LONDON July 24 (The Southern African Times) – On the 26th of June 2020 Zimbabwe’s Ministry of Information announced in a tweet that all mobile money transactions and the Zimbabwe Stock Exchange (ZSE) will stop transacting forthwith. The authorities halted trade because they said speculation, and the use of dual- traded stocks as an indicator of the future exchange rate, as well as mobile money transactions oiling the parallel market with that derived exchange rate were undermining the nation’s currency.
I use the term “authorities” loosely here as the actual Ministry of Finance, under whose purview oversight of mobile banking and securities trading falls, through the Reserve Bank of Zimbabwe (RBZ) and the Securities Commission of Zimbabwe (SCZ) respectively, had initially been blindsided by the announcement. The RBZ had to scramble and issue confirmatory statements only the next day. Their statement actually deviated from the harsh tone of the initial information ministry pronouncement and allowed the mobile money agencies to continue operating. The RBZ issued a watered-down ban on some services offered by mobile money transfer (MMT) agencies.
RBZ governor Mr John Mangudya said people could still do certain transactions as he moved in to correct a statement by Information ministry permanent secretary Mr Nick Mangwana that had ordered the freezing of all mobile money services. Mangudya said money agents were banned from facilitating mobile financial transactions and that merchant transactions were suspended except for receiving payments for goods and services with a $5 000 daily limit. He stipulated that the cash –in and cash-out functions had been curtailed as well and the agencies now have to adhere to a raft of control measures like connecting to a real time monitored ZimSwich connection for audit and monitoring of transactions.
Was Zimbabwe’s banning of mobile money and stock exchange a necessary evil or disruptive interference by the government?
Let us give a cursory look at the background to the decision for a better perspective. Up until the suspension of the all-share index on the Harare-based exchange, it had jumped 677% since 1st January 2020 despite the finance minister Mthuli Ncube later announcing the country expects the Gross Domestic Product (GDP) to shrink by more than 10%. This, by far, made it the best performing index in the world in terms of return on investment percentage on initial capital. The 175 year old Old Mutual is a big player on the bourse. The insurer’s shares are listed in London, Johannesburg and Harare. These interesting numbers show success and this very fact alone implies shutting the exchange down was ill informed. Also, for a capital market which had up to that point only one stock exchange in the country it makes the decision a no brainer. But was it?
Capital markets refer to a broad spectrum of tradable assets that includes the stock market as well as other venues for trading different financial products. The stock market allows investors and banking institutions to trade stocks, either publicly or privately. Stocks are financial instruments (assets that can be traded and these assets can be cash or a contractual right to deliver or receive cash or evidence of one’s ownership of an entity that represent partial ownership of a company and the like). These assets are used extensively by companies as a means of raising capital as they sell portions of their equity (ownership) through this “equities market.” For the Zimbabwean players, the stock exchange had also served as a refuge of sorts, protecting the investor class from surging inflation, thus maintaining value of wealth in real terms. This is signified by the number of trades on the exchange rising by more than one-third, compared with a year earlier, as local investors including pension funds scrambled to shield their savings against hyperinflation.
So central to functions of an economy are capital markets that suspensions are almost a once-in-a-lifetime occurrence globally. Zimbabwe too, regardless of the myriad of economic challenges, last shut down the stock exchange in 2008 when annual inflation, by some measures, peaked at 79.6 billion percent, so it really is a fundamental decision to do so. Yet on 26 June 2020 that very resolution was made.
Equally indispensable to the growth of Zimbabwe is mobile banking and its “mobile money” transfer services (MMTs), more so being in an African economy where access to formal banks per capita are depressed. The move left subscribers and users stranded in an economy which sees a huge portion of transactions flow through mobile money platforms due to long-term cash shortages at the banks. The country provides a fascinating alternative model where mobile money addresses market failures where fiat money as a medium of exchange has been hampered. Zimbabwe is the world’s second-largest “informal economy” (behind Bolivia), but it also represents one of the most cashless; by the 2019, eight out of 10 transactions, including everyday purchases from eggs to cement, were performed using a mobile device (and nearly all of them on Econet’s EcoCash).
Zimbabwe still has overdue loans with the World Bank and other development banks thus it doesn’t qualify for emergency aid to cushion the economic blow of the Covid-19 pandemic. This has left it battling to wrestle control from market players as an intervention tool. Earlier in June, the central bank had already begun the process by outlawing sharing black-market exchange rates on social media. The measures have so far done little to ease the everyday strain of a collapsing currency. Fuel stations and other stores are already demanding payments in U.S. dollars, with consumers having to navigate more than four parallel exchange rates. That the government has now announced a pseudo USD salary component to its civil servants, asked retailers to display prices in both local and foreign currency and combined with some form of USD denominated fiscal taxation has put paid to the unmitigated challenges the Zimdollar faces.
This provides the backdrop to how fundamental the ZSE and MMTs have been to keeping the cogs of Zimbabwe’s economy turning and the government’s decision to eventually call time on their operation.
The sectors became good for the economy up to a point where they became “too good” as far as the authorities were concerned. Pseudo Finance Ministry unto themselves. The biggest players in each of those two economic segments, that is Old Mutual and Ecocash, have henceforth become major government targets.
What is the Zimbabwe government’s justification?
Zimbabwe is at present importing pretty much everything because of depressed local production levels, from toothpicks, milk, to electricity and even maize (the staple food). This is a double edged sword in that firstly, it depletes whatever scarce foreign resources are brought into the economy, mainly from export receipts of raw minerals which according to RBZ in 2019, totalled US$2,91 billion, representing about 55,2% of total export receipts. Only last week, the finance minister Professor Mthuli Ncube in his mid-term national budget review announced that this number has increased exponentially in 2020 to 68% of total receipts. That singular profound dependence on a single sector I dealt with in another article, save to say here that diversification cannot be over emphasised.
Secondly, because the country imports everything, the foreign exchange rate’s importance becomes so paramount that it almost becomes the difference not only in the trade balance (the negative or positive net sum of a country’s exports and imports of goods without taking into account all financial transfers, investments and other financial components) but also in the very GDP growth/reduction as every sector becomes impacted in local money terms according to how much of the local unit is needed in exchange for forex. Coincidentally Professor Mthuli Ncube projected a GDP plunge of an enormous 41.2 percent!
The country’s monetary challenges, which include escalating inflation and a crippling shortage of foreign exchange, are the clearest indicators of the country’s spiralling economic decline. Since the reintroduction of the Zimdollar last year, replacing the domestic use of foreign currencies which had been adopted in 2009 after spiking hyperinflation, the local currency has quickly plummeted from being equal to the American Dollar to current official rate of 1:72.14 as at 21 July 2020. About 30% more than that rate if one considers the still very active parallel rate.
Fixing “exchange rate distortions” became the going mantra and the players viewed by authorities as arbiters of the foreign exchange rate usurping power from market forces became a target, that is ZSE and MMTs. For these reasons, mobile money platforms and trade in any counter on the local stock exchange have now been banned in Zimbabwe. Other mobile money operators such as One Money, Telecash and MyCash will also be impacted.
The MMTs contribution to the scourge was what authorities termed “fake money creation.” The RBZ rate was for long pegged (against advise) at 1:25 against the greenback while on the streets in went up as high as 1:115 at some time. Forex traders were taking advantage of the arbitrage by moving electronic funds across banking and mobile money platforms which they then use to buy US Dollars from the streets whilst crediting the mobile wallets of those selling the forex then using connected individuals and companies to amortise this “air money” in mobile wallets at the official rate and keeping a huge difference.
Equally, a seven fold increase in share values on ZSE gave investors who liquidated their shares the willingness and ability to buy forex at almost any offered rate, a high elasticity of demand. Rates increased daily. The net effect of both these was common imports became exorbitantly expensive for the consumer and the economics of the day were becoming a simmering pot of political tensions among the masses exemplified by the civil servants’ unrest, particularly the health workers demonstrations clamouring for a “living wage.”
The political angle to this very economic predicament is what explains the source of the decision to halt ZSE and MMTs, the Ministry of Information. The kneejerk immediate order to cease operations was bereft of stakeholder consultations and this really makes the case for those who view the action as disruptive interference stick.
On the other hand, the government argues it had to act to obviate multiple exchange rates for Zimdollar cash, Zimdollar mobile money, Zimdollar bank electronic funds and for the US Dollar. On mobile banking, regulators and central bankers worried that a mobile money- dominated financial system erodes the efficacy of the two basic tools governments have in their arsenals for combating inflation: controlling the monetary supply and setting interest rates. Reserve bankers were anxious that the proliferation of digital economies, cross rating of share prices, currencies, and transactions will erode traditional banking systems and by extension render ineffective the monetary policies which rely on them. And so it was a necessary evil and as responsible authorities they had to act.
What the likely outcome of these acts will be in the short and long term is not certain. If there is one thing that stifles market activities, and therefore growth, it is uncertainty. So in that regard the decision does not auger well. The authorities seem aware of this however as demonstrated by their adjustments to complete shutdown of MMTs and allowing them to operate under different conditions. And also in formulating the recently announced foreign currency auction system which brings a semblance of some kind of floating and demand and supply altered derived rate.
Ecocash is now such a giant in the Zimbabwe playfield anyway such that the regulators are best advised to act, but in consultation with stakeholders and Ecocash itself. The intentions, though noble in that a significant segment of the economy was running blind to the Zimbabwe money Tsars, execution of corrections were too sudden and necessarily entailed significant economic whiplash. Though appreciating the need for speed, Ecocash alone at peak was servicing above 75% of the 14.5m population and handling a reported USD 6 Billion annually and allowed to operate unhindered for +9 years now. Those numbers should count for something in any redress as attrition can only beget more harm to the economy.
On Old Mutual, the authorities had in May announced plans to open a new stock exchange in the resort town of Victoria Falls. As a global securities exchange, VFEX will be denominated in USD only and seek partnerships with other global exchanges and partners around the world, and become a truly global platform. It will be managed by the Zimbabwe Stock Exchange, which operates the country’s main bourse in Harare. Now, with benefit of hindsight and in light of the ZSE closure decision I will not be surprised to see Old Mutual counter being forced to migrate from ZSE to VFEX subsequent to trading resumption. This, if agreed upon, will be done with a view to avoid a derived Zimbabwe currency value as Old Mutual shares will now be in USD. Before, simple arithmetic of equating the company’s UK share value to the SA share value weighted by currency exchange rate of the two countries and then equating it with the Zimbabwe share value and getting a derived Zimdollar to USD exchange rate was done. Something colloquially refered to in local economic circles as the Old Mutual Implied Rate (OMIR).
On Ecocash, it is not as clear. Perchance, this is because the Founder of Econet, which owns Ecocash through Cassava, Mr Strive Masiyiwa has other political entanglements with the current political administration. He has on many occasions proffered direct monetary assistance to the government like disaster reliefs and recently footing a potion of the health workers’ salaries to break up a salary strike impasse. It will thus be naive of me to thing Ecocash treatment will be solely based on economic reasoning, which means my economic analysis on the matter will likely be off the mark as I am not a political analyst.
In that regard I will seat this one out. As the adage goes, we will wait and see.
In conclusion, for policymakers the case of mobile money in Zimbabwe should act as a reminder that digital finance systems are today playing an growing role in macro-economic health. Stifling them will be going against the tide. Where possible, measures should be taken, however, that oversight and control should be tightened, just like on any other economic sector in an economy. Where disregard was done, like in the case of Ecocash, by omission or by wilful commission, the redress surely could not have been done literally overnight for a 9 year old neglect. As for Old mutual, the OMIR is a direct reflection of what is likely on the ground, not a cause of it. This reminds me of a certain political leader blaming announced high Covid-19 infection rates on increased testing as if the testing caused the infections yet they merely showed more precisely what was on the ground! Same scenario here. The authorities must strive to correct whatever was causing such a price disparity not blaming a mechanism that exposes the difference.
In light of all the aforementioned narrative, we see that the necessary evil was justified, but it was executed so late, by years in fact, and so rapid (immediate actually) that it became disruptive interference. The ensuring uncertainty is disturbing economic planning and curtailing future investments thus a harbinger of more harm than good, at least in the short term. A stitch in time would have served nine.
Admire Maparadza Dube is a London based Financial Analyst, Banker, MSc, CFA and PhD Student. With extensive banking experience within Southern Africa, Europe and Asian markets.