After much waiting and boiling over of the rumour mill the 24th of February 2019 the Reserve Bank of Zimbabwe delivered a monetary policy statement that at the time gave us the RTGS dollar. While Zimbabwe already had some form of currency in the Bond note, the RTGS dollar which was eventually revealed in its true form the Zimbabwean dollar marked a true separation of US dollars and Bond notes. The Reserve Bank said then that it would allow the currency to float and trading officially started on the 26 of February 2019. So yesterday marked one full year of the Zimbabwean dollar (initially as RTGS dollar) trading. A year down the line and how has the currency faired?
The introduction of the RTGS dollar was coupled with a foreign currency market, the interbank market we all know and love today. There was a lot of big talk about how this market would finally stamp out the black market for foreign currency in Zimbabwe. Nothing could have been further from reality. The authorities decided in a possibly clandestine meeting in their ivory tower that the currency would trade at 1:2.5 with the US dollar. This was the first sign that the idea was ill-conceived as at that time the parallel had the Zimbabwean dollar at 1:4.05.
A year is a very long time, certainly in Zimbabwean currency terms. Along the way, the end of June 2019 the Zimbabwean dollar not only regained its full name but also sole legal tender status. This didn’t do much good. As at 26 February 2020, the interbank valued the US dollar at 17.9 Zimbabwean dollars while the parallel market valued it at 28.6 Zimbabwean dollars. A marked difference.
We have long used the direct method for quoting foreign currency, that is how many US dollars the Zimbabwean dollar buys but to illustrate just how catastrophic the Zimbabwean dollar’s decline has been we need to look at the indirect method, that is how many US dollars (or cents) a Zimbabwean dollar can buy. On the 26th of February 2019, a Zimbabwean dollar would buy you US 40 cents on the interbank market and just under US 26 cents on the parallel. 12 months later the Zimbabwean unit will buy you US 5.6 cents via the interbank market while the parallel market will give you US 3.5 cents.
The rules around the currency space since then have ranged from the bizarre to the absurd. The Reserve Bank of Zimbabwe has tried everything to stop the parallel market for currency except the one thing it actually needs to do: free the currency. The Ministry of Finance in the meanwhile has done everything it can to curb inflation except the one thing it should do: curb money supply growth. Along the way electronic transactions through mobile money were almost banned, the bank interest rate was increased then decreased, the citizenry has been taxed on transactions while giant corporations such as Huawei get retroactive tax breaks.
The inflation landscape has been rocked by the currency movement as well, Zimstats has the year-on-year inflation they ceased Reporting on at 540% while Professor Steve Hank places it at 660%. However, those figures both likely underestimate the true impact of inflation on Zimbabweans pockets. The diminished purchasing power has dwarfed aggregate demand which in turn has seen volume and output reduction across industries. So deep is the rot that our exports have exceeded imports for close to 6 months now.
For an economy that is “dedollarising” more and more applications are being made and accepted for the use of the US dollar. With fuel companies being given what is pretty much a green light the shockwaves will soon ripple through the economy. After just 12 months back in the ring, the Zimbabwean dollar has lost 86% of its value on both markets. Just 12 months ago heralded as the strongest currency in the region, the mighty have indeed fallen.