Exchange control a national cancer

In all the years that I worked as an economist in what was then Southern Rhodesia and subsequently in the Republic of Zimbabwe, I argued in any circles that would hear me, that exchange control was a national cancer, eating away at the economy and destroying value. I had few disciples.

Eddie Cross

The decision about three weeks ago to take 80% of the foreign exchange earnings of the platinum mining industry into the Foreign Exchange Accounts of the Reserve Bank of Zimbabwe (RBZ) and replace them in the accounts of the mines with Real Time Gross Setttlement (RTGS) dollars, at long last triggered a response.

The miners went to see RBZ governor John Mangudya (in his Holy Temple of the Reserve Bank building — logically one of the largest and most luxurious in the capital), and asked him to reconsider his position as they could not accept the directive.

If the governor does not do so, I suspect this matter will then go to the courts for a decision, but the mining companies are right to deny Mangudya the right to steal their output in broad daylight.

When many countries in Africa attained independence, they had little or no knowledge of how the banking system worked.
At Independence in Zimbabwe, some people walked into banks demanding money over the counter, only to be told that you had to have “money” in your account.

Did the bank really mean that that funny writing in the books was real money? Today it is even more mystifying because it is just a number on a screen. But the reaction of many leaders in Africa very soon after independence was to realise what a wonderful thing a Reserve Bank was.

In the former RBZ governor Gideon Gono era, the central bank not only committed the sin of printing money on a vast scale until finally the press could do no more and the whole edifice collapsed, like a baobab in the bush dying of thirst.

His second sin was to take a third of all foreign exchange earnings and convert them into local currency at an exchange rate set by the bank — which, of course, bore no relation to the real value of the stuff in local currency.

Effectively this was a tax on the country’s foreign earnings and the “money” that you received in return was only good for “burning” (an informal sector term) on the local market. At the height of this wholesale theft of private resources by the RBZ, a connected individual could get a small allocation of hard currency (say US$5), change it on the streets and get a whole pile of local cash, walk back into the RBZ and buy enough foreign currency to buy a house or a luxury car at the “official” or even worse, the so-called “legal” rate.

In effect, what this was doing was transferring real value and wealth, from those who earned it and made the economy work in the process, to people in the State or even simply holding a connection, political or otherwise, who could access these stolen resources and lodged in the RBZ.

The screen used to cover this nefarious activity was a thing called “exchange control” and the central bank had a staff of thousands dealing with the allocation of these scarce resources to people who wanted to travel abroad or import goods.

When a political leader left jail in the mid-1980s after spending three years on trumped up charges, he was met at the gates of the prison by a senior State official who took him to breakfast and offered him a bribe to stay quiet and resume work with the regime.

The “bribe” was not cash, it was a “foreign exchange allocation” from the RBZ, virtually a token to be exchanged at the bank for hard currency that could then be used to buy imports — all that the ex-convict had to do was to sell it on the market and become an instant millionaire, which is exactly what he did and promptly was appointed a minister in the very government that had locked him up in the first place.

With dollarisation in 2009, the regime has not been able to print money, until recently, but today, money is not just that paper stuff you use on the streets or in the shops but has a dozen other forms.

We now have “electronic money”, Debentures, Treasury Bills (TBs) and other instruments (bond notes), which hold value because the State (the RBZ) says so. The problem for the central bank and the regime in power is the dammed market which insists on quietly fixing a real value to whatever we are using as a means of exchange.

So today, as I write, the real United States dollar — printed in the US on cotton paper and sold to our banks with real money, is trading at a premium of 35%. This means that if you have “RTGS dollars” in your account — listed as US dollars, in fact, you do not have real currency in your account, but a phantom currency, which is only worth 65 cents in real money.

It is even worse if you have your money in TBs, then you must discount the TB into RTGS dollars at a 20 to 30% discount and take a form of currency that is only worth 65 cents — total discount is 52%.

If you have millions of RTGS dollars in your accounts and you want to get them out of the country, then one way to do that is to buy a share on the local bourse and take the share out to Johannesburg or London, where you can sell it for real money — but take a 60% discount in the process.

That is the problem faced by the mining companies. President Robert Mugabe’s regime that is once again in total control of the State after the rigged and manipulated election in 2013, has succeeded in destroying all the gains made during the short period (four years) when they were forced to share power with the MDC.

They have completely undermined the fiscal stability created by the MDC and, in the process, have caused a massive cash shortage on the market, they have taken so much real money out of the market using various means such as TBs, that nearly all banks are technically insolvent again.

They have reintroduced exchange controls and in the process forced everyone back into the shadowy grey markets of the informal sector and they now want to destroy our exporters by taking their earnings in hard currencies and replacing them with local currency, which although denominated in US dollar, bears no relation to the US dollar and is rapidly losing its value in the markets. It is now clear from official statistics that we are heading for a complete collapse similar in many ways to 2008.

Our budget deficit, which started in 2013 when it came in at US$500 million, has risen to US$1,6 billion in 2016 and it now looks as if it will exceed US$2 billion in the current year. By December I expect our RTGS “dollars” to be worth half of their real counterparts, inflation of a similar magnitude will follow and in 2018 Zimbabweans will again be dealing with hyperinflation and the collapse of their incomes and assets.

Worse of all, many leaders in Africa treat a country’s central bank as “their” bank and draw money at will. Last week, we learned that the First Lady Grace Mugabe bought two more houses in South Africa for nearly US$10 million — paid by the RBZ, whom we know also made the resources available for baubles like the famous diamond ring.

When Mugabe flies out of the country he takes millions of dollars (real dollars) out with him, all from the RBZ, he does not account for this money and the gravy train accompanies him.

If the courts do not put a halt to the lunacy in the RBZ and allow exporters and others who bring in foreign exchange, to retain their earnings and sell their hard currency at real market value on the local market, then the collapse will accelerate because no company, unless it is state-controlled Marange diamonds, can survive if the State takes 80% of their earnings and devalues them by half or more in the process.

Cross is an Economist and MP for Bulawayo South. The views expressed in this paper solely belong to the author. The aim is to provide independent professional advice as well as objective in-depth analysis of monetary and other economic policies in Zimbabwe. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) cell +263 772 382 852 and email kadenge.zes@gmail.com.

One Response to Exchange control a national cancer

  1. Charles Frizell September 9, 2017 at 12:26 pm #

    I am amazed that the “home made money” has not yet collapsed totally, as it did last time Gono stole all the “real” money for his masters.

    But I think it is only a matter of time. I am always reminded of those cartoons of Bugs Bunny who runs over a cliff, suddenly pedals like mad when he realizes there is nothing underfoot before plummeting out of site at the bottom of the cartoon.

    I think the economy is at the stage where they it has run over the edge of the cliff and is just about to plummet out of sight. Zanu can never resist “the urge to steal” especially where it concerns other people’s money

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