Zim’s new El Corralito

Financial Matters: Tinashe Kaduwo

The RTGS dollar has been floated, implying moving away from the fixed 1:1 rate.

“People should not get confused. In the bank, the RTGS balances have the same value with the US dollar, but when one wants forex at the bank, then it changes and its value is determined by the rate prevailing on that particular bank. We have not devalued the RTGS balances, but allowed people to access the forex at a rate which is competitive and allows the economy to grow,” explained Reserve Bank of Zimbabwe governor John Mangudya, responding to questions from the press.

However, the RBZ governor’s statement raises some concerns, especially in this period of hyper-uncertainty and speculation. In October last year, we published an article titled Zim’s El Corralito, drawing comparisons between Zimbabwe’s monetary development and what happened in Argentina in 2001. Confusion in the monetary space and failure by the authorities to fully admit and take responsibility that the RTGS dollar has been devalued are strikingly similar to the situation in Argentina in 2001.

Argentina in 2001, just like Zimbabwe today, had a law stipulating that its local currency, the peso, would trade at 1:1 with the US dollar. Its government also persuaded citizens to open US dollar accounts, a move meant to convince the people that the government really meant to stick to the 1:1 law. The citizens then operated almost dual accounts, the US dollar account and the peso account. The peso started depreciating and as a result there was unease over the sustainability of that currency.

Citizens then began to deposit their money into US dollar accounts to hedge against the probable losses in peso. However, they were too optimistic with the dollar accounts. The government then froze all accounts and only a small amount of cash was allowed to be withdrawn on a weekly basis. At first, 250 pesos were worth $250, which then became 300 pesos — but could only be withdrawn from the peso accounts. Nobody was allowed to withdraw money from their dollar accounts, unless they agreed to convert the dollars into pesos at the 1:1 rate. Nobody wanted to do so. Argentines dubbed this situation El Corralito, meaning “the little coral”. Depositors were hemmed into a corral, like cows, with nowhere to go.

The Argentinian government then devalued the peso and instead of there being one peso for one dollar, there were four pesos for one dollar. However, the government then forcibly converted all the dollar bank accounts into pesos, but at the old 1:1 exchange rate. This implies that someone who had saved US$1 000, suddenly found himself with only US$250.
The government had expropriated three quarters of people’s savings.

Zimbabwe’s nostro FCA deposits have increased as citizens deposit hard currency. However, there is increasing risk that the economy might be headed the Argentinian way — and very fast. The RTGS dollar has been floated at the insistence of the authorities that the value in account is still at par with the dollar. This raises serious questions.

How can the RTGS dollar deposits be at par with the US dollar when the exchange rate has moved away from the 1:1 rate. Foreign currency shortages are still a menace in the monetary space with the available foreign currency deposits reserved for invoiced foreign payments. This is worrying given the country’s checkered history when it comes to monetary management.

The tobacco-selling season is opening soon and farmers are demanding to be paid their hard-earned US dollar soon after making sales. Given the current situation, it is highly unlikely that banks will have US dollars that can be withdrawn on demand.

As such, speculation is rife that these farmers will just be credited the amounts in their nostro FCAs with US dollar withdrawal limitations. Already, banks are under instruction to restrict US dollar transactions to companies and individuals with foreign payments to make. Just mere withdrawals are a challenge and it is yet to be seen how the authorities will resolve the issue, especially for tobacco farmers and gold miners.

Indeed, we have now reached El Corralito, where citizens are hemmed into a corral, like cows, with nowhere to go.

Kaduwo is a researcher and an economist. — kaduwot@gmail.com