, it pours. For EcoCash it poured cats, dogs and cows after 2019.

Perhaps the rapid growth had been a tad bit too rapid because they started experiencing technical difficulties just a little too frequently. This was unacceptable for a service many relied on. Turns out the ICT minister had been right.

With rogue agents ‘selling cash’ and system stability compromised, the perfect storm had brewed for EcoCash and the regulators swooped in to deal with the situation.

Cashing in and out was banned, one of their core services. The premium for cash on the black market soared.

Cash-in and out transactions were reinstated but at a lower maximum amount. That was a win for EcoCash. Truth is, they don’t like cash outs because that’s money leaving the EcoCash platform. So, the limited maximums helped lock funds in EcoCash.

2020 came, Covid rocked the nation and the EcoCash story continued its windings:

• Government decides to distribute Covid relief funds exclusively through OneMoney. EcoCash scraps all charges for such distributions to lure in those funds.

• Mobile money agents (mostly EcoCash) have their accounts frozen under suspicion they were involved in illicit forex deals.

• EcoCash realizes the damage this could do and takes the regulators to court over the frozen accounts. All the while exaggerating the impact of the freeze.

• At this point the RBZ and EcoCash have battle lines drawn.

• The regulators throw big punches, charging EcoCash and Cassava CEOs with money laundering.

• The government through, the Information ministry announces that all mobile money transactions are banned.

• EcoCash responds that it is regulated by the RBZ and so continues operations.

• The government recants, says ban applies to agents and merchants only.

Although the public could still transact, this wasn’t a win for EcoCash for two main reasons:

1. Merchants started refusing EcoCash transfers. Since they could no longer move funds in EcoCash freely, they started accepting everything but EcoCash.

2. The ban diminished EcoCash’s utility to the transacting public. The usecases for EcoCash dwindled because of the merchants’ actions.

EcoCash was truly in a pickle then.

• No cash in cash out transactions meant the only way for money to enter the EcoCash platform was from a bank account. All of a sudden, they needed people to have bank accounts and so they promoted the banks they are integrated with.

• Problem was, let’s say a user heeded the call and opened a bank account. Why would he then transfer the money into EcoCash when more and more merchants were refusing that payment method but accepting bank card payments?

The government wasn’t done. EcoCash was forced to integrate with Zimswitch, it’s biggest competitor. The move was meant to reduce any barriers to leaving EcoCash that remained and to neutralize the power of its agent and merchant network.

There are other significant entries in this journal but that is where EcoCash is today. Still very much on the government’s radar.

This regulatory pressure has severely impacted EcoCash. They detailed the government actions that had hampered their progress as:

21st April 2020 – Reduction in daily, monthly and transactional limits,

4th May 2020 – Suspension of Agents with transactions above ZW$100,000 and requirement for their re-registration,

4th June 2020 – Suspension of Agent to Agent transactions,

26th June 2020 – Directive to integrate to Zimswitch, in line with SI 80, by 30 September 2020,

27th June 2020 – Suspension of some Ecocash User Categories and Functions,

25th August 2020 – Revision of mobile money limits and permissible transactions,

25th August 2020 – Ban of use of multiple wallets by individuals effective 8 September 2020.

Conclusion

Not much has changed since then. And so ten years in, the star does not shine as bright as it should have been shining.

Although they had to deal with an erratic and often irrational and vengeful government, EcoCash has mostly itself to blame for it’s clipped wings.

That being said, the service is by no means done for. It has been a topsy-turvy decade but all things considered, EcoCash has been wildly successful.

Looking forward to see what the next 10 years will look like.

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For a brief period of time, it appeared the Zimbabwean govt was going to adopt cryptocurrencies into the economy and that had us salivating a little. They then yanked that rug from beneath our feet. Turns out they are looking at Central Bank Digital Currencies (CBDCs) and those are infinitely less exciting for us.

We are going to be looking at what CBDCs are. However, it is imperative that we tone down our excitement because CBDCs won’t fix the currency issues we have in this country as we shall see. There are benefits however and we shall look at those too. 

What are Central Bank Digital Currencies?

CBDCs are the digital form of a nation’s currency. Or, in other words, the desperate attempt by central banks to fend off cryptocurrencies like bitcoin. 

So, it is the Reserve Bank of Zimbabwe (RBZ) which would issue, regulate and control the CBDC. 

Like all other national currencies, we would still be talking about a fiat currency, meaning its value and stability would still be dependent on the monetary policies of the RBZ. That is because the CBDC in effect would just be the RTGS$, in a new digital form.

So like the good minister said, technically we would not be introducing a new currency. Rather, we would be introducing a digital token/virtual form of the RTGS$.

But isn’t the RTGS$ already a virtual currency? What’s going on here? 

How currency works today

The way our banking system works today is that physical cash is the real currency in the economy. 

We have a situation where there is more money in electronic form than physical. There is more money in our bank accounts and mobile money wallets than there is cash in the economy.

However, the value of those bank balances we have derives from being convertible into cash. It is the RBZ which bears the liability for the physical cash. Therefore, since the central bank is a govt backed entity which can print as much as it wants, it can never go broke.

Meaning we can trust that the physical cash is and will remain legal tender and that they will honour the physical notes we have. Although inflation may diminish the value of that cash, it remains usable and will be accepted everywhere.

Contrast that with the other balances in our accounts and wallets. Those digital entries on a computer represent a claim to physical cash. We expect to be able to visit a bank branch and withdraw those funds. But of course we can’t all do that, there isn’t enough cash to go around. 

Hence why bank runs can be a thing, where all depositors of a bank demand their cash which the bank does not have. There are measures to protect banks from this but it is a real thing.

Our trust in banks only extends as far as the reserves they are required to keep with the RBZ and their equity capital. Unlike the RBZ which can print more money and is backed by the tax collecting govt.

To note is that when you have a positive balance with a bank, it is that bank which you have a claim on. Not the central bank. That is why when banks folded during the hyperinflation era, people lost their savings. The central bank is not liable for the deposits you place with a bank. A deposit protection scheme was devised for that purpose and it has its own costs and problems.

Electronic RTGS$ vs digital currency

Like we noted, a digital currency would be the virtual form of the RTGS$. This means it would be as good as cash in that the RBZ would be liable for it. Therefore, just like it is when you’re holding all your money as cash, you wouldn’t care if a bank went under. The RBZ would be liable for the digital currency in your wallet, for it is cash in digital form.

The central bank digital currency would be just like cash in that each unit would have a unique identifier. Just like cash which has a unique serial number. 

Again, contrast this with electronic RTGS$ which banks are liable for. They appear as liabilities on banks’ accounts because it is the banks, not the RBZ, that owe that money to depositors. So, although the trust is that the bank balance can be converted into cash which would be the RBZ’s liability, the reality is that that cash just isn’t there. 

Cryptocurrency vs central bank digital currency

Both are ‘digital currencies’ but the main difference is that CBDCs are issued by a central authority which retains the power to issue as many such digital currencies as it wants. Whereas, cryptocurrencies like bitcoin do not have a central authority with unfettered power to issue coin. 

Rather, in the case of bitcoin, we already know the maximum number of bitcoin that will ever be created. And those will be created by users who mine for the cryptocurrency. 

The other difference is that cryptocurrencies utilise blockchain technology which central bank digital currencies could use but are free not to. One of the leaders in CBDCs is China which has a digital yuan in testing and it does not utilise blockchain technology at this moment. They are considering the distributed ledger but cite its scalability and performance limitations today.

How would a digital currency be released?

First we need to know how it would all actually work. There are a few considerations to be made; token-based or account based technology.

Token-based digital currencies allow people to verify the authenticity of the currency just like we would for cash. The kind I alluded to earlier where we can check the unique identifiers and accept if we are satisfied it is the real deal.

This of course mimics cash so well and can allow for offline transactions and anonymity. There is no record of the cash transactions we have and neither would there be for the exchange of the token-based digital currency if we so chose.

An account based system would be similar to the credit card system and to an extent the bank transfer system we have today. When a Zimbo seeks to pay or transfer funds, the system checks whether he has an account and sufficient funds and the transaction is effected.

The other matter to be decided is whether the distribution model would be one-tier or two-tier.

A one-tier system would give the RBZ more power and control at the expense of banks. The RBZ would distribute the digital currency itself and we could hold accounts with the central bank directly and could completely forgo commercial banks. The RBZ would see payment data in full (as opposed to cash/token-based CBDC) and would be able to more accurately tweak its monetary policies.

Banks as we know them would be upended. All deposits would be with the central bank and so with zero deposits, changes to their business model would have to be made. No more relying on bank charges to survive. They would have to borrow from the RBZ and utilise those funds to resume lending activities. Yes, the lending they are not too keen on will become the main source of income.

The one-tier system has a low chance of being adopted. The RBZ would have to scale up massively and improve its systems to be customer facing. Therefore the two-tier system is most likely what the RBZ would use, with banks as intermediaries. Banks would distribute the CBDC and hold depositors’ CBDC wallets. 

A token-based CBDC distributed through the two-tier system would be almost indistinguishable to what we have today. Banks would be intermediaries for the cash-like CBDC in much the same way as they are for RTGS$ cash. Whilst a one-tier account-based system would be the most disruptive for banks.

In closing

There are benefits to CBDCs that can’t be denied:

• Reduced risk for the public as their savings would not be dependent on the health of private banks
• Greater oversight leading to better informed decisions for the RBZ as it has more extensive data on the movement of funds in the economy.
• Reduced dependence on cash, which among other things reduces the cost of printing and distributing the cash.
• Faster and less costly payments for the populace could be achieved whilst also reducing payment frauds and other illegal activities.
• CBDCs would improve our financial inclusion problem, as one would no longer need a bank account to utilise electronic money. Much like it was with EcoCash and friends before we decided to cripple mobile money.

There are drawbacks though:

• Greater control by the RBZ could be a disadvantage if looked at from a different angle
• Privacy would probably be a thing of the past. The anonymity cash afforded us would be gone. The RBZ would know exactly how we spend our money. Token based tech could offer privacy if the RBZ decided so but would they? I don’t think so.
• The RBZ would have to increase in scope as it would be taking on some of the activities currently being done by banks e.g. KYC and anti money laundering.
• The competition between the RBZ and banks for deposits and lending would see banks struggle and some fall by the wayside. So the question is, could the RBZ be able to serve efficiently? Especially if we consider the ridiculous notion of them dealing with personal loans for peeps like me

There is more to all this obviously but we gotta end somewhere. To note however is that it’s all well and good but the fact remains, any digital currency in Zimbabwe will be the RBZ’s digital currency. Meaning the technology might be interesting but in the end the success of the digital currency will be dependent on the monetary policies of our beloved RBZ.

Would people suddenly trust the RTGS$ simply because it was in digital form? Not likely, since they don’t even trust it in physical cash form.

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The Reserve Bank of Zimbabwe (RBZ) governor, Dr Mangudya, sat down for an interview with Trevor Ncube. We got another look into the man’s mind. He called for respect when we do disagree as Zimbabweans so let’s respectfully consider what he has to say about the economy.

The Zimbabwean local currency

The history of Zimbabwe and its currencies is a complicated one. It is no wonder then that there is confusion in the market about the current local currency. The doc reminded us that:

• The currency of the land is the Zimbabwe dollar, denoted ZWL or ZW$. It is not the RTGS$, although it was launched as such, which led to the confusion. 

• The bond note was not a currency and was phased out. The notes we have today are the Zimdollar.

• We don’t have Nostro accounts, what we have are FCAs, foreign currency accounts. The accounts that banks in different countries hold with each other remain the only ‘Nostro’ accounts. Yes, even the Finance ministry does refer to FCAs as Nostros but we have not adopted and redefined Nostro for the Zim economy.

The bond notes

We have had the discussion on why the RBZ governor maintains that bond notes were a success. If we act like economists trying to teach a concept and use the ‘all things being equal’ qualifier, and squint, it does appear that under some kinds of light, the bond note was a success. Read more on that here.

In this interview, he affirmed the same and went further to say that the bond notes did not even lose value the whole time they were in circulation. On this one, no amount of squinting will make us see it as the good dokotela does. Bond notes lost value and that is a fact.

Mangudya says the bond note traded at 1:1 with the USD until its phasing out in 2019. To be fair, that is accurate. However, that was the govt’s pegged rate which was very different from the market rate. On the parallel market, the bond note was worth far less than the USD. A little like it is today with the Zimdollar which has a higher value according to the RBZ and its auction rate than on the actual market the average Zimbabwean has access to.

The forex auction

Mangudya says he is happy with the performance of the forex auction. He says it has achieved its goals and more. How could he possibly think that?

Price discovery

He feels the auction rate allowed us to value the Zimdollar. He therefore believes that is the accurate valuation of the Zimdollar. For the rest of us, the parallel market already did this before the auction rate came along. And it’s more accurate too.

He pointed out that Zim banks do not trade with each other for various reasons. The main one being that they don’t trust each other because of compliance issues. The Zim banks also don’t trade with foreign banks because of several geopolitical reasons. Therefore there really was no interbank market in Zimbabwe.

What he is getting at here is that the interbank market, in normal circumstances, is the main market for the trading of forex in an economy. Banks trade on behalf of clients and also for their own benefit. This interbank market therefore is the one where we discover the real price of currencies. So, when Mangudya says there was no interbank market in Zimbabwe, he is convinced that there was no accurate price discovery before the forex auction came.

Redistribution of foreign currency

The RBZ forces exporters to liquidate 40% of their export receipts at the interbank rate and this forex is what companies bid for on the forex auction. The forex auction is also funded by our trusty friends, Afreximbank and from the forex that is freely traded in the banking system. 

How much are people freely trading with banks when it’s at a rate lower than the parallel market? Not much. So, the main source of funds on the auction is the 40% liquidation of all export receipts. The most exports are from mining.

Other companies that are not exporting but need forex for their inputs, especially those in manufacturing can then bid for that money and fund their operations. Without the auction, these companies would have to visit the parallel market. 

The only problem is that Zim is dominated by informal traders and small businesses that don’t qualify to participate on the auction floor. These businesses still need forex and they get it on the parallel market. Also, those that do participate in the auction are not getting all their forex needs and are turning to the parallel market to supplement the auction proceeds.

This means the auction is not accurate as a price discovery mechanism. Neither is it successful as a forex redistribution tool. The lifeblood of the Zim economy does not participate in it.

Accessibility to forex

What I found funny is that Mangudya believes the average Zimbo can just walk into a bank and trade their Zimdollars for USD at the auction rate and be on their way. He thinks that’s where we are getting the forex to pay school fees, rentals etc. In reality banks only buy from us at the low interbank rate, they don’t sell USD to us at that rate. There never is any forex to trade to us.

Even small and medium sized businesses are not getting all their forex from the auction. Their demand for forex is much higher than the supply on the auction floor. Mangudya claims though that this demand is excessive because of non-economic factors discussed later.

The parallel market

Dr Mangudya thinks in terms of the whole economy and so his eyes are on the large players in Zimbabwe. As he should, as governor of the RBZ. However, I fear this makes him a little blind to the realities for the average person.

He was asked about the gap between the official exchange rate and the parallel market exchange rate. From his response, he does not believe that the RBZ is responsible for the gap. He blames short-termism on our part as Zimbos, for wanting to get rid of Zimdollars at all costs.

People have got this heart, that obsession, that requirement to always hold foreign currency. They think it’s a more stable currency, which it is also.

Dr John Panonetsa Mangudya

Apparently, you guys are too focused on limiting your losses from the drop in value of the Zimdollar. You should not be too narrowly minded as to protect yourself against inflation by exchanging the Zimdollar for a more stable currency.

You should think about the long term impact this has on the Zimbabwean economy. Do you not see that we need our own currency so that we can manage the economy effectively through monetary policies. Do you want to go back to the deflation era when we exclusively used foreign currency? Huh?

Mangudya says the demand on the parallel market is driven by non-economic factors. He stresses that this demand is not for importing but rather to store value in a more stable currency or to take advantage of arbitrage opportunities. We all agree with this and wonder why he thinks this revelation would be a surprise to us.

You would be surprised that the demand factor for foreign currency is a store of value demand as opposed to the import demand for foreign currency.

Dr John Panonetsa Mangudya

In closing

He does acknowledge that Zimbos have been through hyperinflation and deflation, roller coaster-rides and stability, and so find it hard to trust the RBZ and its banks. Hence, the difficulty in maintaining the value of the Zimdollar as people just don’t trust it. The RBZ is trying to steady the ship though and you can read more about that here.

There is more, arguably juicier, stuff from this Dr Mangudya interview and that will follow. It is always a bit of entertainment to hear from the RBZ governor because he always seems to see things just a little bit differently from us, the lay people.

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The RBZ governor, Dr John Panonetsa Mangudya sat down for an interview with Trevor Ncube. We talked about what was said in the first part of the interview here. Now, we continue with the story and get to the meat of the interview, in my opinion. 

I feel I must warn you that if you didn’t like what he had to say in the first part, you are going to hate this a wee bit more. 

The independence of the RBZ governor

The interviewer, Trevor Ncube, told Dr Mangudya that he interviewed the former governor, Dr Gideon Gono in the past. Dr Gono expressed that he wished he had fought for his independence from the Ministry of Finance and from the president. So Ncube asked the current governor what he thought about his autonomy.

Dr Mangudya was sly in his answer, almost like a seasoned politician. He talked about independence being an abstract concept that can only be subjectively measured. He went on to talk about how even in independence, one can never survive as an island. Therefore, cooperation is the wise course of action.

He was slick. So, he was asked whether he has ever disagreed with President Mnangagwa or Dr Mthuli Ncube. The concerning answer was an emphatic ‘no.’ He has never disagreed with the president or finance minister in all his years as governor. How that happens in an economy where tough decisions have to be made regularly is beyond me.

The secret to his pacifier success is that he engages his principals on all monetary matters. Apparently, they are all peas in the same pod and tend to agree on courses of action pretty much every time.

SI 127 and its devastating consequences

If you remember, Statutory Instrument 127 (SI 127) prohibited businesses from; quoting prices at an exchange rate higher than the auction rate, giving buyers a discount for paying in USD and so on. This SI was a bad move and prices of goods shot up and have never fallen since. Dr Mangudya, on the SI, said,

SI 127 was not as bad as people want it to be

Dr Mangudya

So, he definitely agrees it was bad. However, he thinks we exaggerate how bad it was, and is, but we think he downplays its effect. He says those of us who think SI 127 was the worst, are malevolent (i.e evil-minded or spiteful) and are actually sadists (getting pleasure or sexual gratification from the pain/ humiliation of others).

He feels we put him in a ‘damned if you do, damned if you don’t’ situation. After all, we are the ones who complained that businesses were continually increasing prices. Yet, we were the first to complain when the RBZ addressed that using SI 127. 

I’m lost here guys. He expected us to congratulate the RBZ for an SI that achieved the opposite of what it intended to? Should we have been impressed that they did something about the price increases when their solution led to even steeper price increases? 

I know people love complaining, sometimes we grumble when there is nothing to grumble about, it’s human nature I suppose. However, in this case, we are 100% justified in expressing our frustrations, even if we are labeled sadists for it. SI 127 was ill-advised and it backfired, period.

The reinterpretation of SI 127

After the spectacular failure of SI 127, it was then revealed that actually, we had misinterpreted it. It was meant to apply only to those who were abusing the forex auction. It is only those businesses that were getting 100% of their forex needs from the forex auction that were the target of SI 127. 

All other businesses were then asked to revert back to their pre-SI 127 prices and they were not interested in that. After all, SI 127 was not repealed and so it was not wise to obey these reinterpretations. The language in the SI was clear and a business could face litigation for thinking that law did not apply to them.

Dr Mangudya then said the SI also targeted those who were manipulating the currency to increase their profits from arbitration. In addition, it was meant to aid in the fight against money laundering and terrorism financing. 

Forcibly liquidating people’s forex

We discussed how 40% of receipts by exporters are forcibly converted into Zimdollars at the auction rate. For the rest of us, of the forex we bank, 20% is forcibly converted into Zimdollars at the auction rate.

Mr Mangudya says it is their job to ‘find a home’ for those Zimdollars they force unto those who had earned their forex fair and square. He means making sure we can pay our taxes and other similar services which are priced using the same auction rate. Rather than having to use those Zimdollars we never wanted in the first place in the market where prices are quoted using the parallel market rate.

He says what they are doing here will help improve the value of the Zimdollars. So, do not expect this forced liquidation to stop. The message to the RBZ though is, don’t expect us to bank our forex if we can help it. Honestly. Dr Mangudya talked about promoting the use of banks but as long as these forced liquidations and arbitrary policies remain, most of our forex won’t enter the official banking system.

Banks sitting on US$1.7 billion

We have demonised banks for having US$1.7 billion in their vaults and not lending it out. The RBZ governor says about 25% of that has been deployed into the market. In his eyes, that is okay under the circumstances. 

He says exporters and those importers who do earn forex locally and can then pay back the USD loans are the ones benefiting.

We have talked about some of the challenges banks are facing here. In short, there is no interbank collaboration. Also, Zim banks no longer have relationships with foreign banks (correspondence banks) where they had overdraft facilities. Hence the extreme caution.

RBZ ‘guarantees’ survival of banks

I now get why Zim banks are able to get away with a lot of shenanigans. The exorbitant charges, poor service delivery, low lending practice and the like will not be addressed with any enthusiasm. Dr Mangudya says,

The closing of a bank, it sends the wrong signal also to the market

Dr Mangudya

This means that of the banks that fail to meet the US$30 million capital requirement by year end will get an extension. The RBZ boss said so. It also means their golden goose, high bank charges, will not be plucked or slaughtered. The high charges are necessary for most of these banks to remain profitable. Without them, some banks would fold and that would send the wrong signal to the market.

Financial inclusion

Dr Mangudya hails technology for improving financial inclusion in the country. He says mobile banking / mobile money has allowed the formerly unbanked to get access to financial services. He mentions the farmers getting loans through their phones as an example.

I find it funny when he talks about people having mobile wallets which give them access to financial services. That’s because his RBZ has been working overtime to kill the most important mobile money service provider, EcoCash.

In the same breath, the govt reintroduced tax on the importation of the mobile phones that allow for that financial inclusion. In addition, for the phones that avoided paying that tax, a new US$50 levy is in the works. These measures make for expensive mobile phones, thereby derailing or delaying our financial inclusion efforts.

Don’t hold your breath for crypto legalisation

As a central bank we don’t believe in cryptocurrencies, we don’t believe in these bitcoins. We believe in central bank digital currencies.

Dr Mangudya

Despite that ominous statement, he goes on to say now is not the right time to introduce cryptos. He does not rule them out completely.

For now, our prayer is that we work on a central bank digital currency, before we go this other route of cryptocurrencies.

Dr Mangudya

I know the crypto enthusiast is thinking, 

Technically, it appears there is a chance but I’d caution you against holding your breath. 

We talked about central bank digital currencies here. Find out why they won’t help much in Zimbabwe. The new information on this is that apparently we have made progress in our central bank digital currency journey. He says we are almost there, as progress has been swift, as they have been working with a fintech company to assist in the research. We believe we know the fintech company they are working with, in due time we shall all find out.

Blockchain unlawfully used to create money in Zimbabwe?

What concerns me are the RBZ governor’s thoughts about blockchain and mobile money. He continues with the narrative that people were creating money on EcoCash. And apparently he thinks they were using blockchain technology to do that. Maybe he misspoke. But that is what blockchain and bitcoin remind him of, people creating money out of thin air.

Bitcoins, or blockchain like you said it. You see, it reminds some of with what happened to mobile banking [mobile money] transactions in Zimbabwe. Whereby some people were just creating money from blockchain, and creating money supply in the economy.

Dr Mangudya

I think I missed that period in time when people were using blockchain technology to create money through mobile money wallets. If you know what he is talking about here, please let me know in the comments. If he’s mistaken, which I think he is, it may be why his RBZ is unjustifiably hostile towards blockchains. 

The RBZ governor’s resignation

You remember how he said he would resign if bond notes did not succeed. We talked about how they succeeded in his mind here. That’s all in the past but fast approaching is the end of Dr Mangudya’s tenure as RBZ governor. He began his reign in May 2014 and he leaves office in 2024. 

If you don’t like him, it’s only about 2 and a half years before he is gone, console yourself with that. The bad news is that you probably won’t like his replacement. After all, you hated his predecessor, Dr Gideon Gono even more.

In closing

This was a long article but now we are done with all that was revealed in the interview. I know you have thoughts on all this, feel free to share in the comments section below.

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The Reserve Bank of Zimbabwe (RBZ) has in a tweet announced that it would start taking action against entities that are breaching the Bank Use Promotion Act and those that are involved in currency manipulation. This follows the Financial Intelligence Unit’s (FIU) investigations of entities that are allegedly committing these offences.

The statement by the Reserve Bank of Zimbabwe reads as follows

PRESS STATEMENT

ACTION AGAINST CURRENCY MANIPULATORS

The Reserve Bank of Zimbabwe (RBZ) would like to advise the public that the Financial Intelligence Unit (FIU) is currently investigating cases of breaches of the Bank Use Promotion Act and currency manipulations by some business entities. The breaches have become particularly pronounced and prevalent at some schools and pharmacies.

The FIU will deploy all tools at its disposal to deal with such malpractices including imposition of fines, freezing of bank accounts and blacklisting from enjoyment of financial services.

Members of the public are urged to report offending businesses and service providers to the FIU on hotline numbers 0780434475 and 0714039897.

John P Mangudya

Governor

12 January 2022

Action against Currency Manipulators pic.twitter.com/ZrTLLA8wfL

— Reserve Bank of Zimbabwe (@ReserveBankZIM) January 12, 2022

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In the Monetary Policy Statement released by the RBZ on the 7th of February 2022 we found out that 2021 was a record breaking year. Foreign currency receipts in 2021 were up 53.5%, going from US$6.3bn in 2020 to US$9.7bn in 2021. A huge increase even when compared with our previous best year in 2013 where we recorded US$7.6 billion.

It is quite encouraging to see that all sources of foreign currency recorded growth in 2021.

Total Forex receipts

Foreign investment recorded the highest growth at 127.5%. This bodes well for us as it means foreign investors decided Zim was a more attractive destination in 2021. In terms of actual amounts, the increase in foreign investment was small, growing from US$40 million in 2020 to US$91 million in 2021. Still, this represents a positive.

The all important export proceeds recorded a 66.6% growth from 2020 amounts. This source of forex remains the most important to the country. This represents the productivity of our economy and the marketability of our products abroad. In absolute amounts, export proceeds increased from US$3.7bn to US$6.2bn, representing 64% of all forex receipts.

We have relied on diaspora remittances for years. Foreign based Zimbabweans tend to support the families they left behind and we saw a 42.7% growth in these remittances. An economy cannot be sustained by this kind of forex receipt. So, we should be celebrating that our reliance on remittances is falling a little every year as export proceeds grow. You will note that contribution of remittances to total receipts was 14.8% in 2021, down from 15.9% in 2020.

This is the right trend as the contribution was a high 28.6% just five years earlier in 2016.

The RBZ attributes the growth in total forex receipts to increased international commodity prices. This meant the value of our exports increased, hence the 66.6% growth there. The gold incentives that were put in place by the govt also led to an increase in gold delivered to the official market for export. These two factors, increase in output and increase in commodity prices led to the significant export proceeds growth.

Then diaspora remittances also grew significantly.

Forex payments

Whilst receipts grew by 53.5%, payments grew by 45.2%. Banks processed US$6.99 billion in payments in 2021 compared to receipts of US$9.69bn.

This led to an increase in foreign currency deposits in the formal banking sector. The average foreign currency deposits in 2021 thus grew to US$1.7 billion. Only downside is that banks are not lending this money out to help increase productivity in the economy. In defense of banks, they said they are waiting for a guarantee by the govt that should they lend this out, they will be able to collect in the same currency.

What did we spend the US$6.99 billion on? The major payments were:

• 24% on raw materials, pharmaceuticals and food
• 21% on capital goods
• 13% on intermediate goods
• 14% on fuel and electricity

I would like to see that 21% spent on capital goods grow in 2022.

The informal market

The figures discussed above do not take into account the informal market. The diaspora remittances figure gives the best indication of what happens on the black market. Although there is still a huge chunk of remittances that involve envelopes full of cash that are not captured in the official stats.

Payments are even harder to accurately capture with cash leaving beneath car seats and coming back as goods that sometimes evade the customs officers. This could mean extra forex leakages that are responsible for the constant forex shortages which lead to more premiums on forex.

With all that said, it is still encouraging to see that economic activity increased in 2021.

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If you were wise enough to invest on the Zimbabwe Stock Exchange (ZSE) in 2021 you would have seen a 314.37% growth in the value of your investment. Had you invested in the Johannesburg Stock Exchange you would have seen a return of less than 30% for the same period.

The market capitalisation of the shares of companies listed on the Zimbabwe Stock Exchange grew by 314.37% in 2021. You will remember that market capitalisation refers to the total number of shares multiplied by the price per share. So, market capitalisation represents the valuation investors place on a company.

So the 314.37% growth in market cap indicates growth in value of shares. Simplified, it means investments on the ZSE grew by an average of that amount.

The ZSE market cap was ZWL$317.88bn in December 2020 but had grown to ZWL$1 317.21 billion at the end of December 2021.

Of course, different companies’ shares performed differently during the year and this is how the main indices did:

• All Share Index – 310.51%
• Top 10 – 307.51%
• Small cap – 3 280.46% (not a typo, the market cap grew by over 30 times)
• Mining – 89.05%

While the small cap index might be more volatile than the other indices, that average return of over 3000% makes one want to follow this index more closely. Even though the index has eased by 5% since the turn of the year. Such is the volatility of the Small Cap Index.

It was not only Zimbabwean investors that enjoyed this ZSE growth. Foreign investors almost doubled their involvement. Net inflows grew from ZWL$5.01 billion to ZWL$9.74 billion. We saw this when we looked at how foreign currency receipts grew in 2021. With the 314% growth, we just might entice more foreign investors to look at the ZSE.

Inflation adjusted return

There is a fly in the ointment – the high inflation rate in Zimbabwe. Inflation works to reduce the value of the ‘profits’ one would have made. So, to find out what the real return from the ZSE was in 2021 we factor in the annual inflation rate of 60.7% we closed December with.

Simplified illustration

Let’s say one invested ZWL$8,500 (which was equivalent to US$100 using auction rate) on the 1st of January 2021. By the end of 2021, the value of that investment would have been ZWL$26,721. However, if we factor in the 60.7% inflation, we are left with a closing balance of ZWL$16,628 in real value (which is 26721/1.607).

We could also just take the ZWL$26,721 and determine how many USDs we could get with it on the 31st of December. The auction rate was 1:108 to close the year. So, the $26,271 was worth US$243.25 by the end of the year. So, the guy who bought USDs at the beginning of the year and stuffed them under a pillow was worse of than the guy who purchased stocks on the ZSE.

This tells us that unlike in previous years where the ZSE growth was more or less nullified by the inflation rate, in 2021 investors saw real growth.

With inflation set to fall even further in 2022, even modest growth of the ZSE could shield investors from the fall in value of the Zimdollar. So, it might be time for us all to consider investing on the ZSE.

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In the Monetary Policy Statement released by the Reserve Bank of Zimbabwe yesterday, it was revealed that the Deposit Protection Corporation (DPC) now covers foreign currency denominated accounts. This deposit protection scheme was implemented with effect from the 1st of January 2022 and so you should feel safe to deposit your hard currency.

The FCA maximum cover level is US$1,000.00 (one thousand United States dollars) per deposit class per each banking institution and US$500.00 (five hundred United States dollars) per deposit class per deposit-taking microfinance institution with effect from 1 January 2022.

From Monetary Policy Statement

This is in addition to the protection scheme for Zimdollar accounts where up to ZWL$10,000 is covered by the DPC.

For those with balances over US$1000 or ZWL$10,000, they will have to wait for the liquidation process to see how much of their deposits they can get back. This takes years in most cases and all the while, in the Zimdollar’s case, the value would be tumbling. 

Why the need for deposit protection?

The logic of a deposit protection scheme is rock solid. All deposit taking institutions, including banks, contribute to a fund that will be used to cover depositors should one of the deposit taking institutions go belly up. That way, the most important player in the financial system, the depositor, can at least be guaranteed that some of their balances will be recovered.

To further sweeten the deal, the depositor does not contribute to this fund. It is the banks and their colleagues who contribute but you can bet that their fee structures will take this mandatory contribution into account. 

Currently the prescribed annual premium rate is 0.3% of average eligible deposits which premium is paid on a quarterly basis.

DPC

Where was the DPC when we lost everything?

In Zimbabwe, the Deposit Protection Corporation was established in 2003. Yes, the DPC was already in place when banks tumbled all over the country in the hyperinflation era and years after. So, how come many people lost everything?

The main reason will be that the hyperinflation rate rose too high and the old Zim dollar was obliterated to such an extent that no contributions to a scheme could have ever kept up. Same goes for any fund/saving done in a hyperinflationary environment. That money will lose value faster than you can collect it or reinvest it. 

The DPC had its critics and with it having been established by the govt, that is hardly surprising. The RBZ was also criticised for responding slowly when bank executives misbehaved. 

Whatever the combination of reasons, Zimbabweans have not been satisfied with the recovery of their deposits when finance institutions go under. 

Interfin Bank was closed on the 11th of June 2012 and yet the DPC says payments are still in progress. Ten years later, payments to depositors have not been finalised and that’s ridiculous. The payout processes are undertaken with the speed of a sloth and the claims procedure is a little annoying, although somewhat necessary.

Under normal circumstances, once a duly completed and certified claim form has been submitted together with supporting documents (copy national ID, valid passport or valid driver’s licence), a depositor is reimbursed within 4 working days from date of submission of a duly completed claim form.

DPC

Certified claim? Really?

The US$1000 won’t allay people’s fears

It is a good move that we can rest easy knowing that the first US$1000 would be recoverable within four working days after filling out a form. In all honesty, the majority of us Zimbabweans do not even have a thousand bucks to deposit and so our life savings would be covered by the DPC, even before liquidation. 

Even so, I wouldn’t be the only one surprised to death if I saw ordinary Zimbos depositing USDs for safekeeping with the banks. The National Mattress Bank just won’t be beat anytime soon. 

Even the Reserve Bank of Zimbabwe governor knows that Zimbos are still reeling from the bank closures that his predecessor oversaw and are not in the least bit interested in the formal banking system. 

If there was enough Zimdollar cash to go around, most would prefer withdrawing their funds and risking robberies just so they could hold and spend their money as they saw fit. This is not helped by the high bank charges that the RBZ has ignored all these years. Zimbabwe is a mostly non-cash economy, as regards the Zimdollar, simply because there is no cash to talk about. Only 0.49% of the money in circulation is hard cash.

So, no, I don’t think the new FCA cover will mean much to most people.

If somehow they put something in the water that made us all forget Zim’s recent history then this announcement would move a few ordinary people. For the businesses that have no choice but to bank their millions of USD, this protection scheme is a non-event. So, in the end, who is this announcement for?

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The Reserve Bank of Zimbabwe (RBZ) is engaged in a never ending game of Whack-A-Mole. There are too many moles and too many holes for the RBZ to whack every single mole. Besides, for every incapacitated mole, another rises to take its place. Yet seemingly undeterred, the RBZ through the Financial Intelligence Unit (FIU) has frozen some companies’ accounts.

On the 22nd of February the FIU sent a letter to all banks ordering the freezing of bank accounts for the following companies: Transerve, Electrosales, Halsted and Enbee. All four companies are big enough for most of us to recognise those names. The FIU says it noticed unusual activities from these companies and suspects money laundering. 

Banks have been ordered not to process any withdrawals or transfers from the companies’ bank accounts. Deposits and other inflows are allowed though. Banks are to notify the FIU of any activity on those accounts, be it deposits, inbound transfers or any attempt to withdraw or transfer out. 

What is money laundering?

Money laundering is a crime all over the world. If you were to mention money laundering, the average person would think you mean the process of making money generated from illegal activity appear to be from a legitimate source. Recently we were talking about the Amercian couple caught trying to launder US$4.5 billion worth of stolen bitcoin.

Some of the best examples are the ones we see on television, on series like Narcos, where Pablo Escobar pumped his drug trafficking proceeds into a taxi business. On paper it looked as if he had the most profitable taxi business ever but he was merely inflating the actual revenue from the taxi business. The taxis would make hundreds in legit revenue but they would record sales in the millions.

This process works best when the business being used to launder is in the services sector. For example, if a car wash business told you they made US$10000 a day you would be skeptical but you couldn’t prove that figure was inflated. How could you dispute that they got 50 customers a day who paid at least US$200? 

Now, money laundering is only a thing when we are talking about large sums of money. Your neighbourhood jazzman (drug dealer) doesn’t have to launder. No questions will be asked when he spends the small amounts he makes. 

Imagine you had US$10 million though. You could not go on a buying spree. You couldn’t bank that money without having to explain where you got it from. Buying that million dollar Borrowdale Brook mansion would be tricky too, no one is going to accept a million in cash without questions being asked.

That’s where making it seem like your car wash business makes 10,000 a day comes in handy. You could deposit that money and make it appear as if you legitimately made it from your business enterprise. Add a taxi fleet and other service business and you could have the $10m in the system in no time.

Of course Zimbabwe is a peculiar place. With the economy mostly preferring cash, it’s not hard to spend large amounts of cash, up to a point. Add to that corruption in law enforcement and you realise US$10 million can be spent within Zimbabwe with no problem at all.

Laundering in the Zim context

The FIU believes the four companies are laundering money and I gotta admit I’m a bit lost. This is because the FIU did not mention currency manipulation in their notice. Money laundering is not the same as currency manipulation and the Financial Intelligence Unit would definitely know this. 

I imagine most of us thought the four companies were being investigated for using black market forex exchange rates to peg their prices. Or for buying forex on the black market. Neither of which would be money laundering.

Are they saying Enbee has some criminally sourced funds that they are trying to ‘clean?’ I have a hyperactive imagination but even I can’t see Enbee with a flourishing drug enterprise on the side. I might be naive. 

Or maybe we are to stretch the meaning of money laundering to consider the business of using the black market rate to peg prices. See, if a pair of socks costs US$1 and Enbee charges ZWL$225 for it, that would be ZWL$100 more than the auction rate based ZWL$125 they were supposed to charge. The ZWL$100 would therefore represent illegally sourced funds. Trying to bank that $100 would be tantamount to money laundering if we used this reasoning. It’s a stretch though.

RBZ waging wrong war

The RBZ is probably equating currency manipulation with money laundering. That would make the most sense but it leads us back to the Whack-A-Mole analogy.

Currency manipulation is not causing the depreciation of the Zimdollar. Rather the depreciation of the Zimdollar and the insistence that we use a semi-market based forex rate is what is causing the manipulation. Companies need more forex than they can get from the forex auction and so most are turning to the black market. And they can even make a quick profit as a bonus too. Even though that’s illegal. .

That’s neither here nor there. The fact remains that instead of fixing the cause of these arbitrage opportunities, we are busy chasing down anyone who would take advantage of the opportunities. That’s like trying to chase off every fly that lands on a rotten piece of meat. The flies will keep on coming until we deal with the actual problem, the rotten meat. The flies are not the problem.

So when Delta says, 

The tight regulations on accessing foreign currency have resulted in use of runners and currency aggregators which increase the numbers of value chain partners, legal compliance challenges and fraud risks.

From Delta’s Annual Report

You are forced to concede that the situation has descended to chaos. Even Delta is turning to the black market for their forex needs. If that is money laundering, then the FIU should just go ahead and freeze every single bank account. Almost every company is doing this, to get forex and to limit the losses from the fast eroding value of the Zimdollar.

While I would never condone criminal activity, I also understand that immoral, unreasonable or unenforceable laws lend themselves to being broken. You will recall that prior to Zimbabwe dollarising in 2009, it was illegal to have forex in your possession and that law made every Zimbabwean a criminal. Such laws that are likely to be broken by the majority only serve to make law breaking normal. Which is a terrible thing.

The RBZ has been whacking moles for a minute now:

RBZ is coming after businesses involved in currency manipulation

The RBZ Freezes Accounts Of Company Which “Injected Millions Of Dollars In Parallel Market”

RBZ Freezes EcoCash Agent Accounts That Handle Above ZW$100 000 Per Month – Here’s Why That’s Dumb

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In Zim, the RBZ’s FIU can freeze your account without court order. A fact that won’t scare many who shun the official banking sector.

For various reasons, Zimbabwe has been becoming an increasingly cashless society with every passing year. In the Reserve Bank’s latest monetary policy statement we found out that of the total Zimdollar broad money in the economy, only 0.49% was actual physical currency. In the United States of America, physical cash represents about 10% of the total USD money supply.  

While it is normal for hard physical currency to be a fraction of the total money supply, 0.49% is too low. For years Zimbabwe has had chronic cash shortages. No surprise there if physical cash is less than half a percent of total money in the economy. The cash shortage is made worse by the fact that most Zimbabweans prefer holding all their money as cash. 

The government has been trying to sell Zimbabweans on the benefits of a cash-lite society. The RBZ,

The  Bank  is therefore  encouraging  the  public  to bank  their  cash  and utilise  these  digital and electronic  services,  that  include  credit  and  debit cards,  to  minimise  the risk  of  theft and robberies associated with carrying cash  on  person  or possession  of  large  sums  of  cash  at  premises

There are other benefits too. A significant number of Zimbabweans only deal in cash, something that is possible because of the large amount of physical USD cash (in the billions) that is in the economy but just not in the formal economy. 

By dealing in cash, these Zimbabweans are essentially disqualifying themselves from some crucial financial services like loans. Especially for huge loans like mortgages. Cash leaves no record for loan providers to analyse before granting loans. So, adopting digital services would help both Zimbabweans and loan providers.

While one cannot deny those benefits, one has to look at the whole picture. What are the downsides to adopting these digital and electronic services that the RBZ is pushing? 

Of course the Zimdollar is depreciating rapidly and the RBZ has forcibly converted people’s forex to an inferior local currency before. Add to that the fact that Zimbabweans have lost their savings to bank closures. However there is yet another drawback to the cash-lite option.

The freezing of accounts

Just last week, the RBZ froze the accounts of companies that they suspected of money laundering. This wasn’t the first time the RBZ has frozen bank accounts whilst investigating suspicious activity. 

When we are dealing with terrorism financing and money laundering, few would argue against the RBZ freezing accounts. What would give many the chills is how the definition of money laundering and terrorism financing can be bent to practically include almost any activity. It wouldn’t take too much effort to classify the tithe you pay to your church as some kind of terrorist financing.

Case in point: Canada

Canadians just went through this. Some truck drivers were protesting vaccine mandates and other Covid measures in the country. They felt the govt had overextended its reach by practically forcing them to get vaccinated to cross the US-Canada border, or quarantine upon return. The Zimbabwean govt is also doing something similar to civil servants, forcing them to get vaccinated or risk losing their jobs. 

The Canadian government was not too pleased with the Freedom Convoy, after all the protests were as much anti-government as they were anti-mandates. So, the govt wanted the protests to end as soon as possible.

We are not here to discuss the merits of the Freedom Convoy protest, as it was called. Personally, I value a negative test result more than a vaccination record but that’s neither here nor there. We are here to look at how the Canadian govt shut the whole thing down.

Freezing donations

First, the govt saw that other people, including foreigners, who were against vaccine mandates were donating money to the truckers in the convoy. Donations via GoFundMe had reached about US$8 million. These donations were helping the truckers who were missing out on revenue by parking their trucks all those days.

The govt of course could not let that happen. They told GoFundMe that while the protests had started peacefully, they no longer saw them as peaceful. We have seen similar stuff in Zimbabwe when back in the day, every MDC rally would be labeled ‘violent’ and shut down.  

Those on the ground with the Freedom Convoy painted a different picture than the one the Canadian police painted. This is normal ruling govt behaviour, just like we saw in Zimbabwe in years past.

As a result GoFundMe froze the funds. They decided to redistribute the money to organisations of their own choosing instead, if donors did not request refunds in time. There was an outcry and they were forced to refund the funds to all donors. The fact that they even tried to commandeer those funds should never be forgotten.

Freezing bank accounts

The Canadian govt invoked an Emergencies Act that temporarily gave the govt practically unfettered powers so they could end the freedom protests.  What did they do with this power?

Banks were given the power to freeze “personal accounts of anyone linked with the protests without any need for a court order.” Such individuals’ vehicle insurance could be suspended too.

Like the donation freeze, this was meant to cripple the protest organisers financially. Unfortunately the freezes might have been used on regular citizens who had donated to the truckers as well. One Canadian MP claimed a single mother had her accounts frozen because of a $50 donation she made to the truckers before the protest was deemed ‘illegal.’

The effect

Again, you may disagree with the Freedom Convoy but you can’t deny that they should have been able to protest. All too often when we agree with government decisions we tend to ignore any overreach. I believe that we should protect the right to protest and to limit govts’ power to break them up. This will come in handy when the ruling govt you support is replaced by one you don’t agree with.

I’m sure we can all agree that when all our savings are held in bank accounts, the power of a govt to amend or introduce laws on a whim that may reclassify those savings as illegally obtained is frightening. 

Imagine if some amendment to Zimbabwean legislation made donations to a political party like CCC illegal. Recently CCC raised funds from the general population and all those who donated to that effort would be in danger of getting their accounts frozen or worse.

For most Zimbabweans who are outside the official financial system the threat of freezings carries no weight. Zimbabweans’ preference for cash presents a problem for the govt to combat illegal activity but at the same time the govt would find it hard to use the Canadian govt’s tactics to quell protests. 

The Zimbabwean situation

In Zimbabwe, the Financial Intelligence Unit (FIU), an RBZ arm has the power to freeze bank accounts for holders who are suspected of obtaining the money from illegal activities, money laundering, terrorist financing and from dealing in forex with unauthorised dealers. 

We talked to a lawyer who explained to us the meaning of the Money Laundering and Proceeds of Crime Act which gives the FIU that power. 

The FIU does not need a court order to order the freezing of accounts. So, while Canadians were disgusted by the govt giving power to banks to freeze accounts without a court order, the FIU in Zimbabwe does not need a court order to do the same.

So, it’s actually a wonder that the FIU has not abused this power, to my knowledge. That’s something to celebrate but not all are pleased by this.

The Joint Operations Command (JOC)

The JOC is made up of leaders from the army, police, the Central Intelligence Organisation (CIO) and prison services. These securocrats are not happy with the FIU’s effectiveness or lack thereof, especially in combating foreign currency manipulation. 

As reported, JOC is proposing that the FIU be moved to the CIO. A source close to the action told The Independent,

So Joc is saying if FIU is failing to deal with the companies and people manipulating foreign currency exchange, give us the powers to act. What this means is that FIU is going to become more brutal because they need to protect their reputation.

They (CIO) wrote a position paper arguing for the take-over of financial intelligence from RBZ. They are saying FIU is not doing enough because these companies are committing crimes and no action is being taken.

The security bosses sought to understand why the FIU was ineffective in executing its duties. There was an argument that the FIU has enough teeth guided by law to deal with the issue of financial indiscipline.

As quoted by The Independent

The CIO functions to provide high level security to the state from threats both within and outside Zimbabwe. The JOC sees the rampant forex manipulation in the country as a potential security threat hence why they think the CIO which has better investigative prowess should take over.

The law however places the FIU function with the RBZ. 

There is hereby established a unit of the Reserve Bank, to be known as the Bank Use Promotion and Suppression of Money Laundering Unit. 

BANK USE PROMOTION AND SUPPRESSION OF MONEY LAUNDERING UNIT 3(1)

So, it would appear that the CIO could not take over the FIU function. However, emergencies and national threats can lead to funny power transfers like we saw in Canada. That is not to mention that they could just amend the requisite Acts to allow for this if no other law could give them that power.

Should the FIU have such power?

The question then becomes, should the FIU, whether under the RBZ or the CIO, have the power to freeze bank accounts without a court order? Would we not rather have a judge go through any account freezing orders to ensure they are justified and supported by the law?

This power bestowed upon the FIU could be abused as a powerful tool to financially cripple dissenting voices. President Mnangagwa agrees that citizens should be able to protest but that won’t stop an overzealous FIU agent from abusing the FIU’s powers to target political opponents or their supporters. 

Therefore, the best solution would require some process to check the FIU’s powers, preferably having a judge ratify any such orders.

Some Zimbabweans question the objectivity of our courts, if that’s the case then we would have only added a stage to the process only to get the same results. That would still be better than what we have currently though. 

With all that said, we realise that Zimbabweans’ mistrust of financial institutions and their cash preference may be protecting them from some tactics that the govt could use. However most organisations, including NGOs, political parties and other humanitarian organisations cannot bypass the banking system altogether. Therefore they will always remain vulnerable to such tactics unless or until we clip the FIU’s wings a little bit. 

That’s unlikely to happen soon, for now we can expect the FIU to actually ramp up its activities under pressure from the JOC. 

What about you, the average citizen?

The truth is that most Zimbabweans are illegally dealing in forex. The informal economy which most of us participate in is mostly cash based and the USD is king there. No individual has access to forex on the formal market and so most obtain it from the black market. That is illegal and is grounds for account freezes by the FIU.

The FIU is unlikely to act on the average person getting US$200 on the streets. For one, they don’t have the manpower to chase the millions of people doing this. Secondly, the amounts that most deal in are too little to warrant action. Thirdly, most don’t even have bank accounts that can be frozen. 

Christians will try to hold on to cash a while longer as they fear the prophecy that a one-world govt will have the power to prevent select people from purchasing anything or participating in an economy in the end times. A cashless society with arbitrary account freezings would appear to allow for that.

Anyway, the FIU is better off chasing the few money changers that serve the public for now. Or the organisations that earn millions of dollars in revenue in Zimdollars and convert it to USD on the black market. We may not like this but the law is clear on it, the following is a crime, 

any offence of buying or borrowing foreign currency from, or selling or lending foreign currency to, a person other than a person authorised under the Exchange Control Act [Chapter 22:05]

So the FIU fighting against that is not the main issue although we may question the wisdom in a law that makes the majority of the population criminals. The main issue is that the door is open for the FIU to be abused to target any individual or organisation. 

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There is no such thing as a purely capitalist economy and like many, Zimbabwe is a mixed economy. However, we have flirted with socialism more than most with our ‘command’ efforts in recent times as an example. 

We still have a somewhat limited free market though. Although the government loves to exert control in the economy, it is in spite of their price controls for example that the economy trudges along. One of the reasons it crawls along rather than sprint is the shortage of ‘oil’ that a capitalist economy runs on – credit.

I’m not a fan of the credit lifestyle but I have to admit it’s a quick way to lubricate the cogs of capitalism. Credit allows people to buy or build houses just as well as it entices them to splurge on unessential stuff that they can’t afford. 

When people are offered goods on credit they (we) really do feel like we got it for free for a second. You might see an item you like going for say $300 and you might really want it but having to fork out $300 outright might force you to postpone the purchase. However, if the trader said you could pay $15 a month for it until you’re done, then the decision is pretty much made for you. You take the deal and business thrives.

That’s not to mention the business ideas confined to business plans stored in rarely opened files on a computer somewhere. We all know about how Nigel Chanakira put up his parents’ house as collateral to get a loan to start Kingdom Bank. Without that loan, who knows if Kingdom would have ever been.

We had a taste of credit in Zimbabwe

Our parents, as young couples, bought most of their furniture on credit from places like Nyore Nyore and Pelhams. They got clothes for their kids at Edgars/Truworths and that little Edgars magazine was part of our reading growing up.

Even some of the working class, not to mention the middle class were lucky enough to get mortgages on little houses that needed extending. This all worked on credit.

Then hyperinflation happened and loan repayments were impossible to keep up with as interest rates soared. Houses were repossessed, lenders had to write off substantial losses and the public lost faith in the system.

A creditless Zimbabwe born

Zimbabwe emerged as a shadow of itself after the hyperinflation era. One of the reasons the economy has struggled to lift off is that the oil of capitalism has been missing – there is no credit. 

Entrepreneurs are struggling to grow their businesses for lack of funding. The general population is living hand to mouth and has no appetite for ‘luxuries’ that require outright cash outlays. ‘Luxuries’ in the Zimbabwean context now referring to all that is not food or shelter.

That means business will struggle. It makes sense though for businesses to offer their products/services on credit/layby. Like I mentioned earlier, people are more likely to buy even what they don’t need when there are good payment plans. 

It is no secret that a lot of people run a pirated version of Windows. When you find that you need $199 for Windows 10 Home you get why that is. That often is how much the laptop itself would have cost on the second hand market. Imagine though if there was a 3 year credit facility and one could pay $6 a month. That could sway some to go legit.

Why is there no credit?

Borrowers fear interest rate hikes

We touched on it and trust, or the lack thereof is a major factor. The general population fears interest rate hikes that can make repayments impossible. So, while we get why the RBZ increased interest rates recently from 60% to 80% we also know that that scares borrowers. 

We do note that the inflation rate is right up there with the interest rate and so in real terms the 80% interest rate is reasonable. As reasonable as paying $80 interest on a $100 loan can be. However, USD loans provide a way to get around that messiness. 

When both lender and loanee do not have to worry about a fast depreciating currency, they can agree on a more palatable interest rate. We find that in the market, one can get a USD loan on good terms. 

Lenders fear defaults

When it comes to lenders, it is mostly those in the financial sector that can offer lending. That is because of the inherent risks in lending someone money, they may fail to pay you back. So, financial institutions being the ones that maintain people’s bank accounts are in a better position to know how risky each individual is. 

So, why have financial institutions been reluctant to lend out? We touched on it. Our rollercoaster economy, high inflation and currency challenges increase risk of default. 

Lack of cooperation

Then there is the lack of cooperation between financial institutions. Even the RBZ governor is on record decrying the lack of cooperation between his subjects. So, it then means there is no way for a bank to know how risky a certain individual is. 

They say once bitten, twice shy. Banks were duped by individuals who took out loans at various banks and then defaulted. The lack of cooperation meant the banks had no idea just how much debt a loan applicant had at other banks. So, they ended up lending to high profile individuals who were already up to their necks in debt.

The major defaults that followed shook the industry and ended with a special vehicle being created by the government (Zamco) to take over some of those loans. 

The lesson was learnt and banks just decided it wasn’t worth it to lend out. They were not willing (able?) to work together to fix the information sharing problem and drastically decided to just cut everyone off.

The RBZ’s credit registry

“In an endeavour to promote access to credit by individuals, the corporate sector as well as small to medium enterprises, the Reserve Bank of Zimbabwe and the government have taken measures to enhance the credit infrastructure in the country through the establishment of a central credit registry.”

That’s literally the first paragraph on the introduction of the central credit registry. The RBZ decided to step in and collect and share information on individual borrowers and business’ borrowing habits and repayment patterns.

After collecting that information, the registry comes up with a credit score for the person. I asked for my own report and I couldn’t be rated because I have never taken a loan from any financial institution hence no borrowing habits or repayment patterns. That means I am a black box to any would-be lender, making them reluctant to lend to me. One of them will have to take a risk on me.

The central registry does not blacklist anyone or advise any lender on who to lend to. The lender is free to ignore a terrible or nil credit score.

The registry did not have the most explosive of starts but it does appear as if it’s starting to pick up steam. 

Trend of Inquiries at the credit registry shows inquiries rising from; 116491 in 2017, 323904 in 2018, 260252 in 2019, 275829 in 2020 and a massive jump to 980187 in 2021.

Most of those inquiries represent a would-be lender checking to see if a would-be borrower is low risk. That’s encouraging to see because no lender would go through all that if they were not seriously considering lending to someone. 2021 stats show that that’s the case.

Zimbabwean lenders are stepping up

In the Monetary Policy for 2022 we found out that “the number of active clients accessing loans through microfinance institutions increased by 10.66% from 288 561 as at 31 December 2020, to 307 673 as at 31 December 2021.” 

The number of persons getting loans may have only increased by 10.66% but the value of the loans grew by 262.69% from ZW$2.01 billion as at 31 December 2020, to ZW$7.29 billion as at 31 December 2021. That’s something, considering year on year inflation was ‘only’ 61% that December 2021.

Banks joined in on the fun and loosed their purse strings too. Total loans and advances grew 179%, from ZWL$82.4 billion in 2020 to ZWL$229.9 billion in 2021. 

Don’t get it wrong though, they are still cautious. The loan to deposit ratio grew from 39.45% to 48.27% against a benchmark of 70%. Personally, I’m not even comfortable with banks lending out almost half of all our deposits so would accept the 48.27% ratio. 

However, if we’re committed to this capitalist dream we need them to bump that up closer to 70% and stimulate activity in the economy. 

To note is that of that ZWL$229.9 billion in loans, 36.8% were foreign currency denominated. 

There’s still a problem though

I mentioned that I do not have a credit score and if you’re like me, your chances of getting a loan are low. I also do not have good collateral, further decreasing my chances. Then there is the little issue of not being a civil servant which means I might as well not even try.

See, most loans in the market are salary based. Unfortunately, not all salaries are the same. Everyone trusts that someone employed by the government will get their salary and that arrangements to deduct repayments from that salary are not difficult to initiate. 

So, a private company has to negotiate with lenders and assure them that an individual will be in their employ for the foreseeable future and that they can arrange to deduct loan repayments straight from payroll. 

This means an individual employed by a small to medium private company has to convince their employer to negotiate with a lender and sign memorandums of agreement before they can dream of getting a loan. Needless to say, for most people that is not going to happen. 

This caution by lenders is understandable and its results are clear to see.  The international benchmark for the non performing loans to total loans ratio is 5%. Lenders are okay with 5% of loanees defaulting. The actual rate in Zimbabwe in 2021 was 0.94%. 

You just have to commend the lenders here. They increased their loans but still managed to maintain a default rate that low. That’s some impressive risk management right there.

That problem though

Most Zimbabweans are not formally employed and neither do they have good collateral. Being cut off from the official financial markets they also do not have a record of their borrowing and repayment habits. There will be no loans for these people.

It can be frustrating sometimes to realise that it’s mostly those individuals who already have houses that can get mortgages to buy new houses. The fresh faces leaving college and entering the job market are in for a rude awakening. Those who like Winky D thought they would have their own houses by 25 will learn the lesson.

This means the same individuals that got loans in the past will get loans. That’s how it works. We saw how the number of active clients for microfinance institutions only increased by 10.66% in 2021.  

In trying to cater to even the risky borrowers, some of these lenders are straight up turning into loan sharks.

Do you even want that credit?

The interest rate determines if a loan is a good deal. The interest has to compensate the lender for taking the risk whilst reasonable for the borrower too. Some of the microfinance institutions I visited are straight up thugs.

The worst I heard was that I would have to give up a car as collateral and have it parked in some garage for as long the loan has not been fully repaid. I thought, fair enough, you really would be taking a chance on me and for all you know I might disappear as soon as you give me the money. The car thing was reasonable to me to be honest.

Then came the interest rate and I almost fainted – 30% per month. You read that right, 30% per month, not per year. In only 4 months the interest paid on the loan would be more than the principal. You have to have a very serious emergency to accept such loan terms. However, if you’re not going to get a salary based loan, expect such kinds of loan terms. 

It’s not that much better for you if you have a payslip they can trust. Expect interest rates in the 25 – 30% range though this time it would be per annum and not per month. 

That’s still pretty high for a foreign currency denominated loan. Do note that in many places you won’t even get the option for a Zimdollar loan, which makes sense to be honest.

Civil servants do not have to put up with such crazy interest rates as they can easily get 12% at some lenders that only serve government employees. 

It all feels like the wild west

It’s good to see that lenders are slowly finding ways to inject money back into the economy. It is natural that after being burnt in the near past, they are doing this cautiously. They feel it’s still risky and so are turning away most and in some cases are demanding limbs for their loans.

The only problem is that the startup looking to get off the ground does not qualify for the loans with reasonable interest rates. Leaving them with only the loan sharks.

What kind of growth would a company expect to justify getting a loan with 30% interest per month? If an entrepreneur took that loan I would be less confident in their decision making. Whilst it’s good that such loans exist it still shows that we are still in the wild years and are putting up with exploitative practices just so we can get the ball rolling.

So, who is getting the loans and is that money going into productive use? I can guarantee you that the kid with a good idea and business plan working from their bedroom in their mother’s house is not getting any reasonable loan. 

It’s okay, the world over banks and other financial institutions are not in the habit of lending to startups in their infancy. That’s the role venture capitalists and angel investors take. So, even if the loans are not going to startups and small businesses, they are increasing the buying power of individuals who then spend, increasing business for some company somewhere. I’m here for it.

The curious case of telcos discontinuing credit plans

You may remember when all 3 mobile network operators, Econet, NetOne and Telecel offered smartphone financing. This model is working wonders in more developed countries and credit ratings help companies decide who qualifies for such financing. In Zimbabwe, Econet said,

Currently, we do not offer any devices on credit or layby

The fact that they these plans were discontinued in Zimbabwe means one of two things. It’s either there was low uptake or there were high default rates. Now that the credit registry seems to be improving, we shall see whether those plans come back.

I would imagine there is an appetite for such financing. Right now I’m not in the least bit interested in shelling out $800 for a Galaxy S22 but if you offered me $33 a month I would be tempted. The comments we got when we talked about Apple looking to offer iPhones as subscription services show that Zimbos are not opposed to monthly installments for some of these expensive gadgets.

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The Reserve Bank of Zimbabwe (RBZ) has announced that it has ordered Simbisa to halt operations of its loyalty and rewards program, InnBucks with immediate effect.

The RBZ’s statement on InnBucks is as follows:

PRESS STATEMENT

CESSATION OF INNBUCKS OPERATING AS A MONEY TRANSFER SERVICE PROVIDER

The Reserve Bank of Zimbabwe (the Bank) advises the public that it has ordered Simbisa Brands (Private) Ltd to cease operating the money transfer service branded or styled InnBucks, with immediate effect.

In November 2021, the Bank directed InnBucks to apply for and obtain necessary approvals in order to continue offering the service To date, the company has not yet regularised the service as directed, hence the inevitable regulatory intervention by the Bank.

The cessation of the service means that customers shall no longer be able to deposit funds into the InnBucks account or transfer the funds to third parties. However, customers may redeem their balances for cash or goods at Simbisa Brands (Private) Ltd outlets within a period of 30 days from date of this Press Statement.

Reserve Bank of Zimbabwe RBZ on Twitter

Cessation of Innbucks operating as a Money Transfer Service Provider pic.twitter.com/F9v8AHIkn9

— Reserve Bank of Zimbabwe (@ReserveBankZIM) April 20, 2022

You should also check out

• InnBucks to become more compelling domestic remittance provider with 92 new outlets in 2022
• InnBucks, Simbisa officially unveil loyalty and rewards program
• InnBucks: the loyalty and rewards program which introduces a compelling new currency

The post RBZ bans Simbisa’s InnBucks with immediate effect! appeared first on Techzim.

In what came as a shock to most, the Reserve Bank of Zimbabwe ordered Simbisa Brands (Private) Ltd to cease operating InnBucks, its rewards and loyalty program (money transfer service) last week. 

The RBZ was concerned about the money transfer service part of InnBucks. According to the RBZ, InnBucks did not have the necessary approvals to operate the transfer service they were operating. 

Apparently, the RBZ’s first thought was not to shut them down. Instead, they directed them to apply for and obtain the necessary approvals. That was back in November 2021 and so InnBucks had almost half a year to get their stuff in order. I think we can agree that the RBZ was fair if their version of the truth is accurate.

InnBucks responded to the RBZ’s order and shed a little more light on the situation. 

To our Valued Customers,

The Press Statement issued by the Governor of the Reserve Bank of Zimbabwe on 20 April, 2022 refers.

InnBucks has been and remains engaged with the regulator in respect of its ADLA license. Regrettably an impasse has occurred in respect of which the Simbisa Board is engaging the regulator with a view of achieving a speedy and amicable resolution.

Pending further statements, we assure you that funds held in the InnBucks accounts remain secure and all product purchases and cash withdrawals will be honoured as per regulations.

Thank you for putting your trust in us.

By order of the Simbisa Brands Limited Board of Directors.

20 April 2022

InnBucks on twitter

Here we see that Simbisa is working to resolve the situation and get back to business. So, I think it’s a matter of when not if InnBucks will be back. I can’t see a scenario where Simbisa will fail to meet the RBZ’s requirements.

Access Forex

Whilst we were still digesting the InnBucks ban, we got blindsided by the suspension of Access Forex. WIth this ban we started wondering what the RBZ was up to. Said Access Forex of the suspension,

Following communication from the Reserve Bank of Zimbabwe concerning our domestic money transfer service, Access Forex will be suspending local money transfers effective Friday, 22 April 2022.

Access Forex

Access Forex assured customers at the time that their cross-border transfers were not affected and that they were working to bring back local transfers.

They have since been given the green light to resume local transfers.

We reached out to the RBZ, the Exchange Director specifically to understand why the sudden bans but are yet to get a response. However, we know what it’s all about.

ADLA licence

From both InnBucks and Access Forex’s communique’s we now know what’s going on in the background. 

Simbisa announced that the problem has to do with their ADLA licence. With that revelation, now we know under which law InnBucks is operating or will operate. It is the SI 104 of 2015: Exchange Control (Authorised Dealers with Limited Authority) Order. 

The first question then becomes, what is an Authorised Dealer with Limited Authority? The Statutory Instrument clearly lays it out,

A financial services provider not necessarily licensed under the Banking Act but authorised by the Reserve Bank… to carry out small value person to person cross-border cash transfers or buy and sell foreign currency through money transfer systems designated by the Reserve Bank.

SI 104 of 2015

With just that definition, one can clearly see that what InnBucks was doing was different from what an ADLA licence allowed. ADLAs facilitate cross-border cash transfers but InnBucks handled domestic cash transfers. ADLAs buy and sell foreign currency but InnBucks was not in the bureau de change business.

Access Forex had exceeded the limited authority their ADLA licence gave them by processing domestic money transfers.

The abovementioned Statutory Instrument is appropriately titled ‘Exchange Control.’ It really is about the exchange of foreign currency, either through allowing the sending or receiving of money across borders or currency trades. 

InnBucks was a money transfer service, maybe not by name but in deed. However the SI which allows for ADLAs defines a money transfer service as,

The business of sending or receiving foreign currency cash between persons resident in Zimbabwe and persons resident in any other country or residence, and includes the buying and selling of foreign currency on a spot basis

SI 104 of 2015

Again, that’s not what InnBucks was. Access Forex was doing more than what they were allowed to. An ADLA licence does not appear to allow for local money transfers. 

Domestic money transfers

To be able to process domestic money transfers, a service provider must adhere to the domestic foreign currency transfer framework. Also, they must abide by Anti Money Laundering (AML)/ Combatting the Financing of Terrorism(CFT)  guidelines.

This is over and above the requirements to obtain an ADLA licence.

The resolution

Players like EcoCash and OneMoney who followed after InnBucks in the domestic USD remittance space are approved payment systems platforms providing mobile financial services. Steward Remit and BancABC’s City Hopper rely on their banks’ banking licences. 

Mukuru throws a spanner in all that. Whilst Mukuru is mostly about cross-border remittances, it also allows for the same domestic USD transfers that InnBucks facilitated. So, one may wonder why InnBucks and Access Forex were suspended but Mukuru was not.

Access Forex was allowed to resume domestic transfers on the 27th of April only 5 days after suspension. In announcing the resumption of city to city transfers they shed more light on the matter.

Based on submissions made to the RBZ we are delighted to advise you, our  valued clients that the RBZ has since updated our existing license to also cover  local (city-to-city) money transfers, and subsequently, lifted the temporary suspension on the service with immediate effect. 

Access Forex

The RBZ updated Access Forex’s licence to cover local money transfers. So, an ADLA licence holder can apply for and get approvals to do local money transfers. The RBZ said that plainly in their communique announcing the suspension of InnBucks. 

So, it appears that Mukuru already got the go ahead, hence why they were not suspended. Access Forex got their licence updated pretty quickly and earlier than InnBucks who were suspended first. 

We don’t know exactly why it’s taking longer for InnBucks but they mentioned an impasse with the regulator. InnBucks has the full weight of the ZSE-listed Simbisa and one can’t imagine what the hold up is. Whatever submissions Access Forex made are proving to be challenging for InnBucks to make.

The timing

I think we can agree that the RBZ was only doing its job and making sure all was fair in the money transfer business. However, the question becomes, why now?

The RBZ is not opposed to these money transfer services because they get data about the movement of hard currencies in the country. In addition, the RBZ  has a reputation of hindering business and innovation that they would like to erase.

So, regarding InnBucks for example, they were willing to give them almost half a year to regularise their licence. The RBZ seemed reluctant to suspend them and so I think there was pressure from other players in the industry who were compliant. I could be wrong but it feels like it.

What do you think about all this? Let us know in the comments below.

The post The RBZ suspended InnBucks and Access Forex domestic transfers temporarily. Let’s discuss what that was all about. appeared first on Techzim.

When I first heard that the first step in problem solving is identifying the problem, I thought that was a bit condescending. Pre-teen me couldn’t understand how one could not know the problem they were trying to fix.

By the end of my teens I was well too aware of just how difficult it can be to identify the problem. When I went through a rebellious phase my mother forbade me from hanging out with certain friends, I felt sorry for her. I was the problem, not my friends.

As a collective, we have felt the same about our beloved Reserve Bank of Zimbabwe (RBZ). We have watched them misdiagnose the problem for years and years.

As our Zimdollar struggled, we saw the RBZ and the government wage war against ‘economic saboteurs.’ They were adamant that dealers/manipulators were the main reason for the Zimdollar tanking.

We all knew they were expending their energy fighting the wrong enemy. It was frustrating to watch but I’m happy to report that the RBZ’s eyes have been opened.

Governor Mangudya’s open eyes

It was late last year when we noticed the scales start to fall from the RBZ governor’s eyes. He shared the observations he had made in an interview.

People have got this heart, that obsession, that requirement to always hold foreign currency. They think it’s a more stable currency, which it is also.

Dr John Mangudya, RBZ Governor

Our governor thought we would be surprised to find out that Zimbabweans’ demand for foreign currency had nothing to do with imports. Which showed he and his team had been looking at the problem all wrong.

You would be surprised to find out that the demand factor for foreign currency is a store of value demand as opposed to the import demand for foreign currency.

Dr John Mangudya, RBZ Governor

At the time we remarked that not a single Zimbabwean who doesn’t work at the RBZ would find that surprising.

Now that we are on the same page with our RBZ overlords, will they start coming up with solutions that are more appropriate?

Uptick in inflation

The Monetary Policy Committee met on the 29^th of April 2022 and they “noted with concern the recent uptick in month-on-month inflation, from 7.7% in March to 15.5% in April 2022, and the increase in annual inflation from 72.7% in March to 96.4% in April 2022.”

We have all felt this uptick in inflation. Recently we talked about how respected economist, Steve Hanke, calculated Zimbabwe’s year on year inflation in April at 207%. That’s quite higher than the RBZ’s figure of 96.4% and yet feels more accurate to my hurting heart.

Whichever figure you trust, the fact remains, inflation is getting out of hand. Why?

The committee says it’s “a combination of global shocks and the pass-through effects of the recent exchange rate depreciation on the parallel market.”

So, the Russia-Ukraine war and the forex black market. The committee believes the war takes a significant portion of the blame.

This is in line with other governments’ excuses. The United States is experiencing it’s highest inflation in 40 years and their government blames the same Russia-Ukraine war. Never mind that they have been printing the USD like their lives depended on it since 2008.

The war no doubt has some impact on our inflation. We have little influence on that and so most of our energy should go to the impact of the depreciating Zimdollar on inflation.

Sound economic fundamentals

The RBZ notes that on paper, the Zimdollar should not be depreciating like it is. Most economic fundamentals are sound and yet here we are.

Money supply

Our grief with the RBZ usually came from them printing too much money. They seem to have learnt their lesson and we have had multiple ‘excess money mop up’ exercises. By now, everyone knows what the RBZ means by ‘tight monetary policy.’

Reserve money has been hovering around the ZWL$28 billion mark for the past 6 months.

Annual growth in broad money was 151% in March 2022, compared to 384% in March 2021. A slowing growth rate in broad money supply is a good sign and yet inflation is surging even faster.

Favourable current account balance

Ask anyone on the street and they will tell you that Zimbabwe’s problem is that we are not producing enough. We need to export more than we import to lift this economy.

Well, in the first quarter of 2022 we generated US$2.4 billion in forex receipts, a 15% increase from last year, against payments of US$1.8 billion. That makes for a net inflow of US$600 million which helped increase the balances in our foreign currency accounts and national reserves to US$1.9 billion.

Any economics student will tell you that the above is good and yet it was in that same quarter that inflation roared. The economics student will remind you of the caveat, ‘all things being equal.’

All things are not equal in Zimbabwe and so what the economics textbook tells us to expect from a favourable current balance does not materialise.

Other economic fundamentals

The government under Mthuli Ncube has been responsible. They have been spending within their means for the most part. That’s another positive.

Then there is the issue of public works undertaken by the government. The RBZ sees these as a positive but that’s assuming all things are equal.

We discussed how analysts think these infrastructure projects hurt us in 2021. When the government announced they would be doubling their 2021 spend in 2022 it spelt trouble.

The main problem with the government spending billions on infrastructure is that all beneficiaries of that money look to convert it to USD at the earliest convenience. Therefore they flood the black market with Zimdollars, tanking our local currency in the process.

The problem of trust

Most economic fundamentals were sound in the first quarter and yet inflation increased. By process of elimination, the RBZ was forced to admit that the main problem in Zimbabwe is that of lack of trust in the Zimdollar.

The existence of strong economic fundamentals suggests that the recent exchange rate shocks are a manifestation of negative sentiments or perceptions attributable to people’s past experiences with hyperinflation and inevitable losses incurred during currency reforms. The Committee further noted that the erosion of people’s savings due to inflation compelled them to try and avoid similar losses by holding the US dollar as a store of value.

Dr John Mangudya, RBZ Governor

It’s sad that it took this long for these educated leaders of ours to get what the average Zimbabwean has been saying since the introduction of the bond notes.

The solution

With the problem accurately identified, the government and the RBZ believe they have the solution. It all boils down to enhancing confidence in the economy, dealing with market indiscipline and increasing demand for the Zimdollar.

i. Maintaining the 80% interest rate. The high rate is supposed to discourage speculative borrowing but when even the official inflation rate at 96.4% is above that, what’s the point of the 80% rate?

ii. Maintaining the minimum deposit rate for ZW$ savings at 12.5% per annum. This doesn’t make sense any more, inflation is at least 96.4% so who is going to be enticed to save when promised 12.5% interest.

iii. Maintaining a low reserve money growth rate of 5%. Nothing wrong with that.

iv. The $1000 limit on the willing-buyer-willing-seller arrangement for banks and bureaux de change to remain. Why does the limit exist? See, this is why we can’t call the official foreign exchange rate figures accurate. The RBZ won’t allow the market to work unfettered.

Dejavu

You may have noticed that none of the solutions are new despite the RBZ conceding that the problem is different. The following quote sounds ridiculous,

In view of the foregoing developments, the Committee resolved to maintain the status quo…

Dr John Mangudya, RBZ Governor

Here the monetary policy committe is saying that they noticed that the actual problem in Zimbabwe is the lack of trust in the Zimdollar. Which is different from what they thought the main problem was.

However, they are sticking with the solutions they came up with back when they thought the problem was something else.

You would have thought new problems require new solutions but you would have been wrong. The solutions that were in place as inflation soared should be good enough to reverse it.

I don’t get it but it’s what the RBZ is going with. Maybe they reasoned that since some of these measures were only introduced on the 1^st of April, they deserved some more time in the limelight.

While I admit that 1 month is not enough for any measure to transform the economy, I still feel like maintaining the status quo after a disastrous month is not wise. So much for the RBZ’s eyes being open.

The post RBZ finally identifies actual cause of Zimdollar collapse but maintains old measures appeared first on Techzim.

It started with a short paragraph by the President. If we hadn’t been living in Zimbabwe for the past 2 decades we would have been more shocked – all lending by banks was suspended on the 7th of May 2022.

In his speech, President Mnangagwa said,

In order to minimise the creation of broad money that is prone to abuse for purposes of manipulating the exchange rate for financial gains, and to allow current investigations, lending by banks to both the Government and the private sector is hereby suspended with immediate effect, until further notice. 

President Mnangagwa

We thought we had seen it all in Zimbabwe but the motherland seems to have a bottomless bag of surprises. When we heard banks could not lend anymore we wondered how that would work in practice. There was still a lot we didn’t know.

Lucky for us, the Reserve Bank of Zimbabwe did not keep us waiting long. Now we have a few more details on the suspension.

In a letter to financial institutions, the RBZ revealed that:

i. The suspension of lending applies to banking institutions, building societies, development finance institutions, deposit-taking and credit-only microfinance institutions. I wouldn’t be surprised if the suspension was extended to rich uncles lending to their families.

ii. The suspension of lending applies to both local and foreign currency. 

iii. Like the President mentioned, lenders can’t lend even to the Government, let alone the private sector. The RBZ made sure there was no room for misunderstanding,

For the avoidance of doubt, this suspension relates to all lending, whether local currency or foreign currency, to Government and the private sector, including corporates, other legal entities and individuals.

RBZ

iv. The suspension obviously means no new loans may be issued. It goes further than that though and that’s where the hard to believe stuff comes in.

If you had agreed to take a loan from a financial institution and had not received all of it yet, you’re out of luck. The suspension affects the undrawn portions of already agreed loan facilities too.

To make sure we understand that there are no exceptions, the RBZ says overdrafts are out of the question too. They even hit us with a slick catch-all, the suspension covers all “other forms of borrowing instruments, by whatever name they are called.” 

Then there are pipeline transactions, which are exactly what they sound like. These are loans that the lender has approved but has not yet delivered. An example would be mortgage loans where interest rates and other terms have already been locked in. 

For these types of loans, lenders can approach the RBZ for consideration on a case by case basis. But only if the agreement had been made before the 7th of May.

I don’t imagine there are too many pipeline transactions but it’s still crazy to think of the RBZ going through half done mortgage agreements for 2 bedroom houses in Kwekwe. 

I see Dr Mangudya and his fellow executives hunched over a table with multiple 2 bedroom house plans strewn about. After half a minute of intense contemplation, he raises his head and exhales, ‘come on guys, what do you think about this one in Mkoba? Should we allow this sap to get his dream cottage?’

That’s not how it will go down but there is a real possibility of corruption. Will there be transparency on which transactions will be allowed and which won’t? Who knows?

v. Not to worry though, if you had secured funding from outside the country, the government won’t mess with your arrangement. They are not about to disturb forex inflows and so the RBZ says the suspension of lending does not apply to offshore drawdowns.

Then came the ominous promise that the RBZ will be monitoring compliance with the above and will take appropriate supervisory action against those that ignore the directive.

What’s the thinking behind banning lending?

Minimising the creation of broad money

It was just recently that we were looking at the RBZ’s plans to tighten the monetary policy by maintaining a low growth rate of the money supply. It became clear to the government that that was not enough, hence the drastic measures above.

How does lending create broad money? 

Let’s say a bank has one client who deposits $100 with them. The bank does not have to keep the whole $100 in their vaults, they are allowed to lend most of it out. 

So let’s say they lend out $90 to client #2 and create an account for them. They create money the moment they do that. See, now client #1 says she has $100 in her bank account and client #2 says he has $90 in his account. Meaning there is $190 in circulation all from a $100 deposit. 

The actual mechanics of this process create a lot of money. See how our bank above can now boast of having $190 in deposits. They look at that $90 loan as a new deposit and so may lend out most of it again. This time they lend out 90% of it to client #3, which is $81. 

Making for total deposits of $271 all from a $100 deposit. They can go on and on, creating more money with each loan.

So the government and the RBZ are shutting down this process altogether. This should limit the growth of the money supply. We all know by now that the scarcer our currency is, the more valuable it is and the less our inflation is. So, this should help slow the freefall of the ZW$.

Removing arbitrage opportunities

The government saw another problem from lending activities. Recipients of these loans were using those sweet ZW$, obtained at say an 80% interest rate, to buy forex on the black market. 

They were not worried about the high loan interest rates because inflation was even higher, which meant that in real terms they were not paying any interest at all. That’s not to mention the profits they were making from their forex trades.

I imagine most of us would have wanted to get those loans but most of us did not qualify to get them. 

Now, the RBZ is investigating the whole thing and the government believes suspending lending will help with those investigations.

So crazy it just might work

They say unconventional problems require unconventional solutions. There is nothing conventional about the Zimbabwean economy and so we have to assume the solution will have to be just as whacky as the problems.

Here I was complaining that the RBZ had identified the actual cause of the ZW$ collapse but was maintaining old measures. I did not foresee such a new drastic measure. I guess that’s why they say be careful what you wish for. Who knows though? There could wisdom in this directive.

Economist Eddie Cross is one of those that see the wisdom in the directive. He is quoted by Newsday saying,

Without doubt, the package will strengthen the Zimbabwe dollar and I think this is the position of the government and I don’t see us dollarising again…

Eddie Cross

CZI President, Denford Mutashu is quoted praising the unprecedented move,

The move by President Mnangagwa is progressive in that it will help curb the inflationary pressures and also outdo the parallel market. Creating space for the local currency is key

Denford Mutashu

Not all are sold on the directive though. Even Eddie Cross has his doubts. He thinks the measures will strengthen the ZW$ but believes it’s a hodgepodge of approaches which may work against it.

I think this is compacted, it involves a mixture of different approaches and for that reason, it may not achieve what they are hoping to achieve

Eddie Cross

Many others fear for the financial services sector. After all, they are being forced to shut down their core activities. I think banks in particular will be okay, they have long ignored this core business as we shall discuss later.

There are also fears that this move will create a parallel banking economy. I believe we already have one and so am not too worried about that. We shall discuss all this in the following article.

What do you think about the government suspending lending? Stroke of genius or yet another stupid measure?

The post RBZ on suspension of bank lending. Partly drawn loans are suspended too. What is the rationale behind these decisions? appeared first on Techzim.