Yesterday, the Reserve Bank governor, Dr Mangudya, announced that Zimbabwe’s electronic money (which has been circulating on the domestic RTGS* payment system) would be officially recognised as the RTGS dollar. It will now join the other currencies in the multicurrency basket. And a new interbank foreign exchange market is being established to formalise the free trade between the RTGS dollar and the other basket currencies.
*Real Time Gross Settlement

This announcement was what many in the business community had hoped for. The Confederation of Zimbabwe Industries has been advocating for exchange rate liberalisation for over a year. And it has been at the top of my wish-list in almost every blog post that I’ve written on Zimbabwe’s economic crisis since the bond note was first released.

But there has been plenty of (inevitable) political pushback online.

So I’d like to explain why I think this new monetary regime makes economic sense, even if the politics is difficult.

The Great Zimbabwe Freeze

Here’s a diagram of the economic paralysis that has persisted since the parallel market rates went wild in October:

The Great Zimbabwe Freeze

In short, the RTGS:USD 1:1 peg had become a millstone around the Zimbabwean economy’s neck. In early 2016, it was not an especially heavy one – but by October 2018, it had dragged the economy underwater.

For ordinary Zimbabweans, the hardship of the last few months has been extraordinary. It’s the main reason I stopped sharing Zimbabwe instalments on this blog. I have found it very difficult to write about the economic theory while real people have been struggling with its consequences.

The problem is that economic theory lacks any form of empathy. It demands austerity and belt-tightening as though these are simply math equations.

But in practice, austerity means diluting the cabbage soup with unaffordable water. In Zimbabwe, many businesses stopped paying salaries, while some stopped trading altogether. People found themselves spending hours in fuel queues and bread queues. And many went to work to maintain a sense of normalcy rather than simply earning a living.

In truth, people were not really ‘living’. It was more a case of ‘surviving until something changes’. And the depression itself was actually too big to speak about. I’d sit in meetings, and people would sometimes just fall silent.

In many ways, it was worse than 2008 because there is a certain energy in the mania of trying to stay ahead of inflation. But this second time around, even though the price increases were nowhere near the hyperinflationary heights of 2008, a dull resignation took over.

January’s Fuel Price Hike

Dull resignation may not seem like the prelude to the protests that erupted in response to January’s fuel price increase.

But I suspect that the human condition of dull resignation is similar to what happens when drought-ridden plants and trees have lost their ability to sink their roots any further. All the moisture is gone, and the vegetation dries out. It becomes kindling – dead in a productive sense, but with all the potential to come alive in an altogether different form.

So when the fuel price was increased, it was a spark.

And to be clear, I see an edge of self-immolation in what happened. A point that was often under-emphasised in the coverage of the fuel price protests: while the price of fuel may have been hiked from $1.36 to $3.11 per litre, the reality is that there was no fuel available at $1.36 per litre. The only fuel available was on the black market – and it was being sold for up to $12 per litre.

Worse still, the black market fuel trade was contributing to the fuel shortages. It was buying up all cheap fuel from the forecourts, and then re-selling that fuel at far above the general fuel pricing in the region.

And to be clear: that’s not me naively believing the justifications for the fuel price hike. There were certainly fuel shortages that came from a lack of forex allocation: especially around the beginning of the month, when the letters of credit would come up for renewal. But I also saw the fuel tankers sitting in the fuel queues. And I watched fuel attendants take 3 hours to fill up 14 cars off two working fuel pumps. And I saw the loaded tankers moving every day around Harare.

The black market trade in fuel was widespread. And with the pricing discrepancies, there was real incentive for the entrepreneurial to get in on the action.

So with black market fuel prices ranging between $5 and $12 a litre, I don’t think government expected the reaction it received to the new price of $3.11.

In fact, many had advocated the fuel price increase as a solution to the high fuel costs on the black market. This was meant to be palliative, not inflammatory.

From uprising to shutdown

The fuel price hike was intended to pull the rug out from under the black market traders, stop the artificial shortages, and restore access to fuel at more reasonable pricing.

It should have been a net positive.

But it turned out to be provocative.

The following Monday, shutdown protesters pulled commuters from vehicles, looted shops, blocked off highways, (allegedly) took up arms, and set fire to the buses. The government reaction to those protests was an internet shutdown and a military crackdown.

Zimbabweans will bear the scars of that crackdown for years to come.

But here again, it’s difficult to write about that episode in a manner that is balanced.

On the one hand, we’re talking about the suffering and deaths of innocent Zimbabweans.

But the trouble is that unchecked civil uprisings would also have resulted in the suffering and deaths of innocent Zimbabweans.

In all the criticism, I’ve not seen anyone really argue for what should have happened instead. This was a Gordian knot, with no promising solutions. Violent civil protests and violent military crackdowns are both violent – the main debate seemed to revolve around whose violence was worse.

Zimbabwe’s Two Problems

In all the rhetoric, we should recognise that Zimbabwe is attempting to deal with two problems at the same time:

  • An Economic crisis – which is the outcome of two decades of history; and
  • A Constitutional and Political crisis – which is also the outcome of two decades of history.

These two crises are generally conflated.

When I read what the opposition leaders and civil activists are saying, it is clear that they believe the political crisis to be the heart and cause of Zimbabwe’s economic woes. And therefore, they insist that any economic solution must be a part of (and subject to) a much grander political resolution.

I cannot help but agree with this. The two crises are intertwined.

But my inner pragmatist tells me that we may have to settle for a series of smaller solutions rather than a one-time fix.

It also says that we need to start with practical solutions for what is pressing.

And specifically, the fixed exchange rate was a pressing problem.

Abandoning the RTGS 1:1 fixed exchange rate

Here is another Gordian knot:

  • Zimbabwe’s prolonged economic crisis has many causes. But the immediate crisis – the last four months of deep depression – is a direct result of an unsustainable 1:1 peg between the RTGS dollar and the US dollar.
  • This problem of fixed exchange rate regimes is not a uniquely Zimbabwean one. Whenever an unnatural exchange rate is forced onto an economy, it results in shortages, uncompetitiveness, and bizarre distortions (like stock market anomalies and speculative black market activity). History is littered with examples.
  • The economic solution here is simple: abandon the fixed exchange rate, regardless of who put it there to begin with.
  • But politically-speaking, this solution was not generally acceptable.
  • First, because of a commitment that the present RBZ governor made to the fixed exchange rate when he announced bond notes back in 2016.
  • And second, because most activists argue that the political players implementing these policies lack the legitimacy, mandate and trust to do so.

Ironically, there is no doubt in my mind that any government would be forced to abandon the peg. Including the ‘alternative universe’ minority government led by Nelson Chamisa.

In this world, Tendai Biti is saying:

In the alternative universe, Finance Minister Tendai Biti would be saying:

“When you have a patient that needs a heart transplant, you cannot wait until they are healthy to give them a new heart. A healthy patient does not need a heart transplant! If we had market confidence, reserves, a decent Capital account and a stable macroeconomic environment, then we would not need a new currency. But our economy is unwell, so we must operate immediately. We have built some reserves, and we have tried to make some reforms. We had hoped that we would be in a stronger position before we did this. But we cannot afford to wait any longer. The recovery process may be more difficult now – but if we do not do this, we may completely collapse.”

What does it mean?

Regardless of who is in charge, the fact is that Zimbabweans have lost their savings again.

But I do not think that Zimbabweans should continue to take the pain for a loss that has already been incurred.

Acknowledging the RTGS dollar neither creates a new currency, nor does it result in a loss of purchasing power. That process began back in 2013, when government first began spending beyond its means, and when our neighbours experienced currency depreciations that we did not.

This RTGS currency has been in circulation for more than half a decade.

Yes, we didn’t get to choose it ourselves – and that is a political issue. The politicians should debate it.

But the structural economic issue is simple: the monetary authorities had to stop pretending that our currency did not exist.

The good news is that we’ve stopped pretending.

And that’s a first step.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at