Zimbabwe’s currency crisis: when the market rules

Zimbabwe’s currency crisis: when the market rules

By Matt E.T Matigari, HARARE, October 19 (The Source) – Zimbabwe’s foreign exchange situation is getting worse in spite of extensive touting of a ‘nostro-stabilisation’ loan the Reserve Bank of Zimbabwe says it got from Afreximbank. How do we know this? Watch the indicators from your bank.

On 11 October 2017, Ecocash, which some moons ago actively promoted its Mastercard, had this to tell its customers: “Due to the prevailing foreign currency challenges we regret to advise that with immediate effect, Ecocash will be suspending international transactions on the debit card…” Of course, they added the usual ‘we apologize for any inconveniences (sic) caused…” bla bla bla. This is not just true of Ecocash and its mother bank, Steward Bank. It’s true of many banks in Zimbabwe, including the foreign-controlled ones.

Foreign exchange is a resource. Unlike five years ago, the obtaining situation is that very few, a privileged few, have access to it. In its wisdom or lack of it, the Reserve Bank of Zimbabwe, and by extension, Government of Zimbabwe decided to plug the gap by printing a note (bond note) they assigned the same value as the United States dollar. In my previous writings, I argued that the bond note is in fact a local currency, so there is no need to dwell much on this.

Technically, a note (whether bond or promissory) is a signed document containing a written promise to pay a stated sum to a specified person or a bearer at a specified date or on demand. As such, strictly speaking, the Reserve Bank of Zimbabwe used bond notes and various other negotiable instruments like treasury bills to borrow real United States dollars from depositors.

Former Finance Minister Patrick Chinamasa recently revealed that $2,5 billion Treasury Bills were issued out as at June 30, with $127 million going towards paying the Reserve Bank of Zimbabwe debt and $263 million towards recapitalisation of State Enterprises and Parastatals. It’s up to citizens and various other institutions representing citizens to audit and assess how those funds were used.

But the important point is – they decided to use the force of law through Statutory Instrument 133 of 2016 Presidential Powers (Temporary Measures) Amendment of the Reserve Bank of Zimbabwe Act, which INSISTS that bond notes are acceptable legal tender, and that they have an equal value to United States dollar.

So, let’s take a step back! Adam Smith laid the foundations of classical free market economic thought through his 1776 work called An Inquiry into the Nature and Causes of the Wealth of Nations [often referred to as The Wealth of Nations]. It’s important because exchange rates are indeed a function of the wealth of nations.

Through what he termed “the invisible hand”, Smith suggested that an economic system is automatic, and, given substantial freedom, is able to self-regulate and drift towards self-efficiency. The self-regulation ability is of course limited by tax incentives, externalities, monopolies, political lobbying, and things like privileges given to one group of economic players at the expense of others.

The most relevant part of Smith’s work to my thinking is as follows: “As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

I got into an engagement with Busisa Moyo of United Refineries about parallel market pricing. He argued that the rates were crazy and there is no basis (pricing model) for the rates. But he could not tell me either what the basis or pricing model was for insisting that the value of a bond note is the same as the United States dollar as intended by Mugabe’s decree. I argued there was a basis for parallel market pricing.

The basis is rationalism. Rationalism is the philosophy that knowledge or actions are driven by reason, logic and intuition. This philosophy brought into economics the notion of homo economicus, or economic man or rational man; which suggests that humans are consistently rational agents that pursue narrow self-interests to maximise utility (satisfaction).

Although the thinking around the rational man came centuries later through John Stuart Mill and others, Smith had noted this already when he pointed out that: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

We could argue as well that it is not from the benevolence of the Reserve Bank of Zimbabwe governor, the president or the minister of finance that they fix the rate of the bond notes to that of the United States dollar and insist the two currencies are equal, but from their regard to their self-interest – and if I may add, political self-preservation, which gives them access to power, money and control.

So what drives the parallel market rates. As I told Busisa Moyo, it’s a simple case of supply and demand. The scarcer the United States dollars, the higher the value of Zimbabwe dollars (defined as bond notes, digital bank balances and other instruments) you must offer for US dollars.

President Mugabe admitted on national television this year that he also now keeps cash at home (I am not sure which bank gives him that cash), he is just being a rational man. If you also keep cash at home, you are just being a rational man. If I keep cash in my home, I am just being a rational man. If the next guy hasn’t got the United States dollars cash, but badly needs them, and he wants to exchange them for the Zimbabwe dollar as (defined above), the rational man, in pursuit of his own self-interest and not charity, will have to charge a price for them.

If the one with Zimbabwe dollars want the United States dollars badly enough, he will have to pay or negotiate an exchange rate. It’s how things work in the market that officials have chosen to refer to in pejorative terms like a parallel market or black market. But the fact is – it is the real market. It is made up of rational, economic men and women who have woken up to the reality that in the face of United States dollars scarcity, the notion that bond notes have the same value as United States dollars, by decree or any other means is not only ridiculous, but a giant fraud!

Let us be honest. Let us face it. Even Mangudya would not give you $5,000 United States dollars cash from his personal hoard in exchange for 5,000 bond notes. We can challenge him and put him to the test. Those ministers of government would not do it either. Take your bond notes or RTGS and challenge anyone shouting the one is to one mantra and challenge them to give you United States dollars cash in exchange and see if they will.

The reason they won’t do it is because they are economic men, and as such are not stupid. In short, to echo Adam Smith: “As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value.”

The rational man thus seeks the greatest value from his capital. In short, it would be stupid to give away my $100 for 100 Zimbabwe dollars when John wants to pay me 140 Zimbabwe dollars for it, and while Peter is offering 150 Zimbabwe dollars for the same.

As a rational person, I will have to take the highest offer for my US$100. This is the basis for the pricing that we see real market – what officials want to call parallel market. As a matter of fact, it’s just a normal market which gets a bad label from our politicians, who are mere economic man pursuing their political self-interest.

To be clear, Zimbabwe no longer uses the United States dollar as currency. We now have a hotch-potch of digital bank balances, bond notes and bond coins.

I also argued that, “Robert Mugabe is the only President with the unique distinction of battering two different currencies in his lifetime and within a space of fifteen years. He did not just ruin the Zimbabwe dollar, but also tore apart the United States dollar as we knew it 2009 to 2013.”

When the Zimbabwe dollar died slowly in 2008, it was the rational and economic man and women of Zimbabwe, the people, who buried the corpse and brought in the United States dollars as we know them. Between 2013 and 2018, through warped policies, wanton spending, recklessness and gross ineptitude, Mugabe’s government chased away the United States dollar, leaving the Zimbabwe dollar in its trail.

But guess what, its repetition all over again. The government is battering and killing this Zimbabwe dollar, by overprinting it. And if you watch carefully, again, like in 2008, the people are bringing back the United States dollar again, at the right price officials like to call parallel market rates.

In short, they are busy killing the Zimbabwe dollar they brought back between 2013 and 2015, and the people are, once again, bringing back the United States dollar at the right price. They are the heroes, you know why? Because they are rational economic men and women! It’s the work of the invisible hand.

The author holds a business postgraduate qualification from an Ivy League university in the USA, where he carried out research on code driven versus regulated corporate governance issues in the late 90s. Matt E.T Matigari can be contacted on mmatigari@gmail.com