Can currency reforms save the Zimbabwean economy?

There is no doubt that the unresolved currency issue lies at the heart of Zimbabwe's economic meltdown in the past 3 years and the price distortions in the local market. The origins of the currency crisis can be traced back to August 2015 when Treasury passed the RBZ Debt Assumption Bill which involved the government assuming the RBZ Debt of over $1.4 Billion by issuing Treasury Bills (TBs). The objective of this debt assumption bill was to clean the RBZ balance sheet and allow the apex bank to resume its clearing role through the RTGS system. This role had weakened during the GNU era of 2009-2013 when the apex bank operated under a tight cash budgeting policy which meant that government departments expenditure was within what treasury collected through taxes. In order to sustain uncontrolled government expenditure in 2015, the RBZ started crediting local banks with electronic balances (RTGS) which were not backed by tax revenues and Nostro foreign currency balances. As a result broad money supply grew by over $1 billion in less than 12 months. Domestic demand grew and Nostro accounts dwindled due to foreign currency externalization as 5 year Treasury bills were being sold at a discount by alert investors who preferred credits in their offshore accounts than future losses. Cash shortages started to creep in by February 2016. To close the cash shortage gap in the market, the Apex bank announced that it was going to introduce an export incentive named Bond Notes before year end but alas the horses had already bolted.

The bond note was introduced in November 2016 amid immense resistance from business and local consumers who had realized that 2008 was now in replay and savings would be eroded.  What was not known publicly was that the apex bank had added $2.3 billion into the market by October 2016 through RTGS and TBs had been issued to banks, pension funds and the corporate sector to back demands for cash withdrawals as banks were running dry. Soon after the Bond note introduction, the parallel market found its feet again by exchanging RTGS bank balances with US dollar and Bond notes at premiums of at least 10-15%. Even though the apex bank capped physical money supply to $500 million, the devil was in the billions that were circulating in the economy through the RTGS. By the end of 2016, government expenditure had skyrocketed and the budget deficit for 2016 expanded to $1.421 billion from the $393 million recorded in 2015. The value of Treasury Bills (TBs) issued by the government surged coincidentally with the introduction of Bond Notes from $2.1 billion as of October 2016 to $7.6 billion in August 2018, an increase of $5.5 billion in less than 2 years. By December 2018, domestic debt stood at over $9.5 billion. That figure includes out of statute borrowings of more than $2.3 billion through the RBZ Overdraft facility.

Back in 2009, the government was forced to dump the Zimbabwean dollar due to record hyperinflation and economic decline which had wiped off 50% of the economic value. The introduction of the multi-currency regime stabilized the market largely because government expenditure was kept in check with actual budget surpluses realized from 2009 to 2012.

FDI inflows and industry capacity utilization picked up with the economy growing at an average of 10% from 2009 to 2012. Nostro account balances were also stable with import cover of more than $800 million as of August 2012. Domestic debt closed 2012 at $276 million with the bulk of the borrowed funds used in local by-elections. The economy was liberalized so as to manage inflation, allow for industry to retool and improve basic goods supply under a strong dollar. The negative impact of the multi-currency regime during that stable period was mainly felt on the export earnings front as Zimbabwe's exports could not compete in the region due to the strong US dollar that was mainly used for trading in the economy.

Currently, the Zimbabwean government has limited options in terms of currency reforms because foreign debt is over $8.5 billion and international funders (including the Chinese) have stopped advancing any loans to Harare so as to back any meaningful currency reforms. Joining the Rand Monitory Union has been touted as the best remedy to the economy considering that South Africa is Zimbabwe's major trading partner and accounts for most of the FDI inflows and tourist arrivals into the country. In 2017 alone, Zimbabwe' trade with South Africa topped $4.2 billion. The arguments for joining the RMU therefore carry a lot of weight before other preconditions are considered. Key among the conditions is curbing Zimbabwe's debt levels with public debt now over $18.5 billion, having a local currency and stringent rules on monitory policy to control broad money supply.

Faced with the rock and hard place scenario, the government has announced that the Zimbabwean Dollar will be introduced before the end of 2019.  Questions remain on whether any currency can save the Zimbabwean economy without addressing key economic fundamentals. The fundamental aspects that need urgent attention include low agricultural and industrial production capacity which leads to a high import bill and low export capacity (Average trade deficit of $1.8 billion from 2016 to 2018 and insufficient foreign currency earnings); high government expenditure (Average budget deficit of $2.3 billion from 2016 to 2018); lack of confidence in the economy (Poor domestic and foreign investment); high production costs driven by a punitive tax system and high levels of public debt highlighted above. Other limitations in the economy include massive corruption, command policies that crowd out private sector investment, foreign currency externalization loopholes, porous border posts that promote smuggling, weak institutions (rule of law, respect for property rights and governance culture), non-performing State Enterprises and poor tax compliance due to market informalization.

It is essential to point that the Bond Note served in almost the same capacity as the Zimbabwean Dollar only that it could not be traded on the international money market. The economic challenges that bedevil Zimbabwe since 2013 have largely remained the same and coalesced around the government's insatiable appetite to spend beyond its tax collections.

The government has largely chosen to act on symptoms such as multi-tier pricing, inflation rate, cash shortages, labour demands, commodity shortages especially fuel, cooking oil and grain without addressing the real fundamentals that underpin economic growth. Any currency introduced by the government will not sustain as long as key economic fundamentals that support economic growth are negative. Even if it was possible to raise billions in United States dollars in offshore accounts to support the introduction of the Zimbabwean Dollar, those too will be exhausted over time leaving the country with massive debts as long as decisive economic reforms are not implemented to arrest the budget deficit, trade deficit and confidence deficit. Sound economic management policy by the treasury from 2009 to 2012 provides the foundation upon which the current government needs to start on so sustain any currency in the economy. The only sustainable way to grow foreign earnings is by allowing the economy to flourish. Raising foreign currency by incurring more debt without addressing economic fundamentals will not eliminate the black market and the market distortions that are destroying the economy. A currency is sustained by a healthy economy, not external borrowings to shore up the country's Nostro accounts or subsidize a flawed exchange rate.

Victor Bhoroma is business and economic analyst with expertise in business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or Skype: victor.bhoroma1.