Tinashe Nyamunda looks at Zimbabwe’s ‘liquidity crunch’
A political storm is brewing in Zimbabwe over the introduction of some US$75 million worth of bond notes, initially scheduled for the end of October but which the Reserve Bank of Zimbabwe (RBZ) has delayed to November – or even December (as it is unsure of public response).
This is sparking protests from different political movements in Zimbabwe – such as the Evan Mawarire-led #thisflag and Prosper Mkwananzi’s #tajamuka – and government faces legal challenges from former Vice-President and leader of the newly-formed Zimbabwe People First (ZPF) Joice Mujuru, prominent Harare businessmen Fredrick Mutanda, and lawyer Fadzai Mahere. Many see the notes as unbacked bond paper with currency denominations printed on them. They believe their value will rapidly collapse.
This is despite the US$200 million dollar facility that the RBZ claims to have accessed from the African Export Import (Afrexim) Bank to back the new bond notes and hold their value.
But, as economist John Robertson has argued, ‘money is all about trust’. The people of Zimbabwe do not trust the bond notes because of the horrors of Zimbabwe’s recent hyperinflation past. For that reason, their introduction is seen as the act of a desperate and predatory government seeking to return to worthless Zimbabwe dollars. Many believe that this will only result in ordinary people suffering, while providing new avenues of accumulation for the political elite.
The financial history of Zimbabwe, of which studies are only just emerging, has always been contentious.
Following the colonisation of the country in 1890, the British South Africa Company arranged to have its own currency and State and Public Bank in 1899, but the imperial government refused to ratify their bill. It was only in 1932 that a Coinage and Currency Act was accepted to allow fully sterling backed local currency to be created and managed by a Currency Board (created in 1938).
Because of the full sterling cover, Southern Rhodesia’s (colonial Zimbabwe’s) currency was effectively British.
However, it was designed to favour mainly white agrarian and, later, foreign manufacturing capital in an economic system that relegated Africans to providers of ultra-cheap labour.
Even then, the resident colonial government still demanded financial control. It was ultimately given assent to create a central bank for the Federation of Rhodesia and Nyasaland (1953-1963), and in 1964, (Southern) Rhodesia created its own Reserve Bank. This became independent of London and was eventually inherited by the post-independence Zimbabwe government.
Rhodesia was expelled from Britain’s collapsing sterling area as a sanctions measure against Ian Smith’s Unilateral Declaration of Independence (UDI) on 11 November 1965. This only provided what the colonial government had always wanted: freedom to steer its economic development through independent financial means that allowed it to sustain white political and economic dominance.
Although the Rhodesian state, through financial and economic measures administered mainly by its Reserve Bank and Ministerial Economic Development Committee, managed to resist British and international sanctions, its capacity to continue financing its rebellion was eventually so stretched that it led to the political compromise at Lancaster House, and the birth of Zimbabwe in 1980.
Reconfiguring the financial system
The Zimbabwean government inherited a vibrant and diversified financial system which was designed to support white agrarian and foreign capital interests, while excluding Africans. It faced the task of redressing these inequities and reconfiguring the financial system to make it inclusive. Because change was deemed too radical to upset a delicate economy: the new government failed to restructure the economy beyond token measures, such as providing Small and Medium Enterprise financial support through a perennially undercapitalised Small Enterprise Development Corporation, formed in 1983.
For peasant farmers, insufficient support was provided through some government programmes and a Land and Agricultural Bank. For over ten years, the rhetoric of indigenisation was kept at bay as the government benefited from its reconciliation with former colonial capital, while appeasing the populace through unsustainable health and education subsidies. Along with reduced support of the productive sectors, this resulted in serious budget deficits, and an imbalance in its international trade account.
The Economic Structural Adjustment Programme (ESAP) of the early 1990s, with its emphasis on reducing the bloated civil service and privatisation of parastatals as the main condition of the International Monetary Fund (IMF) and World Bank loans, provided to offset these deficits, only opened up the economy to cheap foreign imports – triggering a rapid deindustrialisation, unemployment and inflation.
Declining economic conditions brought protests from civil society groups of peasants, African businesses, students and workers organisations, the newly-formed (in 1999) Movement for Democratic Change (MDC).
Thereafter, the increasingly desperate, corrupt and power-hungry ZANU PF began making a radical shift. Under the weight of its costly excursions into the Democratic Republic of the Congo (DRC), the government undermined the monetary system by printing money for unbudgeted war veteran gratuities as a way of buying their support as one of the most influential and vocal civil society group challenging ZANU PF legitimacy.
The government then embarked on a chaotic, fast-track land reform programme which upset the very backbone of the country’s financial system, descending into an unprecedented financial and economic crisis.
The financial implosion resulting from Zimbabwe’s deepening political crisis brought the Reserve Bank of Zimbabwe back into the centre of political discourse by giving it quasi-fiscal responsibilities to resuscitate the economy especially with the appointment of Governor Gideon Gono in 2003.
Gono embarked on disastrous policies, including placing mainly newly-formed indigenous banks and financial institutions under curatorship. He also put the money printing press into overdrive to settle government debt, resulting in hyperinflation. Despite his unorthodox efforts to revalue the Zimbabwe dollar under various guises such as currency revaluations, introducing bearer and agro cheques between 2005 and 2008, and the Foreign Exchange Licenced Warehouse and Retail Shops (FOLIWARS) system to contain the black market in the currency trade, the public rejected the Zimbabwe dollar in early 2009.
The deepening crisis in Zimbabwe manifested itself in many ways, including through financial implosion. The economic effects of Zimbabwe’s political challenges resulted in the country recording hyperinflation estimated at 89.7 sextillion percent when it was last recorded on 14 November 2008 (among the worst in global history). Thereafter, the Zimbabwean market rejected Zim dollars, forcing the government to legalise a multi-currency system dominated by the US$, bringing an end to the hyperinflation which had resulted in the shortage of goods in shops, dislocation of business, the erosion of people’s incomes and the loss of foreign and domestic investment.
The adoption of a multi-currency system, which coincided with the signing of the global political agreement between the main contesting political parties (two MDC formations and ZANU PF) eliminated the inflation problem, and even increased the public and economic confidence. These developments bond(ed) or reunited the nation to a degree as the parties worked for the country’s economic recovery, even as power struggles caused many disruptions.
A brief recovery saw employment prospects and real incomes increase, while business slowly improved, but a new problem emerged. The country could no longer print its own money and had to rely on foreign currencies acquired only through trade, and its negative balance of payment account injected deflationary and liquidity problems which were only offset by donor funds supporting the health and education sectors.
In 2013, ZANU PF won elections which were celebrated by African observers for being relatively free of political violence – although opposition parties and western observers cited many irregularities which, in their view, made the exercise unfair.
But the results were upheld, heralding the return of legitimately voted government. Normal administrative business could resume and donors could withdraw their funds to allow government to take over its full responsibilities. But this injected a severe liquidity crunch in an economy that produced well below what it consumed as imports.
The multi-currency basket had been funded by the foreign currency that people held onto during hyperinflation (and which they were not legally allowed to use); by expatriate banks using their nostro accounts to bring in US dollars; by South African rands flowing as a medium of trade among cross border traders in Zimbabwe (until they were also rejected by the public when their value collapsed in 2015); by donor funding and, although remittances had declined after 2009, Zimbabweans in the diaspora who were adjusting to the effects of the global economic recession but still supplied currency as remittances.
But production for exports remained far below the required revenue for imports, and even those notes imported from the US haemorrhaged out as Zimbabwe became what former Finance Minister Tendai Biti has termed a ‘supermarket economy’ of net consumers dominated by informal traders whose source of goods is foreign markets such as South Africa, Dubai and China. Meanwhile, with a return to supposedly legitimate governance, donor funding dried up.
Perhaps the biggest cause of the liquidity crunch was the lack of confidence in ZANU PF’s election victory that led to many investors disinvesting in Zimbabwe, while corrupt government officials worsened the situation through externalising their ill-gotten riches to offshore accounts. The threat by Minister of Indigenisation and Economic Empowerment, Patrick Zhuwawo (President Robert Mugabe’s nephew), later rescinded, to nationalise/indigenise all banking institutions also dampened confidence.
The bond notes
The effects of late or non-payment of civil service salaries and other obligations prompted the government to introduce bond notes as an interim solution. This was phased, starting with bond coins of denominations of 1, 5, 10 and 25 cents, released in January, and a 50 cent coin released in March 2016.
The public was sceptical, correctly predicting that it was a way to test the re-introduction of a local currency. Although these coins have circulated with much ease alongside higher denominations of US dollars, introducing bond notes of equivalent denominations is likely to result in people hoarding their hard currency in liquid form. Many fear that government will go after people’s foreign currency savings held by banks.
Given that even the availability of the Afrexim Bank facility is being questioned and the suggestion that government is desperate to pay off debt and civil service salaries, many people believe that the printing press will again be abused, re-igniting the turmoil of 2008.
Even before the introduction of these notes, there have been many protests against the idea – intertwined with numerous others against the government, which has failed to provide the 2.2 million jobs it promised, and other policies through which ZANU PF was supposed to prompt economic recovery.
Instead, the political scene has been dominated by factional fights and succession politics while the economy continues to contract under the weight of a worsening liquidity squeeze, forcing the need for bond notes. If these notes are introduced, it is likely to galvanise opposition to the government. If the opposition is to mobilise around this, it can be a powerful issue in the next election especially if it triggers inflation and resuscitates the parallel black market for hard currency.
Moreover, there is fear that the accompanying exchange controls which will allow a few access to nostro accounts and foreign currency will again provide any opportunity for the ZANU PF elite and their clients to accumulate, engendering even more bitterness from the public.
Inasmuch as the government has never really cared about the plight of its people and used various mechanisms to retain power despite their poor economic record, the introduction of bond notes will produce one of two scenarios: either further protests under severe government repression, or as a game changer in Zimbabwean politics.
However, if, by 2018, Robert Mugabe is no longer in the picture, for whatever reason, the effects of bond notes will reset the game in unpredictable ways.
Even if the US$200 million offshore facility is regarded enough to back the bond notes (which many argue it won’t be,) given the propensity by the government to settle debt by printing, the weakness in bond notes lies in the public’s perception of them. More than any technical mechanisms of managing currency, money is really about public confidence in it.
‘Not real money’
The people I have spoken to all argue that bond notes are ‘not real money’. They cannot be used in international trade and in a ‘supermarket’ economy heavily reliant on imports, it is difficult to see how they will be kept at a par with the US dollar.
Social media has found numerous and inventive ways to explain this government desperation. Most argue that the government is trying to print currency denominations on bond paper, the value of which will not be worth the paper it is printed on. The running joke is that if the state can get away with printing bond papers as currency, they might as well draw pieces of roasted chicken on them and convince the public that it is actually edible.
This is only likely to cause indigestion in an already upset economy, triggering another financial crisis for the most vulnerable of society. The ultimate effect of bond notes in popular imagination is that they are likely to un(bond) the nation politically, economically and socially.
Tinashe Nyamunda is a Postdoctoral Fellow, University of the Free State, South Africa. He is editor with Richard Saunders of Facets of Power. Politics, Profits and People in the Making of Zimbabwe’s Blood Diamonds (Harare: Weaver Press and Johanessburg: Wits University Press, 2016).