Here are words that I didn’t think I’d be writing: the Zimbabwe hyperinflation is re-emerging. We haven’t had any official inflation figures to back that up. But you don’t really need those to see what’s happening.
To be clear: Zimbabwe is not running out of money. There is plenty of it, housed up in the banks and in the mobile money markets. But it’s money that no one wants to use.
How did we get here? Was it the bond notes?
There are plenty of people who like the “The Reserve Bank introduced bond notes – we warned you this would happen” soundbite. Unfortunately, that doesn’t quite seem to tie back to reality. Because in Zimbabwe’s multi-tiered market for cash, the bond note trades at a premium to the “RTGS”* money sitting in the banks.
*RTGS stands for “Real Time Gross Settlement”, which is the domestic payment clearing mechanism. It’s not important to know that – it’s just become the widespread acronym to describe the electronic money in bank accounts.
Just reflect on that for a moment. Here is this unwanted paper currency – one that attracted protests and widespread rejection – and it’s worth more than the money that people have in their bank accounts.
The bond notes also distract from the key fact here: that the most dramatic inflation has come through RTGS bank money. It’s happened insidiously and quietly. And bond notes were a reflection of this inflation, rather than its cause.
So how did we really get here?
Some background for the non-Zimbabweans:
- Zimbabwe uses the US dollar.
- “used to use”
- It was adopted by the Zimbabwean government under the multicurrency basket regime that took over from the Zimbabwean dollar in 2009, when hyperinflation had finally driven the local currency into a near-bottomless grave.
- However, from then on, economic fundamentals meant that Zimbabwe was slowly but surely running out of US dollars.
- And then it began to haemorrhage them.
The basic economic problems:
- Zimbabwe’s government spends more money than it can collect. And it finances the difference by (essentially) forcing local banks to buy treasury bonds from them.
- But Zimbabwe uses the US dollar, which means that the banks are being forced to lend US dollars to the Zimbabwean government. And because we’re now talking about foreign currency, this means that we have to look at the Balance of Payments (BoP).
- Unfortunately on the BoP front, Zimbabwe spends more on imports than it receives in exports receipts.
- Until a few years ago, the ‘extra’ needed was being topped up by remittances from the diaspora, as well as inward foreign loans.
- But then a few things happened all at once:
- The commodity cycle turned (so Zimbabwe was earning less money for its mining exports);
- Commodity-dependent export services suffered a business slow-down;
- The currencies of Zimbabwe’s sub-saharan neighbours weakened (so local Zimbabwean manufacturing companies because less competitive);
- So while the diaspora in those countries might have been sending the same amount of locally-denominated money home to their families in Zimbabwe, it became significantly less in US dollar terms;
- A drought meant that any agricultural exports were lower than expected (and the need for food imports was higher than expected).
- The RBZ and the Minister of Finance paid back the arrears on some historic IMF loans (and a few other long-outstanding loans).
- Some erratic government policies meant that foreign loans dried up.
- So the Zimbabwean balance of payments began to collapse.
- And that collapse turned out to be catastrophic when it became clear that civil servants were being paid in export proceeds.
The government tax on cash balances
Here is a bad Balance of Payments situation:
Export Proceeds + Foreign Loans + Remittances < Import Payments
Here is the apocalyptic version:
Export Proceeds + Foreign Loans + Remittances < Import Payments + PUBLIC SECTOR WAGES
To be clear – this is not my own explanation of the problem. This is the Reserve Bank governor’s explanation of the problem – in his September 2016 mid-term monetary policy review.
Here’s the image that was helpfully included in the presentation:
An International Banking Sidebar (consider this some important background information)
Nostro Accounts: are the foreign bank accounts held by a local bank at a foreign bank (called the ‘correspondent bank’).
RTGS Accounts: are the local accounts within a country (or, at least, that’s what the Zimbabwean banking system calls them).
Here’s a picture that may help:
Basically, the idea is that a US dollar payment from South Africa (Sending Country) to Zimbabwe (Receiving Country) is not simply a US dollar payment from South Africa to Zimbabwe.
Instead, the South African bank asks its correspondent bank in New York to move money to the Zimbabwean bank’s account at its own correspondent bank in New York. When the Zimbabwean bank hears that its correspondent bank in New York has received the payment, it then credits the account of the recipient*. Or, more simply, the foreign payment involves the South African bank transferring money from its nostro account to the Zimbabwean bank’s nostro account. And it just so happens that both of those nostro accounts are held by correspondent banks in New York.
*I know, right? No wonder foreign bank transfers take so long.
The important summary:
Nostro Accounts: hold money which can be spent anywhere in the world.
RTGS Accounts: hold money which can only be spent in Zimbabwe.
This might sound scary, but all it really means is that your local payments get swapped between local banks, and your foreign payments get swapped between the nostro (foreign) accounts of local banks.
And in an economy where the local bank accounts are denominated in foreign currency, there should be a 1:1 ratio between local money and nostro money. Possibly with some variation for local credit extended by the banks to the private sector.
However (the Zimbabwe Hyperinflation Prologue)
In Zimbabwe’s case, there was a really high demand for physical cash notes. Zimbabweans have been burned by hyperinflation before – they want their money to be real.
So in order to meet that demand, the Reserve Bank of Zimbabwe (the RBZ) was regularly cashing its nostro account at the New York Federal Reserve in order to import nice clean USD bank notes back to Zimbabwe.
Unfortunately, cashing out nostro accounts in order to pay civil servants in ‘real’ currency (especially given that almost the entire tax revenue collection is spent on civil servant salaries)… Well now you’re effectively spending export proceeds on the public sector wage bill.
To reiterate: the country was collecting local RTGS payments from taxpayers, and converting those into real-cash-nostro-account balances for civil servants.
This is especially not great when your importers are already consuming more of the nostro account balances than the exporters can replenish:
So when all those issues I mentioned up top started to happen:
- the RBZ inevitably began to run out of money in its own nostro account.
- It then imposed new rules on the local Zimbabwean banks to deposit even more of their nostro balances into the RBZ’s nostro account, in exchange for local RTGS balances in Zimbabwe.
- Those too were cashed in.
- Then when local importers came to pay for their imports, the local banks had no money in their nostro accounts, and had to go request some from the RBZ.
- And then the payment processes started to be delayed until exporters paid money into Zimbabwe – at which point, the RBZ nostro balances would have new money in them, and the local banks could then process the importer payments (if they were high enough up the priority list).
The introduction of Bond Notes
As the RBZ borrowed nostro money against future exporter proceeds, the RBZ desperately wanted to stop depleting those nostro balances in exchange for cash notes – cash notes which then leave the formal banking system permanently because everyone was worried that it might not be there tomorrow.
So the RBZ introduced bond notes, apparently backed by a foreign credit facility, in order to create a medium of exchange that might reduce the general Zimbabwean preference for pulling everything out of the bank account on payday.
This kind of worked, actually – because there is now a shortage of bond notes, which trade at a premium to bank money. So people adopted them.
However, it didn’t solve the real problem.
Fiscal Deficits, and how to fund them
The big problem here is that the Zimbabwean government is running a fiscal deficit. That is: it’s spending more money than it collects in revenue.
And it has funded this deficit by:
- Issuing Treasury Bills to the bank sector (which is a form of money creation);
- Transferring the loan proceeds into the bank accounts of civil servants; and then
- Allowing those loans to be cashed out for real money.
This is what is forcing the disparity between the markets for USD cash, bond notes and bank money to widen at exponential rates.
And the borrowing is escalating:
- In March 2016, there were about $2.8 billion of outstanding treasury bills.
- In March 2017, there were over $4 billion of them (these figures are taken from the National Treasury quarterly bulletin, Q1 2017 – the last one we’ve seen).
- And in 2017, the projected budget deficit is expected to be double what it was last year.
- So expect the current TB issuance to be floating up near $5 billion.
These are staggering increases in government borrowing. And it’s coming out of bank accounts.
If hyperinflation is a tax on cash balances, and the government is effectively confiscating the money in people’s bank accounts, then the Zimbabwe Hyperinflation is back for round 2.
All our fears are already fully realised.
Zimbabwe Hyperinflation 2.0
Here is the stock market, which is often the most ‘live’ indicator of what people are doing with their money:
The 2016/2017 price resurgence that you see is not built on the back of renewed confidence.
What we are seeing is the panicked purchasing of people who do not want to hold their bank balances. And because they can’t withdraw cash, it goes into the stock market. This, after all, is not Zimbabwe’s first rodeo.
And when even the Reserve Bank governor, typically circumspect on political issues, says things like:
“The second creation of money is through the Ministry of Finance by providing Treasury Bills. When the ministry [of Finance] finances the government there will be an overdraft by the RBZ. It means there will be money creation. […]. Those dollars are not backed by foreign currency because people who are exporting are independent from those creating the local dollars. When minister Chinamasa is paying civil servants, say about $20 million above his revenue in a month, that $20 million has nothing do to with exports coming in the country. They are independent. The idea is we need to manage them now.”
You know it’s for real.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.
Pwess September 14, 2017 at 09:45
What’s the solution? You’ve done a great job showing what is happening but what should the RBZ be doing instead of creating more and more dummy money? If our expenditure exceeds our income and we cannot pay our bills as when they fall due, then we’re bankrupt. What happens to a bankrupt? – their debts are forgiven. But….nobody will lend to them again for fear that they will simply become bankrupt again and again. That is what has happened in Zimbabwe for the last few decades. When will some Zimbabwean think-tank spell out what is necessary to stop this cycle? What are the fixes? What are the alternatives? Think people, think. then act.Reply
Simon September 14, 2017 at 10:57
Use the rand then you will block capital flight and prevent Zim from continuing to be the bureau De change of Southern Africa.Reply
Mambo September 14, 2017 at 15:19
Eat what you killReply
Anonymous September 14, 2017 at 17:43
But chief I think the solutions are not that difficult. Remember under GNU ministry of Finance had cash budgeting. “We eat what we kill”. The situation was much better then.
1. the government has to stop spending more money than it collects in revenue (that takes away the need for all the monetary trickery)
2. The productive sector needs to be rebooted to bring down the import bill (requires FDI)
Zim has a political crisis that is playing out in the economy. So nothing gets better until the political crisis is sorted. There is no magic.Reply
Nyasha September 14, 2017 at 19:39
The Rand is not the solution here. Government needs to reign in on spending, the Biti approach: You eat what you kill. They also need to drastically reduce that ridiculously large wage bill they have and finally they need to work on legislation that enables the ease of doing business. I’m sure that these are just a starting point before you look at sanitizing the awful image the country has, in order to attract FDI.Reply
Anonymous September 14, 2017 at 19:42
The answer is actually very simply.Reply
Instruction to ZANU PF: Get out of the bloody way.
Instruction to voters: Get rid of ZANU PF.
Until we get rid of he armed robbers in power, we are not going to move forward.
Economies work fine by themselves.
Banks and governments only ever hinder an economy – they never help.
Zuze September 14, 2017 at 22:29
The answer is a combination of all the above responses. It all comes down to the politics, which is intricately tied to the economics, at least in Africa. How does a ‘legitimate’ gvt screw up so bad but stay in power. Simple, it is not. The ruling gvt has forced itself on the population for too long but eventually like Biti said, you can’t rig the economy. It’s barely hanging by the thread but no one can tell them any different. Case in point, this week Mugabe is taking a 70 strong delegation to the UNGA, including: wife, son, son in law, grandson daughter. Multiply that over 20 years and it breeds disaster. The biggest irony is a President who studied economics, but doesn’t believe a country can become bankrupt, despite all the mineral resources he boasts about. A classic case in the sad history of Africa, if you can remove a gvt through the ballot, you know what comes next.Reply
Anonymous September 15, 2017 at 06:14
Only one person said the truth on Zim problems.You can’t separate politics and the economy of the country.Zanu pf we thank you for liberating the country but now we want new blood into the system.Look when the likes of Biti were in power things started to change to better not old dogs like Chinamasa he was minister since 1980 only changing ministries what change do you expect from him besides looting the few resources around sending their children overseas.You can say RBZ must do this and that but as long as Zanu PF is in power its a waste of time.Reply
Isaac moyo September 15, 2017 at 06:16
Zanu PF out is the solution.Reply
Anonymous September 15, 2017 at 10:26
The relevant paragraph in article says
“Just reflect on that for a moment. Here is this unwanted paper currency – one that attracted protests and widespread rejection – and it’s worth more than the money that people have in their bank accounts.”
Simple really. The Bond Notes are are success! Stronger, not weakerReply
Anon September 15, 2017 at 21:31
Possible Solution : Go back to basics use the old precious metal coin system internally?Reply
Anonymous September 16, 2017 at 08:21
I read this article. It is premised on the fact that civil servants are paid in real money. They most certainly are not they are paid in funny e money aswell and are given no preferance for withdrawing cash.
So I call BULL**** to your thesis.
Quite close to an explanation but not close enoughReply
RA September 16, 2017 at 08:41
Thanks for your comment – but I think that you may be mixing things up here.
This post was about the history of how we got to this point. There was a time in which civil servants were freely able to withdraw their salaries in cash. In that situation, the cash could only come from the RBZ cashing in its nostro account (at the Federal Reserve in New York, or wherever). So if the government was issuing Treasury Bills to pay civil servants RTGS salaries, and those salaries were withdrawn in cash at the time, then those civil servants were being paid in real money.
Obviously, this was unsustainable. And it has led us to this point – where everyone faces the same cash shortages. And agreed, civil servants are not given preference today.
Although civil servants are still using their RTGS bank cards to pay for imported goods in supermarkets. So there is still an effective trade of RTGS-government-borrowings for goods that are paid for in export proceeds. Meaning that the situation will continue to worsen.Reply
Anonymous September 16, 2017 at 13:03
Money is earned, To use the rand , we need to have enough of it, to have it we must earn it . . . .Reply
Anonymous September 16, 2017 at 13:13
WOW great article. Not sure that anyone really knows what to do anymore, common sense is just not common.Reply
Ngonidzashe Mudede September 17, 2017 at 14:34
Great research and very informative. The solution is right in front of us. Looking at the table with the exports vs imports, I see we have been exporting more than importing.
I noticed on 1992 imports increased and exports dropped guess it was because of the drought and that shows we are an agro based economy because we recovered in the following years only to have more imports again from 2002 obvious the effects of the land reform were being felt now. Again this goes back to telling us we are an agriculture based economy and we must go back to producing food for the world. We export agri produce to replenish our nostro accounts. The mines also help and as a nation we encourage the enterprise as a factor of production that will help in value addition.
Ignorance is killing us and we think zanupf exit is a solution and yet we have the people of Zimbabwe in a bad state in terms of mindset build up. We must fix also the mind.
Our attitude toward life as a nation. We must believe in our motto unity, freedom and work. This we must demand.
In short given your informed research, Mugabe must retire, politics must not drive the growth of a nation but enterprise must. We must export more than import. Let’s train and fund the new farmer, let’s put our money in the soil and produce.
Mugabe has hijacked the national institutions and zanupf is lead by robbers so we must craft a new strategy beyond the opposition politics. Let’s deal with the victim, preach goodness drown the negative energy and create positive energy. We must recreate this nation. It is the jewel of the world and there is a future with HOPE.
We must live to fulfill cde Tongogara’s dream of seeing black and white children working together to build a new Zimbabwe.Reply
FRANCIS Phiri September 23, 2017 at 00:06
Mudede, I love your positive energy but how and when should we do that? Now is the time. Wake up Zimbabwe, let’s rise up and make our beloved country great again.
We’ve got lots of big brains that can overturn our country tremendously in a short while.