Illegal cash traders in Zimbabwe - An economic analysis with Tryson Dube

In this crippled economy of Zimbabwe that is barely surviving. 'A lot' of people depend on the informal sector. Many of these people are living with income below the poverty datum line; 'plastic money' cannot be the only solution to the money shortages in the economy. Quite a number of vendors survive on daily profit that can be less than $1 per day. Many Zimbabweans depend on the informal sector directly and indirectly. Although there are plastic money facilities that may accept smaller transfers, the informal sector favours hard cash that has limited costs. With over 50% of the population depending on the informal sector, hard cash is highly demanded than plastic money in the informal sector. This result in excess demand and bring about the existence of un-registered opportunists who sell this hard cash (USD and Bond Notes) at approximately 30% interest, with the USD having higher value than the Bond note. Agents are seen on a daily basis, on the streets, carrying a lot of money that is un-accounted for.

This means that a person with hard cash can make an untaxed profit of about 30% in the black market without contributing to the economic productivity. The black market is growing even bigger and in the informal sector, the economic agents respond by increasing prices when swiping to reduce losses made by the cost of getting hard cash. The city of Bulawayo is filled with these people and they circulate significant amounts of money to which the regulators have no control over. How then can the RBZ enforce good economic policies? Is the loss of confidence in the financial sector as extreme as in 2008? We all know that the financial sector can succumb to market failure and the main cause being lack of confidence in the sector.

Why would anyone deposit their hard cash into a bank if they are going to pay an additional 30% approximate interest just to have their hard cash again in the black market if their demand for hard cash is sudden? The alternative however is to wait in large 'atm' ques if it is banks, in which people start these ques as prematurely as 8pm (the day before) to withdraw their money. These ques are controlled by the security guards. Usually they are the ones who tell the depositors if there is no money on the 'atm'. What happens to the deposit taking financial institution's obligation to return depositor's money of the same kind, quality and quantity? (This is law concept of mutuum). I guess Zimbabwe is a special case.

Even at the highest interest rates that the law allows, buying cash at this interest rate is inappropriate. Licenced intermediators like banks end up losing business because of lack of confidence inflicted by the cost of getting hard cash. Instead of targeting the unbanked population the, banking institutions may opt to retain the existing customers because of lack of confidence in the sector.

People demand hard cash for daily transactions. Ordinary people depend on selling imported goods from our neighbouring countries hence need not only hard cash but foreign currency to be exact. Shortages of hard cash have bad consequential effects on the economy resulting to reduction in incomes of the people who are earning the little cash they can salvage. With so much cash problems Zimbabwe is facing currently, the Bond notes is are supposed to be the saviour in the economy. However the Bond Note is now subjected to an illegal exchange rate of its own which is not what the statute suggests. In a market, whenever a price is fixed, actions have to be taken to curb the consequences of the differences between the equilibrium price and the fixed price.

In terms of s44B of the RBZ Amendment Act, 2017
 "Bond note" means a unit of legal tender whose par value in relation to the United States dollar is backed by a guarantee extended to the Reserve Bank by one or more international financial institution.

According to law, the Bond Note has the same value as the US $ but does not have an exchange rate of its own because of its complex nature. It is secured by a $200 million facility. In a normal situation, it is not always the case that two currencies equate to each other exchanging at 1: 1. The value of two currencies normally differs because of the factors which include policies of the central bank, currency demand & supply of money and inflation amongst many factors. In Zimbabwe the money in circulations can only be used within the Zimbabwean boarders. The USD has more demand as a hard currency (especially to importers) and it is favoured by the countries we import from e.g. Botswana, South Africa but 'statutes' restrict its legal value deviation from USD purchasing power.

Previously the black market used different cross exchange rates to make the inequality of the USD and Bond Notes. This means that the USD traded 1:1 with Bond Notes, but one can buy more of another currency with USD than they can buy with Bond Notes in the black market. The Bond Notes started by having exchange rate with the USD $ directly in the black market illegally of about USD $1: Bond Notes 1, 05.
Illegal cash traders, buy products on standard prices in legitimate companies using 'eco cash' or other money transfer services. They sell these products for hard cash at a discount of less than 10% (JUST TO GET HARD CASH). They then sell this hard cash at a profit of about 30%. In Zimbabwe, particularly in the informal sector, hard cash has become a financial investment instrument that pays more than the legal instruments.

A law was passed through a statute which empowered the police to arrest illegal cash traders. However after the resignation of the former president of Zimbabwe, the police have been less visible than before and the illegal cash traders have increased their numbers, attracted by abnormal profits. What scares people most is a similar situation of about a decade back. I still argue that in 2009, this problem was eradicated. The policy makers should try and correct the economic FUNDAMENTALS in the same manner as in back then. The statutes will not fix demand for the foreign currency or eradicate profits from this illegal activity.

This situation undermines the investment markets and its instrument which apparently pays less interest for most liquid asset (hard cash) investment. Even some of the former leaders of the country were allegedly found with large amounts of money (USD), that they did not want to bank or introduce to the economy. Zimbabwe desperately needs these investments. In recent weeks we have seen much change in the political leadership of the country. These led to significant changes in the financial markets in what the economics geniuses say, 'it is a process of auto-correcting'. This this was shown by the changes in stock value of the biggest companies on the ZSE.

With the amount of leakages, this country had after dollarization, the country has to protect its foreign reserves. This has however drastically reduced the availability of foreign currency circulating in the economy. The demand for foreign currency however has remained unchanged with a significant number of people depending on imported goods. The demand for the USD specifically is a little greater than that of bond note and despite the laws against the differences in value, the black market tries to satisfy the demand un-catered for at a premium.

Tryson G. Dube is a Student at National University of Science and Technology, Banking and Investment Management 'CBA-BIMP' (in progress)