As it stands today, Zimbabwe’s monetary system is a labyrinth. Many different kinds of ‘money’ operate with multiple cross-rates. There are nostro US dollar balances, RTGS US dollar balances, US dollar cash, clean US dollar cash, large denominations of US dollar cash, bond notes, bond coins, Rand cash notes, nostro Rand balances, and mobile bank balances. And it affects everyone: businesses need nostro money to make their foreign payments; workers need bond notes to pay for their taxi fares; everyone wants to cash to secure the value of their money and/or to earn the arbitrage. We’re a nation of money traders. It may be another “Zimbabwe Cash Crisis”, but Zimbabweans are unbelievably sophisticated at this game. Not by choice – but still, actively demonstrating a degree of collective financial prowess that far outstrips the international competition.
That aside, everyone would prefer it if the crisis had a solution. My guess is that the solution will involve the Rand. So here is how that could work.
Zimbabwe Cash Crisis: Illustrated
Officially, Zimbabwe operates a multi-currency basket, using nine different official currencies for trade: the US dollar, the Euro, the Pound Sterling, the Australian dollar, the South African rand, the Botswana pula, the Japanese yen, the Chinese yuan and the Indian rupee.
In practice, the widespread denomination is the US dollar (USD) – and to some extent, the South African rand (ZAR).
And that’s before Zim tipped over into the murky waters of bond notes, parallel exchange rates, and differentiation between the denominations and cleanliness of the cash.
However we got here, the (simplified) landscape today looks something like this:
All the money trades
Essentially, there are three classes of money-trading:
- The Formal Banking Sector: exporters are required to internalise their foreign proceeds at parity between their ‘nostro’ earnings (which is the foreign currency they earn), and the RTGS bank balances that they receive. The Reserve Bank then allocates the ‘nostro’ funds for key Zimbabwean imports (like fuel), at the same one-to-one ratio. Exporters are also permitted to use their earnings for foreign payments – but only within 14 days of the inward remittance.
- Parallel Cross-Border Trades – for Zimbabwean importers that can’t get make payments to their suppliers through the banks (which is nearly all of them), the only alternative is to go to the ‘open market’, and source the foreign currency at a premium. The mechanics are complicated – but essentially, this is a currency swap between importers and those who have foreign currency abroad, but local Zimbabwean bills to pay (or assets to buy). It can also be a currency swap between importers, and those that have managed to get their funds out through the formal banking sector at 1:1 (which is the ultimate arbitrage).
- Domestic trades – there are still some key daily expenses that cannot be paid in bank transfer or mobile money (mainly, transport). So Zimbabweans are forced to go to the market to source cash (either US dollar cash, or bond notes) to cover those. Then, there is the effort to hold a non-depreciating currency. And some speculation (although my suspicion is that the real speculation happens, at scale, with the big money flows of the parallel cross-border trades).
Side note: for the most part, you can still swap USD for ZAR at the normal exchange rate through the bank. But that’s assuming that you’re only changing currency, and not changing the nature of the money. That is: you can’t swap RTGS US dollars for Rand cash at the current spot rate for the USD:ZAR – there’s a change of currency ‘type’ taking place there, from bank money to cash.
The first problem with the current set-up: Export Competitiveness
Without a more radical monetary regime change, the only real way for the monetary crisis to resolve itself is for exporters to start generating sufficient ‘nostro’ earnings that all importers could source their forex requirements through the formal banking sector. This would pull demand out of the parallel cross-border trade market, which would pull down the premiums, which would de-intensify the speculation levels.
- Exporters use their foreign proceeds to pay for local Zimbabwean expenses;
- They are being forced to internalise those proceeds at parity (there is, actually, a 5% export incentive – but it pales in comparison to the parallel premiums of well over 50%);
- Their local expenses are being priced upwards to reflect the parallel market premium;
- So the monetary crisis is making their cost base progressively more expensive;
- Which makes them less competitive;
- Which means that there are fewer foreign proceeds;
- And that would drive up the parallel market premiums;
- Which drives up their cost base;
- Which makes them even less competitive.
There is a vicious cycle here – in which exporters are being strangled.
The second problem with the current set-up: the potential for market manipulation
Because the parallel market operates underground, it is highly volatile. A viral whatsapp message can send the rate spiralling. And who is to stop unscrupulous parallel cash traders from starting those messages in the first place?
The Rand Option
Any solution to the Zimbabwe Cash Crisis should probably attempt to do two things:
- Allow exporters to obtain full value for their nostro-funding inward remittance; and
- Formalise the parallel market through the banking sector, in order to make it more transparent.
Putting those two objectives aside briefly, many people talk about the South African rand as a potential solution to the Zimbabwe cash crisis.
In general, the South African rand is a much better choice for Zimbabwe’s de facto currency. South Africa is one of Zimbabwe’s major trading partners – and our regional competitiveness is linked to theirs. Former Finance Minister, Tendai Biti, has said for some time that his hope was that the multi-currency basket would only be a temporary solution, until Zimbabwe could join the Rand Common Area, or adopt a SADC currency, or something along those lines.
So why aren’t we pushing for it more?
From what I can tell, many seem to assume that the only way for Zimbabwe to use the Rand would be for it to join the Rand Monetary Union. And this has ‘structural’ hurdles that need to be overcome.
Only, Zimbabwe already uses the Rand. It’s part of our multi-currency basket. So we can ignore the structure hurdles (at least for now).
What we really need to do is find policies to incentivise the use of the Rand, as part of the multi-currency basket.
How to emphasise the ZAR
The answer is an old one: let the ZAR float freely within Zimbabwe’s borders, and let the exchange be traded through the formal banking sector.
- All export proceeds would arrive in a ZAR-denominated CFC account* of the exporter.
*basically, a ‘nostro’ account – the CFC account would be the bank balance representing the exporters foreign currency allocation to the bank’s nostro account.
- Importers would bid, through their bank, on a conversion rate for the Rand, to take their USD bank balances, and convert them into their own ZAR-denominated CFC account.
- The exporter would then convert at the bid exchange rate, into their USD bank account.
- And the importer would have their CFC account funded, which they could then use to make their foreign import payments.
- Any Rand cash deposits into the system would also be credited to CFC accounts.
Very quickly, the system would begin to look like this:
To be clear: we’re not talking here about exchange rates like “$1 : R13.40”. It would be more like “$1 : R9”, where an exporter could obtain a lot more dollars for their Rands, due to the premium adjustment.
But here are the important things:
- Exporters could receive full market value for their inward remittances;
- Importers could have access to a formal exchange market for their foreign currency requirements through their banks;
- The parallel premium would almost certainly come down – even outside the formal banking sector – because of the transparency of a formal exchange process;
- Exporters could focus on generating exports, rather than trying to find ways to prevent the value-loss on their export proceeds;
- Importers would be better able to manage their pricing, thanks to a less volatile foreign exchange market.
The added bonus: with most monetary regime change, it needs to happen suddenly, in the dead of night, in order to prevent panicked bank runs. But because this is simply a revision of the way that foreign proceeds are received, it need not necessarily happen in secret.
The longer term prospect
Over time, if Zimbabweans chose to accept it:
- Increasingly, there would be more denomination of domestic pricing in Rand;
- People would start to hold more Rand cash, and salaries would be renegotiated in Rand; and
- There would a gradual move, by the market, toward using the Rand as the more dominant currency of the multi-currency basket.
And if, at that point, Zimbabwe wanted to join the Rand Monetary Area – then it would be a declaration of the status quo, rather than a directive of monetary regime change.