The economic situation in Zimbabwe is a mess.
There is no cash in the banks and people sleep on pavements outside banks queuing for cash which they seldom get. The money itself is “rated”, which is informal talk to mean it has different value depending on whether is is electronic, in physical US dollars or if it’s in bond notes.
Hardly a day passes without a story in the papers about how one bank or the other is making some adjustments or facing challenges due to the cash flow issues we have in this country.
The chief culprit seems to be my own bank, Steward Bank, which I also suspect to be one of the biggest in terms of client numbers. Over the past few years the bank has embarked on an aggressive signing up of clients that virtually means you can create an account in the streets with few hassles.
This, coupled with the fact that it integrates easily with mobile money transfers, had made Steward a popular option.
However it also seems that Steward did not have the necessary infrastructure in place to handle the high volumes. Its systems are notorious for going offline, and its accounts occasionally have errors.
Unsurprisingly a lot of people are unhappy and, like with so many things, they have taken their anger online. Techzim reports that there’s an online petition doing rounds threatening to take Steward Bank to court.
But Steward is not alone. A lot of banks are in trouble at the moment and the problem is hardly theirs.
It’s a broader problem caused by the government’s economic decisions and a serious trade deficit that led to hard cash disappearing since late 2015.
This led the government to print “bond notes”, fixed at a rate of 1:1 with the US dollar in an effort to make cash available. The move obviously did not work, as it did not address the underlying economic issues that led to the disappearance of the US dollars in the first place.
We still have people sleeping outside banks in the hopes of getting a little hard cash. The bond note itself has fallen in value; on the informal market a US dollar is worth as much as 8% more.
The central bank however insists that the rate is still 1:1 and this has created a lot of additional problems for financial institutions and also businesses; most of which import from South Africa and therefore need to convert their bond notes into acceptable currencies.
John Mangudya, the Reserve Bank Governor, was warned of such eventualities when he proposed his bond notes idea but he proceeded to print them anyway, arguing that the bond notes would not lose their value. What he got was a lesson in basic economics: You cannot successfully fight the market.
The situation is a classic case Gresham’s law which states that “bad money drives out good”. The US dollar, which was already hard to come by before the bond notes came, has virtually disappeared. Curiously the bond notes themselves have disappeared as well, and there’s still a massive cash shortage.
Mangudya has also inadvertently created a new sector: that of illegally trading money. Nowadays the streets are full of mostly young people exchanging hard cash for electronic funds at exorbitant rates that can be as high as 25% for USD. These people then find ways, some of them quite ingenious, others criminal, of converting their electronic funds into hard cash to sell again.
On an unexpected upside the lack of cash has boosted electronic and mobile payments as people have had to adapt. Two years ago paying with a credit/debit card was quite rare but now a lot of people are transacting electronically, even in rural areas. Electronic transactions now account for 70% of all payments. This is a good thing, especially for tech entrepreneurs.
However the structural issues with the economy, such as a large unsustainable wage bill, currency externalisation, lack of production and corruption remain.
These problems show no sign of ending, in fact it seems quite certain that things will get worse before they get better, as the IMF has warned.