Friday, 12 October 2018

Zimbabwe's RTGS and Bond Note Value: Black Market vs Official Policy

Three days ago l did an analysis on the causes of the price hikes & shortages of basic goods in Zimbabwe shops. The main problem l cited was panic buying. 

The panic buying was triggered by the perception that the RTGS and Bond note has been devalued by government and will be worthless in the future.

Analysis by Kudzai MutisiThis thinking emanated from the fact that the RBZ directed banks to separate FCAs and RTGS Accounts. I also advised that it's wise to keep your bond notes and RTGS balances because their value is guaranteed by government.

Some have asked:
Why do you have confidence that upon demonitization of the bond note, government will pay people 1:1 with the US$? Below l give my reasons:

1. Government wants the banking sector to continue thriving: The banking can only thrive if people are depositing money into banks and keeping it there. They can only do this if they are sure their savings won't disappear overnight. Currently, people with RTGS balances have always regarded them as having a 1:1 value with the US$. If we are to say, from nowhere, that their deposits are now worth a few US$ as dictated by the black market rates, people WILL never trust the banking system and that will be a blow to the financial system and the Economy. Govt will thus not allow it to happen.
Zimbbawe's RTGS and Bond Note Value: Black Market vs Official Policy
2. Government has the capacity to guarantee the 1:1 rate between the RTGS and Bond note and the US$. After separating FCAs & RTGS Accounts, government can determine the total value of RTGS and convert it to US$ via Credit facility or some other means. In fact, that facility already exists for bond notes. Upon demonitization, govt will give people US$ at 1:1

3. The Government has already committed to guaranteeing the value of the RTGS at 1:1: The Minister of Finance, Prof Mthuli Ncube, issued a Press Statement today (10/10/2018) emphasising that govt will guarantee the 1:1 value of the RTGS balances. He said they will be a Statutory Instrument (law) with those guarantees in order to protect people's deposits.

So what's the way forward?

As it always goes in these cases, it all goes back to people's confidence. Do people believe this? Do people trust the government will guarantee the 1:1 rate? Well, the government is already doing that. Zimbabwe businesses accept EcoCash and RTGS and bonds at 1:1 with the US$ because they also get US$ at 1:1 from the Reserve Bank.

All fuel dealers buy Foreign Currency at 1:1 from the reserve bank.
People have two choices: To trust the govt and preserve their RTGS balances OR to rush to the black and surrender their savings to money changers for a few US$. Personally, l won't give my money to money changers.

Will the shortages and price hikes stop?

Indeed, it's a matter of when not if!

Firstly, the producers of all basic Commodities work with RBZ to get forex. They are all getting the forex and operating at normal levels. They even received more funding to buttress the current buying madness. So, products are there. But being hoarded by speculators.

Moreover, people have limited amounts of money, eventually they will stop buying.

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