BSR: Challenge of currency policy contradictions


You can’t have your cake and eat it, so goes the saying which commands a person to choose only one of two contradictory options, never both at the same time. If you are going to eat the cake, you must give up the option to retain it.

Zimbabwe’s currency policy reflects a government that wants to defy this wisdom and exercise both options at once. It wants to have the cake and eat it at the same time. The result has been a chaotic scene of policy contradictions.

The government runs a command policy on currency, by which it prescribes that its pseudo-currency (RTGS/Bond Notes) is equal to the US Dollar (USD) at the fixed exchange rate of 1:1. However, the government’s conduct in many ways militates against this position. The government does not believe in its own policy. Instead, its behaviour contradicts and undermines the command policy, confirming the well-known reality that the pseudo-currency and the USD are not equal.

Incredibly, the government thinks it is protecting people’s savings. But, as this BSR argues,  this is a delusion. Wages, pensions, deposits, export earnings and savings are being eroded while the government dilly-dallies. The erosion of wealth is present and real. At best, the government is merely postponing judgment day, lulling the public into a false sense of comfort.

This BSR examines the policy contradictions and demonstrates how they undermine efforts on the economic front. A clear, consistent and believable currency policy must be a top priority for 2019, if efforts to extricate the country from the abyss are to bear any fruit.

Separate but Equal?

The introduction of the bond note in 2016 came with the command policy that the pseudo-currency was equal to the USD. One of the key pillars of that policy was that there was no need for bank customers to open a new account for the new pseudo-currency. Keen to reassure the market, the government promoted the fiction of equality by saying the same bank account would hold USDs and bond notes.

To use a common analogy, cows and donkeys were kept in one pen and would be treated as if they were the same animal. Despite their differences, the government wanted the market to believe that they were the same in terms of value.

In October 2018, a new monetary policy statement brought a fundamental policy reversal when the central bank directed all banks to create two separate customer accounts: the Nostro FCA, which would hold foreign currency deposits only, and the RTGS FCA, which would hold pseudo-currency deposits. For the first time since the pseudo-currency was introduced, it would be kept separate from the USD. The cows and the donkeys would be kept apart.

Yet, despite this separation, the government insists they are still equal. We refer to this as the “separate but equal” doctrine, reflecting the segregationist idea behind it and belies the reality that separation comes with unequal treatment. The moment you segregate, you reaffirm differences and unequal treatment. By segregating the foreign currency from the pseudo-currency, the government was officially confirming underlying differences.

The previous one-account policy had been adopted to reassure the market that the two currencies were equal and would be treated in the same way. The segregation of accounts challenged this wisdom, but the government somehow clings on to the notion of equality.

This “separate and unequal” reality is confirmed by the fact that funds are not freely and equally transferrable from one of the two accounts to another in both directions. Banks accept that while a customer can transfer funds from the USD account to the pseudo-currency account, they can’t do it the other way round. This is because they know the pseudo-currency is weaker than the USD and they would lose money if customers freely transferred from the pseudo-currency account to the USD account at the fixed rate of 1:1.  Likewise, no reasonable customer would transfer funds from their Nostro FCA to the RTGS FCA at a rate of 1:1 because they would be losing money.

No reasonable attempt was made to reconcile the new position with the old; to adequately explain why the change had been done and how the currencies could remain equal given these realities. It is these arbitrary changes which reflect a clear disregard for property rights which in turn undermines public confidence in the government.

“We won’t raid foreign currency accounts”

When the separate accounts’ directive was introduced, the Minister of Finance made a firm promise that foreign currency accounts would not be raided as had happened a decade before.

He knew that the public was suspicious given the government’s previous record.

Despite the reassurances, not long after the new policy, some customers are already complaining of inconveniences and challenges in their attempts to withdraw funds from their foreign currency accounts. Some report that they have been advised by their banks to submit an application to the manager for authorisation, which is cumbersome. Others have reported that they are getting only a portion of their funds in foreign currency and the rest in pseudo-currency. Clarity on this from the central bank is limited, if it exists at all and banks seem to be making up rules as they go.

The idea that a customer gets a portion of his funds in pseudo-currency is particularly worrying. If correct, it is obviously based on the fallacy that the USD is equal to the pseudo-currency. However, since the currencies are in reality not equal, the customer loses out if he gets a portion of his foreign currency deposit in pseudo-currency. They would be better off if they had sold their foreign currency on the black market.

The effect of this is that it makes the foreign currency accounts unattractive. In effect, the bank and government would basically be stealing from the customer under the guise of 1:1 equivalence between foreign currency and pseudo-currency. It would mean contrary to the promise, the foreign currency accounts are being raided.

Retention of export earnings

The raids promoted by this policy extend to the export market. Current policy allows small-scale gold miners to retain 70% of proceeds from their exports in foreign currency. The remaining 30% is paid in pseudo-currency. For chrome exports, the producer retains 50% in foreign currency, with the other half is paid in pseudo-currency. Large-scale miners are allowed to retain 55% of export proceeds in foreign currency, an increase from 30% before an outcry caused revision. Tobacco farmers are in the same boat, as they surrender a portion of their export earnings to the government.

The government reasons that it needs a portion of export proceeds in foreign currency in order to fund essential imports such as fuel, medical drugs, electricity and wheat.

This situation would not present a problem if exporters got fair value in return. The problem is they get the pseudo-currency as if they were 1:1 with the USD, which does not reflect the reality on the black market where pseudo-currency is weaker than the USD. If you are a small scale gold producer, it means 30% of your export earnings are heavily reduced. As we will see shortly, this policy is counterproductive as it upsets exporters.


In some cases, the government’s insistence on the 1:1 rate is actually counterproductive and burdensome at a time when it is claiming to be saving costs by cutting public spending. With the average price of fuel at about $1.40 per litre in pseudo-currency, this converts to less than 40 cents per litre in USD, making Zimbabwe’s fuel some of the cheapest in the world in USD terms. One can sell their USDs on the black market, and buy fuel on the cheap in pseudo-currency. This is why the Minister of Finance was complaining that consumption of fuel had risen unsustainably and foreign drivers were taking advantage of the cheap prices. Who wouldn’t use the opportunity if it availed itself?

But how is a broke government which is severely short of foreign currency able to finance this pricing system? One obvious manifestation of the problem is the fuel shortages across the country. However, more importantly, the government can only finance this system by stealing from someone else and this is where the export proceeds retention policy comes in.

We have already seen how the government takes a portion of proceeds of exports from miners and tobacco farmers. In place of their foreign currency, it pays them in pseudo-currency. These exporters lose out because they get significantly less than they would get if they earned that portion in foreign currency. The difference between the pseudo-currency they get and the USD taken by the government is essentially a form of a subsidy that exporters are paying to fuel importers.

If in such circumstances, fuel importers sell fuel in foreign currency, they would be earning significantly more profits off the backs of exporters because they would most likely have been allocated foreign currency at the 1:1 fixed exchange rate. However, the government generally requires them to retail in pseudo-currency so that fuel remains affordable to the public. Fuel costs can be a major source of protests especially because they can result in higher prices for goods and services. But the fact of the matter is that someone is paying for this cost and the rest are taking a cheap ride.

Free-rider Problem

However, as these exporters realise that the government, fuel importers and others are taking a free ride on their export earnings, they begin to find ways to circumvent the official system. This is perfectly rational behaviour because no one wants to support free-riders. It’s not surprising, therefore, earnings from gold have fallen sharply in recent months. The ZimBollar Index states that gold output declined 30.7% between October and November 2018. It also states that earnings fell 63% from August where earnings were $169.76mln to November where earnings were $61.54mln.

While some small-scale gold producers cited a rise in production costs, it’s unlikely that they actually stopped or reduced production so significantly in the last few months. The low deliveries to Fidelity Printers are more likely because they have found alternative markets to sell their output or there are keeping their product waiting for a better moment. In other words, it’s likely that there is a flourishing black market in gold where producers earn all their cash in foreign currency rather than selling to Fidelity Printers where a portion is paid in the significantly weaker pseudo-currency.

The problem is once transactions go underground, the government loses out in more ways than one.  Thus, in short, government policy in this area is actually counter-productive.

Fuel for corruption

The government claims to be on an anti-corruption drive, yet the rigid and unrealistic currency policy presents fertile ground for corruption. This is exacerbated by the lack of transparency in the allocation of foreign currency to importers. Such a lack of transparency is a haven for rent-seekers among political elites and their associates.

To appreciate the nature of opportunities for corruption presented by the currency policy, an old national scandal provides a useful mirror. In 1988, the government set up a commission of inquiry into the corrupt and illegal selling of cars by ministers and senior government officials.

The Sandura Commission, as it became known, found that political elites were using their influence to buy cars from a government-owned company at low and controlled prices and reselling them for big profits on the black market.

Willowgate, as the scandal became widely known, was essentially a scam where political elites used their positions to take advantage of low prices of a scarce commodity which was in high demand. They bought low and sold high, earning enormous profits.

This is no different from the situation with foreign currency today. Foreign currency is available from the central bank at a ridiculously low rate of 1:1. Once obtained, it can be sold on at significantly higher rates on the black market, generating huge profits. The same reasoning applies even where they import goods and later sell them in foreign currency or at high prices in pseudo-currency. Once again, it is likely that political elites are at the forefront of Currency-gate.

The currency policy is therefore inconsistent with the government’s anti-corruption drive. If anything, it provides fertile ground for corruption. This is why it is critical for government to enhance transparency in foreign currency allocation. The current system is grossly inefficient, unfair and presents vast opportunities for corruption.

Tax in foreign currency, Pay wages in pseudo-currency

In November, ZIMRA, Zimbabwe’s tax authority, issued a notice (Public Notice 45/2018) demanding businesses that trade in foreign currency to remit taxes in those currencies “without any conversion to RTGS, bond notes, local point of sale and mobile money”. The tax authority supplied a number of Nostro FCA which it holds at various banks to which the foreign currency taxes should be paid. When the Minister issued the 2019 National Budget, he also directed that duty on cars and selected goods would be paid in foreign currency.

These measures show that although the government insists that the pseudo-currency is equal to the USD, it actually prefers the latter. This is plain because the government knows its pseudo-currency is weaker than the USD. If they were equal, the government would not reject its own pseudo-currency. It would have no problem receiving taxes in pseudo-currency. Although the government says cows and donkeys are the same, it clearly doesn’t want donkeys when it comes to tax remittances.

A related contradiction is that while the government is charging duty in foreign currency on cars and selected goods (which is a long list of consumer goods) it still pays wages in pseudo-currency. If retailers pay duty in foreign currency, it’s only rational that they also sell their goods in foreign currency. But where are civil servants expected to get the foreign currency to buy these goods when their wages are paid in pseudo-currency? They might resort to the black market to buy foreign currency, but another government policy, now backed by law is that this is illegal. They could end up spending 10 years in prison.

If retailers price their imported goods in pseudo-currency, they are likely to charge higher prices consistent with black market rates. It wouldn’t make sense for them to use the government’s 1:1

rate when they would most likely have obtained the foreign currency at higher rates.

The government says it is keeping the 1:1 exchange rate in order to “preserve people’s savings”. However, with employees still receiving wages based on the 1:1 rate, the purchasing power of their wages has been significantly diminished by the high prices being charged consistent with black market rates. That’s why one school is denominating its fees in both USD and bond notes. In effect, while the government has dollarized taxes, wages have remained in pseudo-currency. The result is that the ordinary person is left in a significantly weaker financial position.

This is easily illustrated by a hypothetical case of a worker who had saved up to buy a car. They had hoped to save enough to import the car and to pay duty using pseudo-currency. After the policy change, they found themselves sitting on pseudo-currency which is worth significantly less when converted to USD using black market rates. They must now save up some more before they can accumulate the USD to pay duty. But remember, buying USD on the black market exposes them to criminal charges and a potential 10-year jail term. The irony is that the same government says its measures are designed to preserve people’s savings.

Killing its own myth 

By rejecting its own pseudo-currency in preference for the USD, the government is killing its own myth, which it is supposed to promote. All currencies are fictions whose value and strength depend on the extent to which they are believed by the market. A currency is strong when the fiction of its value is believed by the market. It follows, therefore, that the issuer of the currency must have confidence in it.

This means the issuer must be happy to accept it as a form of payment. If the issuer does not believe in it, no one else will. So how does the government expect anyone to believe in the myth of its pseudo-currency when it doesn’t believe in it? Shouldn’t the government be at the forefront of promoting its pseudo-currency? It doesn’t make sense.

So what is the government up to? 

That the Finance Minister does not have confidence in the pseudo-currency is not a secret. Before taking on his current role, one of his recommendations was to phase out the pseudo-currency. However, when he became Minister, he realised he could not immediately implement his prescription. The political cost of abandoning the pseudo-currency would be too high for the bosses.

When he came to London in October, he pointed out that market forces would do the job rather than the government formally removing the pseudo-currency. At the time, the pseudo-currency was in free-fall against the USD. The market had panicked when rumours spread that the pseudo-currency was being phased out. People were seeking refuge in a stable currency. High demand for USD pushed the price upwards. The rates came down eventually but shortages of foreign currency persist.

The government itself is not showing confidence in the pseudo-currency. Everyone, including the government, prefers the USD because it is a better store of value. The problem is that the country does not have the USD and there are very few sources willing to give Zimbabwe some USDs. The US Federal Reserve, which prints the USD, will not extend a line of credit to Zimbabwe.

Foreign Direct Investment would help but the “Zimbabwe is Open for Business” mantra is sounding hollow with each passing day. Zimbabwe’s political disharmony and a failure to win the support of major Western countries have kept Zimbabwe out in the cold. The ruling party’s negative attitude toward suggestions of political dialogue is unhelpful.

The country could borrow from foreign banks but its poor credit reputation with creditors stands in the way. It has long been in arrears with major creditors and is generally regarded as a delinquent debtor. The arrears need attention before there can be movement on the credit front. Even China, the so-called all-weather friend is wary of extending more loans to a country which has defaulted on existing facilities. Mnangagwa’s efforts to get a large bail-out package from China have so far hit a brick wall.

Even so, a few creditors have drip-fed Zimbabwe with a few loans. The British firm CDC extended one such facility ($100 million) to the private sector just before elections, through Standard Chartered Bank. Gemcorp, another British firm extended $250 million facility in October 2018. These facilities might help to inject foreign currency into the system but it’s not nearly enough.

One option is that companies that have foreign parentage can get some injection of foreign currency. After dollarization in 2009, CABS got a $1.5 million loan from its parent company, Old Mutual Group. This might help too, but it won’t be enough to solve a chronically weak economy. The government has resorted to mopping up foreign currency through taxes, hence the demand for duty in foreign currency.

More production and exports remain the major ways to generate foreign currency. However, policy contradictions highlighted in this BSR stand in the way of progress. The government must generate policies that are clear, consistent and progressive. These policies should encourage production and exports. As argued before, they should promote import-substitution in order to reduce the import bill.

But what about the pseudo-currency? 

The government has no appetite to remove the pseudo-currency and this is not for the reason they are giving, namely to “protect people’s savings”. We have seen that the current policy does not actually protect savings.

The real reason is that phasing out the pseudo-currency will take away government’s power to print money and it doesn’t want that. RTGS and bond notes present opportunities to print money. The Finance Minister wants to run a tight ship to curb spending but his lack of political power may be a handicap.

The government wants to retain this power to print money and the pseudo-currency serves this purpose. It has tried to cover this by claiming that bond notes are guaranteed by facilities from Afrexim Bank, but there is a yawning gap in respect of the ever-increasing RTGS balances. There is no external facility to guarantee those deposits.

Protecting savings?

The government and its supporters claim that the present currency policy is designed to “preserve people’s savings”. In October, the Finance Minister was quoted by The Herald as saying, “Government recognise concerns surrounding RTGS deposits, and we commit to preserve the value of these balances on the current rate of exchange of 1 to 1, in order to protect people’s savings”.

But this is a façade. How does the government preserve people’s savings by maintaining a currency policy which is far removed from reality? How are people’s savings preserved when prices are being quoted in USD or if in pseudo-currency, at rates that reflect its weakness compared to the USD? How are people’s savings preserved when the government is demanding duty on cars and selected goods in foreign currency only, which is expensive to buy and is available on the black market, which is also illegal? The claim that government is protecting savings is hollow.

Command policies don’t work in respect of myths which are dependent on collective belief. The myth of money is as strong as the belief that it attracts. People believe in the USD. Their belief in pseudo-currency has diminished significantly. To preserve the value of the pseudo-currency, the State must either live up to its promise and honour the 1:1 conversion rate or the market must believe in the fixed rate of exchange. Neither is likely to happen. The government does not have the foreign currency to support its claim and the market is unlikely to ever believe that the pseudo-currency and the USD are equal.

Instead, what will happen is that the market will once again have to devise ways of salvaging value – salvaging because preservation is not really going to happen. But the grim reality is that a lot will lose out. A good example of attempts to salvage value can be seen in the way schools are re-adjusting their fees. One upper-middle class school in Harare reassures parents that school fees remain unchanged but 25% of the fees will be paid in USD. This belies the significant increase due to the mandatory USD component. The net effect is that the fees have actually changed in real terms because acquiring USD is costly.

Another school is charging fees in both pseudo-currency and USDs. For example, fees for a full boarder in USD is 2,390.00 while in pseudo-currency it’s pegged at 7,165.00. The school fees notice clearly states that the fees will vary depending on the “prevailing rate”. “Kindly note that the USD cash or Nostro amount is subject to change dependent on the prevailing rate. Please contact us prior to payment to verify the rate”.

While the source of the school’s “prevailing rate” is not clear from the notice, what is plain from the figures is that it is not the government’s fixed rate of 1:1. These are efforts by schools to navigate an uneven and foggy currency terrain and are symptomatic of the coping strategies that market actors are adopting.

However, since banks are short of foreign currency, most parents will have to resort to the black market which again, is illegal – itself a manifestation of a policy contradiction. The government is basically criminalising behaviour which is perfectly rational and necessary.


For a glimpse of what is happening or might happen in future, the 2007/8 currency crisis provides some lessons. Back then, the government’s hand was forced by the market. It merely followed a path that the market had created as it sought means to survive. During that crisis, when the Zimbabwe Dollar faced its nadir, the market resorted to various means to salvage the value of savings, although many citizens suffered serious losses.

Some resorted to the black market to convert their local currency into various foreign currencies which were more stable. Others bought assets, including residential stands, houses, cars, household equipment, even bricks – anything that could store value, etc. Others took the exit option and left the country to start new lives elsewhere. People took rational actions to contain the costs of a rapidly depreciating currency. The ones who suffered the most were those, like pensioners, who did not have immediate access to their money. They couldn’t do anything because their savings were held by third parties upon whom they relied but let them down.

This is already happening. Wages and pensions are being paid based on the fallacious 1:1 rate and yet most prices are reflecting the unequal relationship between the pseudo-currency and the USD. The purchasing power of the wage or pension dollar has been significantly reduced and as ever it is the weakest and most vulnerable in society who are losing out. There is a need for readjustment of wages and pensions to reflect market realities. But this won’t happen as long as the government insists on the false 1:1 equivalence.

The Finance Minister is right to be concerned with the budget deficit, which needs to be significantly reduced. However, the currency policy is an equally important area that needs clarity and consistency. It’s important that the government makes up its mind and sets out a firm, robust and believable currency policy. It reassures the market – both citizens and foreign investors. The current policy contradictions on currency are inconsistent with the notion that “Zimbabwe is Open for Business”. It needs sorting and that should be a top priority as the New Year begins.

The government cannot have its cake and eat it at the same time. It cannot insist that the pseudo-currency is equal to the USD, while at the same time rejecting the pseudo-currency because it knows that its weaker than the USD. The market will not be fooled and once again, like a decade ago, the government will left behind and will be forced to follow the market.