By Eddie Cross
ONE morning I had breakfast with three friends and we were charged at the rate of $115:US$1 for our food which was priced in US dollars. Later I had coffee with another group of friends and the rate charged was $120:US$1. On the auction that week, the weighted average rate was $84,60:US$1. Exchange rates are important as they determine price levels and the value of our incomes and savings.
When I started working in 1957, the rate of exchange for the Rhodesian pound against the British pound was 1: 2,5. My salary as a farm assistant was small, but I could buy a lot, even a small car after six months.
At independence in 1980, the local dollar was worth $2:US$1 and again I could live very well on my salary in local currency which had real value. It was taken for granted that our currency was stronger than the international currencies in which we traded.
In fact, we were proud of the fact, although, I thought as an economist and businessman, that we should rather have a weak currency and build up our reserves of hard currency for a rainy day and to encourage exports.
After independence, we maintained a strong local currency for a long time but gradually the foundations of fiscal prudency and sound State management of our affairs began to undermine the local currency.
The crunch came in 1997 when the State paid out $3,6 billion to war veterans and entered the war in the Democratic Republic of Congo to remove Mobutu Sese Seko and replace him with Desire Laurent Kabila.
The combined cost to our economy led to an immediate and catastrophic collapse of our exchange rate to $12:US$1.
In the following decade, we were to see our currency simply go down the tube and by 2008, a billion local dollars could not buy a loaf of bread.
Even today, I do not know how we survived — many did not of course, many famous firms that had operated for a century, vanished.
To survive we had to break the law and trade in hard currency. But the overall effect was that we wiped out over 100 years of savings and value.
In 2008, the value of the local currency in circulation was a few cents in real money per capita.
On February 17 2009, I sat in Parliament as a new member, and listened to the Finance minister dismantle the economy of the past and usher in a new dispensation that was to transform Zimbabwe in the next four years.
The speech was short — 15 minutes, but its impact was enormous. He allowed us to trade in the currency of our choice, lifted all controls on the exchange rate and on prices and liberalised the marketing of gold. Inflation collapsed.
In the next four years State revenues grew exponentially — US$280 million in 2009, US$900 million in 2010, US$1,7 billion in 2011, US$2,8 billion in 2012 and our budget for 2013 was US$4,3 billion. In 2012, we liquidated all local currency bank balances for the paltry US$19 million. The problem then was that we were starting to trade very substantially on electronic platforms. The traditional role of the banks and currency was changing very rapidly.
Cheque books vanished, cash transactions declined to a small fraction of the local market. The Reserve Bank of Zimbabwe (RBZ) printing machines resumed activity after four years of inactivity — not to produce paper money, but electronic money.
Suddenly we were wealthy again — Zimbabweans had bank balances worth US$23 billion. Compare that with the paltry US$19 million in January 2009.
But it was not real money, it was mainly air. When Mthuli Ncube took over as Finance minister in 2018, he quickly stated the obvious — our RTGs balances were not real money, it was something else and did not, in any way represent the real value of our currency holdings.
I said at the time that if you wanted to know whether our currency was worth US dollars at 1:1, just take $1 000 bond notes to the RBZ and ask for real US dollar.
If you were paid, then in about five minutes the queue outside the bank would stretch to Mbare.
He let the local dollar loose, called it the RTGs dollar (electronic dollar) and allowed it to float. In June 2020, just two years later, the local currency was trading at $135:US$1.
Inflation in local currency, tied almost directly to the exchange rate, went to 850% mid-year. Suddenly we were poor again. The common expectation at that point was that it was “business as usual” and that the local currency would be at 200 to 1 by the end of the year.
However, we had not read the game plan, it was called the transitional stabilisation programme (TSP).
This had been published in August 2018 by the new government and most of us had dismissed its contents as just another false State vision of where we were going.
The reality was very different. We were wrong, the new government implemented the TPS. They balanced the budget, reduced recurrent expenditure and raised taxes.
It allowed inflation to devalue our stock of electronic US dollars to more realistic levels and it curbed the printing of money. Someone said it threw away the printing press. Slowly the fundamentals started to assert themselves.
In June 2020, a decision was taken to start a formal market for foreign exchange. The reason for this was the failure of the banks themselves to do this, the appreciation that, at $135:US$1 the local currency was seriously undervalued and the direct correlation between the exchange rate and inflation. Money supply was no longer the cause of our inflation.
The auction had an immediate impact — at the first auction we sold US$15 million with a wide spread of bids, rapidly the market settled at $82:US$1, we were right the local currency was worth much more than $135:US$1. Over the next year the turnover on the auction rose to nearly US$2 billion per annum, sales on the interbank market to about US$800 million and transactions for local US dollar bank accounts to US$2,8 billion — all at the indicative rate of $85:US$1.
This means that the parallel market had shrunk from almost 100% of trades in the early part of 2020 to perhaps 20% today. Even on that market the rates strengthened and then declined to where they are today at about $125:US$1.
Debate rages as to what the correct exchange rate is — many arguing that the only real market is the street where you can change money day and night. They claim the auction rate is somehow manipulated. To the extent that the auction rate is determined by the weekly bids of about 600 companies, they are right. What is now required is for the people holding US dollar balances to offer them on the auction at a rate of their choice.
This has happened only three times — right at the start two NGOs sold US$550 000 on the market at $90:US$1. Just recently a major mining company put US$15 million on the market and accepted the weighted average exchange rate. If this happens, then we can gradually move to a more normal system, where the banks fix the rate everyday on the basis of supply and demand.
Given that we have a small surplus of hard currency on the formal market and maybe a significant surplus when the informal market is included, it is my view that under such conditions the local currency would quickly become overvalued. At that stage, I would argue that the RBZ should intervene as a buyer and build up our hard currency reserves. That is exactly what the Asian Tiger economies have done with great success.
But there is no doubt in my mind that we are now much better off than we were, that what we earn, even though it is less than we want, has real buying power. But even better than that, our economy is now on a sound footing and starting to grow rapidly in real terms. If we stay on course into the future, it is just possible, that we could join that small group of national economies that are now delivering a higher standard of living to their people.
- Eddie Cross is an economist and former Bulawayo South legislator. He writes here in his personal capacity.