Desolation As Economy Falls Apart Again in Zimbabwe

Taking the same shopping list that he uses every month, the former printing machine operator goes to the supermarket at the nearby business centre where he does his shopping. But what he discovered left him distraught that he went to bed with his shoes on. His pension – the only income he depends on – the same amount that he received the previous month and on which he bought everything on his shopping list, can now buy only a third of the basics on his frugal shopping list of a dozen or so items.

“What is the meaning of this?” the visibly angry old man asked. “How can they suddenly increase prices like this? How are we pensioners, who have no other sources of income, going to survive?” he asks.

These are questions that most ordinary Zimbabweans are asking themselves as prices have suddenly shot up making money in their bank accounts and mobile wallets almost worthless.

Zimbabwe is fast sliding towards an economic crisis similar to one that the southern African country suffered a decade ago after two fiscal measures by the government disturbed the already poor confidence that citizens have in the country’s financial sector following their experience of 2008.

The latest economic meltdown has been triggered by a tax increase on all electronic transactions from five cents per transaction to two cents per every dollar transacted as well as the separation of the existing bank (local RTGS) balances from Nostro foreign currency accounts.

The crisis is the culmination of what economists have always warned of, the government paying its bills with fictitious money not backed by anything, while passing off this virtual money as United States dollars.

As of June 30 this year the total amount of money held in Zimbabwe’s 21 banks was supposed to be US$9,53 billion. The amount was slightly higher than the US$8,48 billion that the institutions held at the end of December 2017. These are amounts that ordinary citizens and businesses earned and saved since 2009 when they started re-building after the economic crisis that saw the country abandon its own currency which had been ravaged by a world-record inflation. The economic crisis resulted in most citizens losing most of their life savings and pensions.

Since the rebuilding started in 2009 with the dollarisation of the economy, the country has always used a basket of about a dozen currencies, with the United States dollar being the primary currency.

In 2016, faced with a growing shortage of United States dollar notes, the government introduced what is called a Bond Note, a local currency which the Reserve Bank of 

Zimbabwe (RBZ) insisted was just an incentive for exporters, not a backdoor way of resurrecting the defunct Zimbabwe dollar. The central bank, which has insisted on an exchange of 1:1 between the US dollar and the bond note, repeatedly assured depositors that all their deposits would always remain valued in US dollars and those that would want to make withdrawals in greenbacks would be free to do so as the bond note could not forfeit on them.

The government then started promoting the use of electronic transactions to beat the teething cash shortages. On the back of these severe cash shortages, in no time the bond note became the only money available.

Suddenly at the beginning of October, the RBZ ordered the separation of the existing local RTGS bank balances from Nostro foreign currency accounts, “in order to eliminate the commingling or dilution effect of RTGS balances on Nostro foreign currency accounts”.

The material effect of the move was that the nearly $10 billion in the country’s banks which hitherto been treated as US dollars were no longer treated as thus, with the depositors massively losing out on their savings without any compensation from the same government that two years ago assured them that their US dollar bank balances will remain in that currency.

The market saw the new policy by the central bank as confirmation that depositors were left holding “money which is not matched by foreign exchange” in bank balances. This prompted panic buying and price hikes as everyone tried to abandon the suddenly worthless money.

The RBZ confirmed this “printing of money” in its monetary policy statement of January 2018 when it noted that “the increase in the RTGS position was largely driven by increased Government financing through the overdraft at the central bank and the issuance of Treasury Bills and Bonds, which increased from $3,2 billion in 2016 to $5,2 billion at the end of 2017.”

The bank went on to point out that this was not a sound policy noting that, “under dollarization financing of the deficit should ideally be from foreign sources in order to mitigate the domestic creation of money which is not matched by foreign exchange.”

In an attempt to stop the rout on citizens’ bank balances, the government announced that it had secured a US$500 million facility from the Afreximbank to guarantee depositors’ bank balances in US dollar terms. The amount may turn out to be more than enough given the rate at which the value of the bank deposits has fallen. The exchange rate on the black market, where most transactions in the country’s highly informalized economy take place, fell to as low as 1:6 (US$0.17= $1 bond). This caused price hikes of more than tenfold on some commodities.

An economist, Tinashe Muzamindo said the only way of getting the country out of its economic challenges is to revive the country’s industrial base that has seen thousands of firms closing over the past two decades, so that the country can become productive once again.

“If you check very well, we have been surviving on borrowing and we have a huge budget deficit, the gap is too wise to close,” Muzamindo said. “Instead of talking of other measures like multi-currency system, the best option is recapitalization of the industry. We need to close the gap of borrowing. The major challenge is whatever we are going to borrow, we spend it and we go to borrow again. How then do we expect to close the gap of borrowing? We need to be cautious on how we spend our money.”

Although the government still insists that the value of the bond note and local bank balances is still 1:1 to the US dollar, an ordinary citizen like old Moyo, the disconsolate pensioner, can only believe it if his monthly pay-out can buy the same basket of basics that it could purchase only a month ago. This is the assurance that the government is struggling to give even to its own workers, itself being the biggest employer in a country where unemployment is more than 90 percent.