One of the most epic responses to any question ever was by Patrick Chinamasa when he was asked earlier this year about the trading of the USD and other currencies on the streets. He said he did not know about any such activity because he was not there when it happened. Huh?
In his recent 2018 National Budget statement, however, the ex-Minister of Cyber Security Threat Detection and Mitigation seems more informed. Maybe he was there when it happened this time around.
The source of the problem
In addressing the problem of the cash crisis and why people are failing to access their earnings and savings, as and when they need them, the minister said this:
Central is mismatch between stock of foreign currency available, as represented by hard currency and nostro balances, and electronic RTGS money balances in banks, largely being fueled by borrowing requirements to finance the Budget deficit.
By saying this he clearly says the government was responsible for the problems we faced and continue to face, through ‘printing’ money to finance operations (most likely a runaway wage bill). When the Bond Notes where introduced, we all thought that the government was going to print them en mass and introduce the 2008 problems all over again. We were wrong!
The government had a more efficient machine for printing money, not bothering with ink and paper at all. They simply added zeros to bank balances through the RTGS system. This was just ‘money’ added to the circulation without any real money backing it at all. Fiat of a fiat.
Probably, the Bond Note was introduced to back up this unbacked money in electronic circulation. The money was created after the fact. Kind of: ‘Hey look, our bank account says we have $300 but really the money held by the bank is $75! No problem, let’s print on this bond paper the balance needed before someone comes to the bank to withdraw.’ Thus a fiat of a fiat of a fiat was created.
The resulting inflation
Chinamasa goes on to say:
In the outlook, the biggest threat emanates from inflationary pressures that the economy faces from potential general price hikes driven by speculative tendencies, arising from the mis-match between electronic bank balances and available foreign exchange.
When there is an oversupply of money, there is inflation. Zimbabwe’s case strongly proves this basic economics textbook theory in a very peculiar way. Zimbabwe has both inflation and deflation happening side by side. How?
The real money (the USD which we are officially using) is in very short supply hence it’s forcing deflation in USD terms. Generally, if you have USD cash and you are willing to use it locally you can negotiate and get away with paying a ridiculous price even for fixed property.
At the same time, RTGS money (supposed USD in our bank accounts) is in oversupply because of the printing described above and this has forced inflation. As a result, prices have been going up because all of us are using electronic money to buy (above 75% of transactions). Bond notes are kind of a middle ground if you have them. Kombi prices have neither gone up or down because we are using bond notes and coins for kombi.
Chinamasa acknowledges the black market rates
As he continued with his address the minister made the following statement:
The emergence of foreign exchange rate premiums on the back of foreign currency shortages is, thus, symptomatic of the above mismatches that remain the key driver of inflation.
The mismatches he refers to are the difference between the actual USD in circulation versus the balances in our bank accounts. As the age-old wisdom goes: acknowledging the existence of the problem is half way to solving it. Chinamasa said:
Reserve Bank interventions to prioritise foreign currency allocations to producers of essential goods and services should partly assist overcome such premiums.
This should be complemented by Government exercising flexibility in the issuance of import licences to those with free funds, in order to ensure that the market is adequately supplied with essential goods not produced locally.
These measures make sense because when goods that people want are adequately supplied, people will not mind what form of money they hold. Foreign currency is in high demand right now because every random person has to import their needs themselves. When I was a little kid, my father was in the US and whenever he sent USD we would immediately seek to dispose of it by changing it into the Zim Dollar (Iya yechinzou iya).
We didn’t need to hold on to the USD because the Zim dollar could buy all we needed. We didn’t need to know what happened to the forex after we gave it to the teller. Someone else in the retail business would get that forex from the bank to buy the goods we would need if they were not available in Zimbabwe. The system worked.
The final quote I will make from the minister’s budget statement is super important:
However, overall, the above initiatives merely address the symptoms, and require to be buttressed by measures which address fundamental issues related to fiscal imbalances and low production.
As long as the country’s current account balance is skewed towards importing, the problem will persist. In the eighties to early nineties, Zimbabwe and Singapore had the highest per capita trade surpluses in the world. This meant, considering the size of our population we were punching way above our weight in the exports space.
We will obviously not go back to these levels overnight but when the Minister of Finance and Economic Planning starts acknowledging the existence of our problems and their source, we may be on our way to some stability.