There was much talk on social media earlier this year when it was announced that Zimbabwe was launching a currency backed by gold. However, it was not what many believed it to be. It was not physical money but a digital currency, called ZIG tokens.
ZIG tokens have been the worst of all the 10 versions of domestic currency the country has had since 1980, said Eddie Cross. ZIG “takes the cake and is by far the most ridiculous” so far.
Over a series of two articles, he made the argument why Zimbabwe should stop transacting in foreign currency cash and needs its own printed money.
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In the first week of October, he wrote an article arguing why it was not in Zimbabwe’s national interest to continue with the use of foreign currencies for domestic settlement.
Any informed observer of our economy must be astonished at the things that go on here, he wrote. “Many of which bear no relation to the situation on the ground or even rational thinking. This past week has been no exception.”
In all, he said, I think we have had 10 versions of a domestic currency since Independence. “Now we have the ‘ZIG’. This takes the cake and is by far the most ridiculous step taken so far in our convoluted path back to sanity.”
At independence, when the Rhodesian Government handed over to the new Government of Robert Mugabe, the Rhodesian dollar was 2 to 1 US dollar. For the previous 23 turbulent years the local currency had been stable, Cross said. “It had survived the break-up of the Federation, 15 years of mandatory UN-enforced sanctions, a British blockade of Beira Port and 16 years of civil war. Quite an achievement.”
For the 17 years following the start of Mugabe’s government, the Zimbabwean economy grew steadily but expenditure exceeded revenue consistently, funded by loans and then printed money. Consequentially, in 1997 the currency collapsed and the Zimbabwean dollar slumped to 12 to 1 US dollar.
“Over the next 11 years, our Reserve Bank printed money recklessly to prevent a total collapse of the economy and in a final act of desperation, a printed note for Z$10 000 000 000 000.00 came out and was declared valueless by the market. The local dollar collapsed and died; it was December 2008,” Cross said.
In February 2009, Zimbabweans were given an option of using any one of 6 international and regional currencies for transactions – the USD, UK Pound, South African Rand, Botswana Pula, Japanese Yen and Chinese Yuan.
“In two months, the Rand and the US dollar fought for supremacy but in 6 months the US dollar was king. It has remained so since then,” he explained.
In 2014 the old regime took charge and the madness resumed – the fiscal deficit spun out of control and the Zimbabwe Reserve Bank began printing money again.
“By 2017 we had $23 billion US dollars in our bank accounts. Only the stuff was not USD – it was an electronically manufactured substitute without any backing. It was air,” Cross wrote.
In November 2017, a regime change occurred “assisted” by the Army. Mugabe stepped down as the country’s president and Emmerson Mnangagwa took over. During the first two and half years of Mnangagwa’s government, Zimbabwe’s economy seemed to be improving. It was during that time that it was announced that what Zimbabweans had in their bank accounts was “RTGS dollars” which bore no relation to US dollars. But this came at a cost to ordinary Zimbabweans. “On the ground, we found that [there was] about 12 per cent of the real dollars left in our accounts – 88 per cent shrinkage,” Cross said.
Elements of the old economy and administration did not like the idea of a free economy with open competition. What the Zimbabweans were faced with, Cross explained, was that “the Reserve Bank retained some elements of the role it played as almost a shadow Government under Mugabe and resumed printing money to pay for what they were doing. The result, our new local currency is again floundering. It has lost most of its value and the paper notes printed in the early days are just scrap paper. Instead of the new currency taking over on the street, we have again dollarised.”
Note: For a brief and mind dizzying rundown of all the currencies Zimbabwe has introduced since 1980 read the article ‘The Kingdom of Funny Money’ published by Zim Price Check on 18 June 2020.
Today, Cross suspects that 85 per cent of all transactions on the street are in US dollars and over 80 per cent of bank balances are in USD. “Now we have introduced gold coins and worst of all, the new gold-backed ZIG token. All counter-productive and simply making things worse.”
Cross proposed a solution: Zimbabwe should revert to using a single currency, its own currency. As he pointed out, when Zimbabwe managed its monetary affairs properly, the US dollar was always worth less than Zimbabwe’s own currency. All the countries in our region have done this successfully, he noted.
Our main problem is confidence in our authorities and our own currency. We have got to get back to a mono-currency economy which uses our own currency. All foreign exchange coming into the country must be sold on arrival on a bank-managed market which produces an exchange rate every hour of the day. Our Reserve Bank should be buying surplus currency off the market to keep the rate down and holding these balances as national reserves. Anyone needing foreign exchange for any purpose should be able to buy it from their Banks. That is how the rest of the world does it without exception. Exchange control should be scrapped, it has no role to play. If we did that this would be a different country in 24 hours.The Continued Chaos in Zimbabwe Money Markets, Eddie Cross, 6 October 2023
Much to Cross’ surprise, President Mnangagwa took up the issue at a major meeting and stated quite clearly that Zimbabwe was going back to the use of its own currency. “What the President said was that no country had been able to develop its own economy without using its own currency. I happen to agree,” Cross said.
“The question is how to affect the transition from what we have now and what has to prevail once the deed is done?” he asked and wrote down what he saw as the way forward.
Firstly, Zimbabwe has to have an alternative. Zimbabwe has a variety of seemingly ever-changing payment methods as noted in the article ‘The Kingdom of Funny Money’. Cross discussed three:
- The Reserve Bank’s ZIG “gold-backed tokens” are just another form of Bitcoin – a currency without any real support.
- Another payment method is Real Time Gross Settlement (“RTGS”) dollar notes ranging from $2 to $100, but at 7000 to 1 they are worthless and no longer acceptable in the market. Although electronic transactions in RTGS dollars run into the trillions making it a significant means of settlement.
- The Nostro USD dollar balances are not real USD but according to Cross have value because Zimbabwe’s banks keep balances in real currency offshore to ensure that when a payment is made from accounts, they are settled in real-time in real money. “That is where we have to go with our own currency,” he said.
A Nostro account is an account held by a bank in a foreign currency at another bank, used to facilitate foreign exchange and trade transactions. Although as Zimbabwean author Cathy Buckle explains in THIS article, it doesn’t work that way in Zimbabwe. Since introducing them in 2019, the government has changed the rules along the way.
However, the only viable alternative to what Zimbabwe has now, as Cross sees it, is the Nostro accounts.
70 per cent of Zimbabwe’s economy is informalised and in that economy, they work in cash. In the formal sector people can draw US$1000 a day from ATM’s and 85 per cent of all retail transactions are in US dollar notes.
“In my view,” Cross said, “we will have to have a new currency printed and this must be equal to about 15 per cent of all such transactions in the market. We should still encourage the use of electronic means to settle, but as a developing country with a large informal economy, we need cash.”
Secondly, the Nostro account system needs to be protected and allow people to bank real dollars into these accounts, which should then be accepted as “free funds” and to be available for individuals and companies to settle external liabilities. This will allow people with US in cash to bank this and not lose access to US dollars or Rand for specific purposes. “These balances should not be touchable [by the government],” Cross said.
Thirdly, Zimbabwe needs to abandon exchange control on all current account transactions. “Exchange control is not appropriate in a free market economy,” Cross said.
Fourthly, Zimbabwe has to have a completely free market for all hard currency needs. Any Zimbabwean who needs currency should be able to buy what they want at their banks and Bureau du Changes, at the market price of the day.
Fifthly, Zimbabwe needs to demonetise all foreign currencies for local transactions. That means that foreign currencies will no longer be acceptable in local markets, taxi fares, hotels, service payments, taxes and all other local payments people have to make must be conducted in local currency. “That means that retailers and all others are going to have to have confidence in our currency and that means discipline in the monetary system. It also means that our local currency must be convertible into hard currency on demand,” Cross said.
Having confidence is going to be a tough call for Zimbabweans. Not only have Zimbabweans endured record-breaking hyperinflation and not been able to withdraw money from their accounts but the government has a history of taking foreign currency out of private bank accounts with no warning. For example, an Exchange Control Directive dated 24 August 2020 stated:
“With effect from 21 August 2020, 20% of the foreign currency receipts of providers of goods and services shall be liquidated at the point of depositing in the domestic FCAs [Foreign Currency Accounts].”
The directive was issued three days after it came into effect.
On the same day that President Mnangagwa said that Zimbabwe would revert to the use of the local currency as the sole legal tender and dump the multi-currency regime, Mthuli Ncube, Zimbabwe’s finance minister, announced the country’s desire to establish a new staff-monitored program with the International Monetary Fund (“IMF”) by April next year. “It will focus on maintaining discipline on the fiscal front and continue fine-tuning our exchange rate system and maintaining a tight monetary policy,” Ncube said.
It seems Zimbabwe’s monetary affairs will be “managed” by the IMF. Will the IMF permit the country to use cash?
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