BSR: Currency woes and how elites rob the state


The government is in a state of ideological flux over the economy and this is no more evident than in relation to the issue of currency and prices of retail goods. It is unsure of the direction it must take: should the government intervene more to control rates and prices or should it leave it all to market forces?

The current Minister of Finance, Professor Mthuli Ncube is arguably a  market man. His professional background suggests that he is a typical Davos man, one who is more comfortable among the Bretton Woods crowd than with his newfound comrades at Shake-Shake building, the home of ZANU PF. ZANU PF is a habitually interventionist party and therefore more inclined to having the state controlling and directing economic affairs.

But as we shall see in this BSR, ZANU PF’s interventionism has never really been to advance the interests of the ordinary person. Rather, it has largely been a cover for political elites and their business associates who specialize in extracting from the state. To use the language of economists Daron Acemoglu and James A. Robinson in their much-acclaimed work, Why Nations Fail, ZANU PF has built a network of extractive institutions through which a small caste of the privileged elite siphon resources from the state or find protection from the state as they extract from the public. It is a system in which the few who claim to be in the service of the many are actually financed and flourish on the back of the many.

When Mthuli Ncube gave a speech at a London-based think-tank in October 2018 and was asked about the fate of Zimbabwe’s surrogate currency and whether the government would accept its devaluation, his response was that the government didn’t have to do anything as the market was already doing the job. At the time the government had just announced a new policy of segregating US Dollar accounts from local surrogate currency accounts. In other words, privately, they were acknowledging that devaluation was taking place through market forces although publicly they kept a straight face as they claimed that the surrogate currency was at par with the USD.

What has happened since then suggests that the statement was not a faux pas. He was still new in his role but he had already disclosed his dislike of the surrogate currency before he took the job. But he realized that getting rid of it was not going to be a quick job. The surrogate currency has been falling even on the official market. However, there is a big caveat. It is that the government is refusing to let go of control of exchange rates, despite announcing liberalization.  It is reluctant to give in to market forces.

The government’s worry stems from the fear of losing control. One major consequence of surrendering to the market is loss of power and control and few governments, let alone a government inclined to authoritarianism, like the idea of losing control. Leaving it all to the market would be against ZANU PF’s natural instincts and too much of an adventure into the unknown. To be fair, Mnangagwa appears to have given his Finance Minister great latitude in economic affairs but surrendering completely to the market is something that would face resistance.

Regaining control of monetary policy

The Minister has recently emphasized the importance of regaining control of the economic policy-making function. He was writing on the need to have control of monetary policy, an important part of economic policy making and management. After Zimbabwe lost its currency in February 2009, the government by operation of the laws of economics also lost control of monetary policy. It is not often said or admitted by a regime that publicly holds the idea of sovereignty in high regard, but on the day that the country dollarized, a chunk of sovereignty evaporated. The Federal Reserve of the US, not the RBZ on Samora Machel Avenue was now in charge of monetary policy.

The Minister wants the government to regain control over monetary policy and he recently disclosed that the separation of USD accounts from the surrogate currency accounts towards the end of last year was a key step in that direction: Writing an exclusive for NewZWire, the Minister said, “… what we did on the first of October last year was to begin the process of restoring monetary policy as an additional tool to deal with macro-economic issues.”

It goes back to much earlier times, of course, with the introduction of the surrogate currency in 2016 as a tentative, and half-hearted step in that direction. But with the USD still dominant, and the bond note pegged to it on equal terms, the government still didn’t have much control over monetary policy.

To have such control, the country would need to restore a full domestic currency. But this is no easy feat to achieve, a point accepted by the Minister. As he wrote in the NewZWire article: “It is quite clear that we need to move towards having our own domestic unit account and the RTGS$ is the beginning of that.  But it is a process. You cannot run before you can walk. And our economic legs have been broken for too long, we must first recover and get back on our feet before racing ahead with a full-on new domestic unit”

All things being equal, the idea that the country would be better off with its own currency is not really a matter for much debate. Every sovereign nation-state ought to have control over its currency and monetary policy. The USD is too strong compared to other currencies in the region and this reduces our competitiveness. While it is a reliable store of value and might provide stability, the downside is that the goods that we sell to others will be too expensive while the goods they sell to us will be too cheap. So, we end up with a large number of imports but very little exports.

If we don’t export, we don’t earn foreign currency, which in turn will affect our ability to import. So we may have to borrow but our creditworthiness is weak and few are prepared to lend. We already have serious arrears which inhibit our ability to borrow. A country that spends a lot buying from others but does not also sell to them in return is doomed. It’s not surprising that over the years we have become a giant South African supermarket importing everything including toothpicks, cucumbers and toilet paper.

This situation is by no means unique to Zimbabwe. Acemoglu and Robinson describe how Argentina faced exactly the same problem in the early 2000s. Like us, the Argentinians had created the fiction that their local currency, the Peso, was equal to the USD, trading one for one. They had a period of stability but soon enough exports suffered while imports grew. Using the USD they had a strong currency which bought cheaply from neighbours but it made their goods too expensive for export.

People locked their money in USD accounts, believing it to be a better store of value. (It’s the same thing that Zimbabweans with USDs in FCA Nostro accounts are doing) But in the end, the Argentinian government froze all USD accounts, allowing people to withdraw limited amounts and only after converting into local currency. We shall return to this issue when we discuss what might happen to the millions of USDs in FCA Nostro accounts.

Ready for a new currency?

With the need for a domestic currency settled, the real question, as ever, is our readiness for its restoration.  To use the Minister’s metaphor, the question is whether the “broken economic legs” have been repaired sufficiently enough so that the nation can be said to be “back on its feet” again. The Minister used a metaphor where others invoke that other amorphous but much-favoured cliché, “fixing the fundamentals”. To the layperson, all this cryptic stuff simply means the economy must be working, stable and capable of supporting a new currency.

How to do the repair job is the question but answers to it are still at large. Our experience with the bond note and the RTGS is a lesson that restoration of the domestic currency is not simply about announcing it. There is much more that goes into supporting a currency, chief of which, as we shall see later, is trust and confidence in the political authority underwriting the currency.

Meanwhile, the RTGS$ which the Minister said was the beginning of restoring a domestic currency continues to collapse. In fact, the market appears to be dollarizing, with retailers fixing prices in USD or RTGS equivalents at the parallel market rate. All this seems consistent with his statement last October that the market was already doing its job when he was asked about devaluation and phasing out surrogate currencies. This begs the question: is the government using the market to kill the surrogate currencies?

A pensioner who earns $80 per month used to buy a basic bottle of cooking oil at around $4 a few months ago but must now part with nearly $30. The price of goods has changed drastically but his earnings have remained stagnant. The result is that the pensioner is comparatively more impoverished now than he was a few months ago. The Minister’s books might look pretty to the money people in the Bretton-Woods quarter but the situation at the household level is ugly and unsustainable. The trouble is if he raises wages for workers and pensioners it would disturb his books. The much-vaunted “surplus” might disappear and the books won’t be pretty anymore.

Has the currency market really been liberalized?

While the government claims to have allowed the market to determine the exchange rate through the Interbank Market, on closer inspection, it hasn’t really loosened its grip. And this partly explains why despite the purported policy changes, the parallel market remains vibrant. When I asked experts why the parallel market was still healthy and running after the government liberalised the currency market, the unanimous response was that the government had not really liberalised the market because it was still playing an influential and controlling role.

According to economic analysts at Equity Axis, “floatation of the interbank rate is still partial”. This is echoed by another think-tank, the ZimBollar Research Institute, which wrote: “the honest truth is the Interbank Rate has never been floated in reality.” This is because the central bank still imposes a daily ceiling on rates. Banks’ freedom is limited by the cap determined by the RBZ which at the moment is the primary supplier of forex. This means rates can only go up to the set level. The fate of the Foreign Currency Allocation Committee is not clear but if it remains functional it will still have an impact on the currency market.

In other words, the state, through the central bank still maintains a controlling hand on the market, which limits freedom of the market. This, according to analysts, necessitates off-market transactions in order to meet demand. In ordinary language, this is called the parallel market. On the parallel market rates go beyond the ceiling imposed at the Interbank Market and sellers are happy to trade. Those who want the forex have no choice but to pay a premium for the dollar.

The controls by the RBZ are a sign of a government that is deeply uncomfortable with surrendering completely to the market for this would leave it without control. But these controls are contributing to a loss of confidence in the Interbank Market. Those who have forex would rather do it off-market where they know it will fetch a higher price. As Equity Axis put it, “This excess demand [demand which can’t be satisfied on the official market] has put pressure and widened the gap between [the] interbank and parallel rate.” Hence the parallel market continues to grow and flourish. Consequently, the very problem that the government said it wanted to resolve continues without abatement.

Interventionism is part of ZANU PF political culture. That is the language they understand but only for two reasons: partly populism but mostly to give elites greater opportunities to feed off the state. The market does not offer such opportunities. It takes away control and they don’t like it.

Can the monkey teach the tortoise to climb trees?

One way to describe Mthuli Ncube and ZANU PF in relation to market ideology and interventionism is the analogy of an encounter between a monkey and a family of tortoises. The monkey understands the language and techniques of climbing trees but the tortoise does not have similar blessings. The monkey might try all he can but the tortoise will not be able to climb the tree.

For the past three years when it introduced the bond note, the government maintained tight control of the exchange rate, claiming its surrogate currency was equal to the USD. It was clearly on an interventionist path. Many questioned the wisdom of this approach but the government was obstinate. The market reaction was mixed. The market doubted the official rate and soon enough a parallel market emerged.

The biggest beneficiaries were the elites who had access to the foreign currency from the central bank at the 1:1 rate and traded it at higher rates on the parallel market or simply imported goods and sold them at prices that reflected the parallel market rates.

The Billion Dollar Question

Interestingly, the government has recently disclosed that there is more than a billion dollars’ worth of foreign currency sitting in exporters’ Nostro FCAs and offshore accounts. In other words, this is money that could be traded on the Interbank Market but it isn’t being traded. But why isn’t it being traded? That’s the billion dollar question.

The answer appears simple enough: exporters have no confidence in the Interbank Market. If they did, they would be trading freely. But we have already seen the Interbank Market isn’t working. The notion that the rate is freely floating is a mirage. The government still wants to have a say and it is influencing trading on the Interbank Market. In short, the billion dollars sitting in bank accounts is a vote of no confidence in the Interbank Market.

Here we come face to face with one of the essential features of money: it is not just a medium of exchanging goods and services but also a store of value. For these people, it’s better to keep their money because the USD is a safer store of value. We already saw how Argentinians did the same when they had a crisis in the early 2000s. They also ran for safety, converting their money to keep it in USD accounts.

But the thought that their money was safe was wholly mistaken. The government froze their USD accounts and restricted withdrawals. As described by Acemoglu and Robinson, “Nobody was allowed to withdraw money from their dollar accounts, unless they agreed to convert the dollars into pesos. Nobody wanted to do so.” Locals called it “El Corralito” (the Little Corral) a metaphor which meant “depositors were hemmed into a corral like cows, with nowhere to go,” the economists write.

The Argentinian scenario is likely to send shivers down the spines of Zimbabwean depositors who have USDs in their FCA Nostro accounts. Much depends on the government’s willingness to protect property rights and to honour its word. Unfortunately, its record is less than honourable. In the past, the government has shown no regard for property rights, something that the current Minister of Finance must be very familiar with, having been a proprietor of a bank that was taken over by the government much against his will. More critically, in 2007, faced with a similar crisis, the government repudiated its promises and raided foreign currency accounts of organisations and individuals held at banks.

Mthuli Ncube has promised he will do no such thing. So far, he has remained true to his word. But for how long? And does he have the power to stop his bosses if they decide otherwise? He was right to add a caveat to his undertaking when he said he would do everything in his power to protect customers’ foreign currency. But that’s little comfort to customers. It means there is a line where his jurisdiction ends and beyond which there is nothing that he can do to stop the government if it decides to go after the foreign currency. There is a worry that the government might get frustrated by exporters who are keeping USDs in FCA Nostro and offshore accounts. Knowing ZANU PF, it will be devising strategies to force them to release and make these funds available.

In Argentina, the government eventually ordered conversion of USD accounts into local currency accounts using the one for one rate at a time when the local currency had been devalued to one for four. This caused a serious depreciation in people’s USD accounts. Suddenly those who thought they had been wise to keep their money in USD accounts found themselves with only a fraction of it.

If one day the Zimbabwean government decides to force USD account holders to convert their money to local currency at the old one for one rate or even at the Interbank Market rate, they will obviously suffer losses as none of these rates is anywhere near the parallel market rates. With President Mnangagwa announcing this Friday that there are plans to introduce a new domestic currency, USD account holders will have reason to be jittery, unsure of the rate at which their savings will be converted.

How the elites extract from the state

When you speak to business elites, they present a picture where they dislike the state and prefer that it stays as far back as possible from business. They don’t like to be regulated and they say the state should let business have freedom. But when you analyse it closely, business elites and their political associates rely on the state and in our under-developed nations practically strip it to its bare bones. From tenders to subsidies to special facilities reserved for elites, the entire caste from business and politics practically eats on behalf of everyone else. Let’s start with the Foreign Currency Allocation Scheme (FCA Scheme), which is actually a huge subsidy to big business in the import industry.

Foreign Currency Allocation

The FCA Scheme is a device designed to give a select group of businesses that are supposedly involved in the importation of essential commodities. This includes fuel, grain, energy, medical drugs and others that qualify as essentials.

The Scheme is traditionally opaque. Efforts to get information on how it works and who the beneficiaries have been and how much over the years have been utterly fruitless. That this FCA Scheme is heavily abused is beyond question. An FCA Scheme Committee was announced a few months ago. But its operations remain as opaque as ever.

The FCA Scheme provides cheap foreign currency to these privileged few in the import industry. They got it at the one for one exchange rate, extremely cheap, when rates on the parallel market soared. But these importers could sell their products at prices reflecting the parallel market rates. Individuals use their allocation to trade on the parallel market. This is precisely why they have an interest in keeping the parallel market running. They are the drivers and beneficiaries.

Where does this cheap foreign currency which goes to big business come from? It comes from poor tobacco farmers and small-scale miners who risk their lives every day. They are the generators of foreign currency but they only get a fraction of their earnings in foreign currency. So, the tobacco farmer toils during the year and her export earn foreign currency but she gets only a fraction of it but a fuel dealer buys that foreign currency at a cheap rate and pockets the profits.

That this facility is abused is known to the government. When it recently announced the liberalisation of fuel procurement, the government stated that the policy change was “necessary to promote the efficient use of foreign exchange and to minimise and guard against incidences of arbitrage within the economy”.

It has known all these years that there was arbitrage going on, taking advantage of the difference between the official and parallel market rates. Yet it allowed it to go on unchecked. The irony is that it’s still going on under the new “liberalised” system. It’s basically fraud on a commercial scale which is supported and condoned by the government.

That this is the case is explained by the incestuous relationship between big business elites and political elites. The political elites are also the business elites with key stakes in the fuel industry. It’s not surprising that the supply of cheap foreign currency continues under the guise of cushioning society.

This practice of the poor funding the lifestyles and businesses of political and business elites is not new under ZANU PF rule. There is one example from the recent past which provides a stark illustration of this phenomenon.

RBZ Farm Mechanisation Scheme

Sometime during the Fast Track Land Reform Programme the central bank devised a scheme to acquire and supply farm equipment. It was called the RBZ Farm Mechanisation Scheme. Although the list of beneficiaries was never made public, it is widely believed political elites and their associates were the chief beneficiaries.

These beneficiaries should have paid for the equipment, which included tractors, but they never did. Instead, the RBZ was saddled with the debt, which it could not pay. Unable to pay the debt, it was transferred to the government. Parliament passed a law transferring the debt from the RBZ to the government. It was called the RBZ Debt Assumption Act.

What this meant in simple language is that the men and women who had failed to pay for their tractors had now passed that obligation to the taxpayers because the government is funded by taxpayers. The rest of society who had received no equipment from the RBZ was now paying for the few who had benefited. In short, without their consent, taxpayers bought farm equipment for the few political elites and their associates. It was basically theft from the taxpayers legally sanctioned by the state. It’s legislated fraud.

Now compare these two scenarios: The political elite who took a tractor under the scheme but never paid for it was never prosecuted. Instead, the government got taxpayers to pay for the tractor on his behalf. On the other hand, the man who made off with a plough from a shop during the recent demonstrations was given a … year jail sentence. One is described as a farmer, the other, as a criminal.

No one would seriously argue that stealing an ox-drawn plough should be condoned, no. But why should the system treat the be-suited man who stole a tractor under the guise of a scheme differently? It’s an example of how there is systematic but subtle discrimination between people depending upon their station in life. The privileged are treated with velvet gloves; the poor are flies subjected to the might of the hammer.

Others siphoning schemes

There are other examples of situations in which the elites have carried out grand heists from the public. A more recent example is Command Agriculture, where the wealthy elites greatly benefited from public funds. Millions worth of treasury bills were issued to fund Command Agriculture and it is the taxpayers, not the beneficiaries, who have to pick the bill. If a person does not pay his restaurant bill, the owner might call the police. Here there are men and women who got public money but never paid back. They are free and some are in power.

The looting of the War Victims Compensation Fund in the 1990s is another. That Scheme was supposed to benefit ordinary war veterans. But political elites made off with large payments, many using falsified medical records. It was a fraud on an industrial scale. No one served time for it. Compare with what happens when an ordinary person commits a fraud however small.

The VIP Housing Scheme was also supposed to assist civil servants to build homes. Again, it was looted by political elites, including the then First Lady, Grace Mugabe. This was public money used to build and acquire private assets. Not a single person was prosecuted.


The government is confused as to the direction it ought to follow over the economy. The Minister of Finance, who has the role of the chief driver of the economy, is a pro-market man. He prefers market forces. He long explained his dislike of the surrogate currency.

However, the party that he serves has other ideas. It has never been comfortable with losing control. Resources must be directed by the state purportedly for the public good but really for the benefit of the privileged elites. The Foreign Currency Allocation Scheme and the Farm Mechanisation Scheme in the past are examples – different times but in both cases, the bills of the elites are paid by the poor. There are other examples.

This is why the government has been prevaricating over its currency policy. The strategies have been half-hearted, causing unsureness and confusion in the market. The persistence of the parallel market is an example of the consequences for half-hearted and insincere efforts. As ever the elites continue to exploit the arbitrage opportunities.

Now the government sends mixed messages over a new currency. Mnangagwa says there will be a new currency this year. Just a couple of weeks back his Finance Minister was denying suggestions of a new currency, saying the current RTGS is the currency. It could be Mnangagwa has unwittingly let the cat out of the bag, announcing the new currency at a political rally.

The effect is that the market will be jittery over the surrogate currencies and the fate of their USD savings. When exactly will the currency arrive? At what rate will it be introduced to the USD? What will be the fate of RTGS and bond note balances? These are critical questions that will be occupying the minds of market actors. Both the Interbank and parallel market rates will respond to the announcement and it will be by how they react to the surrogate currency.

It goes without saying that however desirable it is for a country to have its own currency; a new currency is not a silver bullet for general economic challenges. It is a unit of exchange and a store of value. As a unit of exchange, it works if people are confident that others believe in it. As a store of value people prefer a currency that is stable. The Zimbabwe Dollar failed this test. The bond note and RTGS dollar have failed this test. Before jumping into another, the government has to understand why they failed. Have those factors of failure been fixed?

The other chief characteristics of currency are trust and convertibility. A farmer who sells his produce and then pays a fee to get treatment is able to convert his labour into health. This is facilitated by money because the farmer, the buyer at the market and the doctor and pharmacist at the hospital all believe in the value of the money used. If one of them doesn’t, the conversion won’t happen.

Trust, which is paramount, depends upon the political authority behind the currency. That is why, when all is said and done, the success or failure of a new currency depends on the success or failure of the political authority sponsoring it. The people or to use the language of economics, the market must trust the political authority. As far as trust in the Zimbabwean political authority is concerned, this remains a moot point.