(A Preamble Caveat: after I started writing this post last night, new directives were issued – I’ve edited for them, and I’ll get to the new stuff at the end; but expect many of these new regulations to be superseded by further new regulations before the week is out).

Thanks this website
Thanks this website

After last week’s announcement from the Governor of Zimbabwe’s Reserve Bank, I wrote a post about the new proposed Bond Notes: The New Zim Bond Notes…Are Not What Worries Me. The Bond Note plan has inspired great waves of criticism and mass action, but as I mentioned in my post, and as I said repeatedly on Facebook and Twitter and basically on any social media platform that would have me, the Bond Notes were not the truly dramatic part of those new directives.

Firstly, on Bond Notes

Yes, it’s true that the Reserve Bank of Zimbabwe (RBZ) is planning on issuing Bond Notes, backed by a $200 million loan from Afrexim bank. But the question to ask is: “Why are they not just getting $200 million of US dollar notes on the back of that loan, and issuing them into the banking system?” 

To re-iterate: the RBZ is trying to inject liquidity into the market, and they’ve borrowed money to do it. Now what the RBZ could be doing is going to the Federal Reserve, cashing in its new bank balance (fresh with the $200 million loan proceeds), importing the US dollar notes and then dolling the cash out to the Commercial Banks. But if they did that, then all those fresh new notes would leave the formal banking sector. Just like all those other US dollar notes which used to flow through the formal banking sector, and now do not.

So instead of doing that, the RBZ is issuing bond notes. In other words,

Dear Zimbabwean public, you could have had the USD notes, but we can’t trust you to keep them in the system, so use these bond notes instead, Best, Your Friendly Neighbourhood Monetary Authority.

Now while there are clear legal issues with doing this (see this glorious article, and the follow-up, from the Zim Iron Lady), what is far more interesting is the way in which the RBZ is proposing to insert the bond notes into the system. Bond notes are not going to spew forth from ATMs immediately: instead, they’re going to be offered to exporters as a 5% incentive on their inward remittances.

An example:

  • An exporter receives a customer payment of $100,000.
  • The RBZ will award the exporter an additional $5,000, in a new USD bank account, but one that can only be cashed in bond notes.

Presumably, that exporter will try to use the bond notes as settlement for some of its obligations, and if it can find suppliers or employees who will accept them, then the bond notes will go into circulation.

In a sentence: the Reserve Bank is trying to use the small group of Zimbabwean exporters that are left as a fulcrum to propel the bond notes into the economy.

And that should have been the first clue here: because if you can use exporters as the fulcrum for bond notes, why not use them as the fulcrum for something else?


Here’s the part of the new RBZ regulations that had me all hot and bothered: exporters were no longer going to be receiving their USD remittances in full.

Back to the example:

  • Let’s say that the exporter received that customer payment of $100,000 yesterday morning, Tuesday 10 May.
  • Before that remittance ever hit its bank account, half of it was going to be confiscated by the RBZ, and replaced with Rands and Euros, at the prevailing market exchange rates (R15.15 to $1 and €0.88 to $1).
  • Meaning that, by the time the money cleared, the exporter would have had:
    • $50,000 in its USD account;
    • €8,800 ($10,000 converted into Euros), in its Euro account;
    • R605,860 ($40,000, converted into Rands), in its Rand account; and
    • $5,000 in bond notes.

So perhaps that sounded reasonable. Only:

  1. Those Rands and Euros were just as bonded as the bond notes.
  2. The Commercial Banks were not permitted to convert those funds back into US dollars – and moreover, the uncompromising instruction coming through from the Reserve Bank was that those Rands and Euros had to be used to settle domestic obligations.
  3. That is: the first 50% of exporter remittances that were going to be spent into Zimbabwe were not in US dollars.
  4. So, when the exporters needed to pay their foreign suppliers, they’d be forced to use their US dollars.
  5. And when the exporters need to pay local suppliers, and the salaries and wages of their employees, they’d be forced to use Rands. And Euros (if they could, because if we’re honest, the Euro has only ever been a nominal member of the multicurrency basket).

Just look at the scale involved. The Rand usage was being compelled over the Bond note usage by a factor of 8.

How would the Rands have been spent?

Let me outline the multiplier effect:

  1. Exporters have to pay:
    1. Foreign Suppliers;
    2. Local Suppliers;
    3. Loans; and
    4. Salaries and Wages
  2. And they’d need to use their customer remittances to make those payments.
  3. So here’s how the new inflow would have been allocated:
    1. The 50% in US dollars would go first to settle Foreign Suppliers and USD-denominated loans;
    2. Then any remaining US dollars would go toward settling the USD-denominated invoices of Local Suppliers – and any outstanding balance would have to be settled in Rands.
    3. If there were any US dollars left, they might cover a portion of the salaries and wages bill. But by far the bulk of the salaries would have been paid out in Rands.
  4. Meaning that exporter employees, who are spending their money in shops and on rent and in utility bills, would be paid mostly in Rands.
  5. Then the local suppliers who received some US dollars and some Rands would have their own:
    1. Foreign Suppliers;
    2. Local Suppliers;
    3. Loans; and
    4. Salaries and Wages.
  6. And the same order of priority would apply. Meaning that now there are also non-exporter employees being paid mostly in Rands, who are also spending their money in shops and on rent and in utility bills.
  7. At this point, the shops and landlords are faced with a conundrum: either accept Rands as payment for merchandise (which they haven’t been doing), or lose sales.
  8. According to the RBZ, retailers are going to be helped with this conundrum by a helpful band of inspectors, who’ll be insisting that retailers accept Rands.
  9. And then, the retailers who are receiving both US dollars and Rands from their shoppers would have their own:
    1. Foreign Suppliers;
    2. Local Suppliers;
    3. Loans; and
    4. Salaries and Wages.
  10. And again, the prioritisation cycle repeats, and now nearly all employees are going to be receiving most of their salaries and wages in Rands.

Presto. Zimbabwe will have Randised.

And sure, perhaps employees may not have liked being paid in Rands.

But if employees were presented with a choice of either Rand or Bond notes, the general reaction is already “anything but bond notes!” Just take a glance at Twitter.

The Infrastructural Spanner

So the above Randisation plan is actually not a bad one in the overall scheme of things. Zimbabwe’s economy is uncompetitive in general – and it doesn’t need a strong US dollar to make it any worse.

But unfortunately, you can’t just decide “OMG, wouldn’t it be like totes great if the entire country just, like, used a weak currency though? #NikeBaby #JustDoIt”

No, that’s not how it works. It’s the economic equivalent of saying to a heavily obese person with heart disease “OMG, like, you know what would be great though? If you were thin. Here, swallow this bottle of laxatives, and then let’s run a marathon. #JustDoIt #FeelTheBurn.” Because that would obviously end well. There’d be a lovely funeral, assuming that you could get them off the couch.

But going back to the Zimbabwean scenario, the biggest getting-the-obese-person-off-the-couch problem is the banking infrastructure itself. It’s all good and well to say to exporters “Pay for 40% of your expenses in Rands”. But when the RTGS* payment structure does not facilitate Rand payments, then what you’re saying to exporters is “We’ll cut your monthly budget in half, and you can just spend that.”
*RTGS – Real Time Gross Settlement, which is just a description for the process by which money moves from one domestic bank account to another.

To clarify the infrastructural issue:

  1. If you wanted to make a Rand payment in Zimbabwe this morning, there is no “pay and clear now” function.
  2. The procedure of making a domestic Rand payment seems to require corresponding banks in New York and corresponding banks in Johannesburg and a long relay of nostra accounts.
  3. Basically, in layman’s terms, doing a domestic Rand transfer in Zimbabwe can take 2 to 3 weeks to reflect. Sometimes (often), longer.

And that’s how long it would take for employees to receive their wages? You really can’t do that. Those exporter businesses would collapse.

I have basically spent the last seven days aghast. And openly asking “But what do they think Exporters are going to do with this? Clearly, they’ll instruct their customers to withhold payment until the RBZ can be persuaded to see reason. Because the frank alternative is liquidation. Which can only worsen the balance of payments crisis.”

The exporters have been up in arms since Thursday last week. Especially as the “live date” of the new multicurrency RTGS system is still more than a month away (according to the RBZ Governor’s press release, the expected date is 13 June 2016).

Now, cut to: earlier this morning:

RBZ Scraps Plan To Convert Export Earnings into Rand, Euro

Here’s the extract from the actual circular:

Screen Shot 2016-05-11 at 11.39.22 AM

So having written a long blog post about Zimbabwe’s impending transition to the Rand, the RBZ has apparently been persuaded to abandon its fast-track Randisation Reform plan (perhaps until it can fix the RTGS infrastructure).

But Don’t Sigh In Relief Just Yet

As for those new regulations, even if they sound relatively innocuous, consider this:

  • Zimbabwe has not had FCAs since 2009.
  • Because an FCA is a “Foreign Currency Account”.
  • As opposed to your normal account, which would have normal domestic currency in it.
  • And why have a Foreign Currency Account if all your domestic currency is actually foreign currency?

If those new regulations go unchanged, all the exporters will have to open brand new FCA bank accounts. Only:

  • What will be in the exporter’s FCA account? US dollars.
  • What will be in the exporter’s local RTGS account? US dollars.

Effectively, the RBZ will officially be creating an exchange rate between US dollars and US dollars. You’ll have some US dollars (FCA ones) which are freely convertible into other US dollars (RTGS ones), and then some US dollars (RTGS ones) that are not freely convertible into other US dollars (FCA ones).

Let’s call the RTGS dollars “bond USD”.

Because that’s what they appear to be: US dollars that are not freely redeemable as US dollars, but rather bonded within the Zimbabwean economy.

It’s like an extract from Alice Through The Looking Glass. When is a dollar not a dollar but still a dollar. Oh look, a sand dollar.

*skips away*

thanks this website
thanks this website

Until the next round of public circulars then… As you were.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.