Do not let us down Dr Governor!

PART 2
By Wafa Kuchera & Walter Mandeya (for Trigrams Investments)

“The new RBZ Governor, Dr John Mushayavanhu deserves to be given a fair chance to implement his policies.”

“While the new Governor’s approach triggers our traumas, we fully appreciate the personality differences to his predecessors and the context in which he had to present himself at his first Monetary Policy Statement presentation.”

This was part of our earliest impressions of the Dr. Governor after his first Monetary Policy Statement presentation on 05 April 2024.

A new doctor, with some bitter medicines…, we should give him the benefit of doubt, we thought seven months on and here we are checking in after a turbulent month for the ZiG, the financial markets and indeed Dr. Governor and his team.

We will not dwell on our theories as to why our new currency fell sharply on 26 September 2024 as time will provide us with the answers.

The Dr. Governor has dug in with his narrative, which the data will either corroborate or conflict in due course. We, however, find it curious that the sharp fall happened at the same time as the quarterly tax payments (QPDs), meaning this might not have been driven by liquidity concerns.

Also, we will not dwell on why we had to inject USD$50 million ostensibly to address a build-up in pipeline demand at banks by economic agents.

This happened a day after the Mid-Term Budget Presentation on the 25th of July 2024, which introduced new fiscal measures to support and strengthen the ZiG.

At the time, we believed it was a genius move to constrain the liquidity flowing from tax relief measures in the Mid-Term Budget. Was this the first domino to fall in the ZiG’s defence armour? The data will tell us in due course.

In a statement on October 25, 2024, the RBZ revealed that they had intervened in the forex market with a cumulative USD$50 million in October “to smoothen the mismatches between supply and demand” due to increased seasonal demand to meet agricultural preparations and festive period demands.

The ZiG had slipped 11 percent the day before on October 24, 2024. We await the data as the RBZ statement touched on too many issues for us to get a clear picture of what caused the ZiG to slide further.

What is clear, though, is that the ZiG being a new creation will be giving us a lot to study and discuss over the next few years or rather throughout its lifespan.

The ZiG is a structured currency backed by gold and other precious minerals in addition to the traditional basket of reserve currencies, mainly the United States dollar (USD).

This is a very well structured product, so why is it experiencing such turbulence?

In banking and especially central banking they talk about ‘the plumbing’ to describe the detailed workings of financial systems. The intricate processes and procedures coupled with the nuanced application of certain rules, principles or regulations that apply when the central bank carries out its day-to-day operations.

Just like how a plumber will find a way to connect pipes even with significant limitations, Central Bankers need to find a way to address financial and monetary challenges on the fly.

‘The plumbing’ is usually the unseen part that Central Bankers work hardest to get right because it determines how monetary policies translate through financial flows into the achievement of policy objectives. In other words, it is how the sausage is made.

Architecture and engineering vs foundations and roofing

While ‘the plumbing’ analogy works for normal currency management, we would like to explain our understanding of the ZiG using two different analogies. This is because the ZiG is a new “structured currency” of which there would be aspects of it that the concepts of plumbing cannot really capture.

In Zimbabwe we always put a spin on things, even the most mundane.

Before I landed in finance, my childhood dream was to become an architect or an engineer (structural/ materials).

Architecture in general is a creative field in which someone conceives and designs buildings and structures.

An engineer on the other hand is concerned with making sure that the architect’s designs obeys the laws of the materials to be used so as to achieve the structural integrity needed from the building or structure being envisioned.

An Architect is creative, an Engineer is practical. Architecture is conceptual, engineering is pragmatic.

However, both disciplines are required to produce strong and steady buildings and structures that look pleasing and meet the functionalities for which they are built.

Applying these concepts to the ZiG, the design or architecture of the ZiG was done around backing it up with gold, precious minerals and major reserve currencies as this would anchor it and give it that aesthetic of dependability.

The engineering, however, remained that of fiat currency to allow it to obey the rules of being a currency, especially around the aspect of convertibility.

Herein lies our first challenge. Trying to bridge the confidence gap by using credible anchors like gold versus the continued use of fiat currency rules and principles that have been problematic for us previously.

There is no escaping this contradiction in design and narrative and the reality of the engineering which is a deep flaw in the structural integrity of the ZiG.

“The plumbing” of the ZiG needs to match its design specifications otherwise the confidence anchors will not hold.

The second analogy is between the relationship of the foundation to the roof. When building, the strength of the building or structure is determined by the strength of the foundations. If the foundations are not properly built, cracks will soon emerge.

Your foundations by and large decide the type of roof you need. A roof is usually a very basic addition to the house.

It comes at the end and basically crowns the building. If the foundation has been done right, the roof will snuggle comfortably onto the building.

In this second analogy, the foundation represents the fiscal rules that guide and inform our fiscal policies. These are the hard rules, usually enforced through the enactment of laws or promulgation of statutory instruments.

Our tax code, public finance management rules, the national budgeting system, customs and export rules, etc all for the concrete, bricks and mortar used to construct our national financial foundations.

The roof on the other hand represents our monetary policies, with the banking system, financial and capital markets and other subsystems like currency, credit and payment systems all coming together to form an intricate matrix that sits on top of the fiscal foundation.

The monetary system is by design more modular, more dispensed, more devolved and yet interacts closely to maintain stability.

This intricacy creates fragility, which is why monetary authorities worry about contagion and systemic risks.

One spoilt beam or one cracked tile or even one faulty bolt can cause the whole roof to collapse if left unattended. This is why rules around Know Your Customer (KYC) and anti-money laundering (AML) are very important to avoid bad actors from infiltrating the financial systems and markets.

The second challenge we face in our view is what we call the “Tinkerbell problem”. The constantly changing rules and policies at the fiscal or foundational level that necessitate even more tinkering with policies and rules at the monetary level.

We should stop tinkering with the foundational rules before we have established solid anchoring for the ZiG. Architectural and engineering designs account for the need for the flexibility needed to adapt building and structures through such things as pillars, windows, doors, vents, beams, etc., because they understand that once the foundation is cast, it should not be tempered with.

My go to example of this “Tinkerbell problem” is the introduction of the Intermediated Monetary Transfer Tax (IMTT), initially introduced as an austerity measure meant to last just six months.

In our analogy, this is the equivalent of putting an unplanned extension to a building by cutting into a load bearing corner. Because of the introduction, all banking systems had to the updated to include it as banks were assigned as the tax collection agents.

In turn all monetary and financial agents (basically everyone) had to also incorporate the tax into their systems, including on pricing. As a consequence, certain economic actors decided to shift their businesses towards cash and USD transactions as these did not attract the tax initially.

That shift to cash & USD transactions had their own ripples of cascading outcomes, all unintended consequences of the tinkering by fiscal authorities. Seven years on, we are still dealing with the consequences of that unplanned extension that destabilised foundational concepts of taxation and fiscal rules.

Coming back to the ZiG. The local currency in majority of economies is the glue that binds financial actors and systems together. In Zimbabwe, the local currency fails at this because as a glue, the previous iterations of the local currency proved to be undependable at holding its value over the long term creating a fragmentation in the markets that is amplified by our use of multiple currencies that are all stronger than the ZiG.

Backing the ZiG with gold which is the ultimate store of value together with other precious metals was meant to stabilise its value against these other currencies operating in our economy. So, what keeps going wrong when the architecture of the structured currency is so brilliant (in our opinion)? We need to turn to the engineering for the answers.

The RBZ, for example, maintained the export retention scheme and flattened the retention rate to 25 percent for all exporter categories.

Under this scheme, exporters surrender 25 percent of their export proceeds (USD) in exchange for ZiG at the going exchange rate, with 12,5 percent of the USD retained put into RBZ reserves and the remaining 12,5 percent put into the Treasury (government) account.

Based on the engineering design, RBZ and Treasury forex reserves should technically grow by 12,5 percent of exports each, with exporters gaining local currency liquidity to keep the local financial systems oiled.

A worst case scenario in such a design would be a temporary mismatch between payment of ZiG to exporters versus the booking of USD receipts into reserves. Very little else can go wrong if we stick to the design. Unfortunately, this has not the case so far.

The ‘Last Word’ column of the Business Weekly of July 19-25, 2024 made a compelling argument that the ZiG needed a year to prove its acceptability as a medium of exchange for local transactions.

This was in the week leading up to the Mid-Term Budget Presentation and the first major intervention by the RBZ in the forex markets came the following day.

The intricate roofing matrix and its relationships to all its parts and the foundations suffered its first major test and held its own. The second and third blows, however, exposed serious flaws that need to be openly discussed with a wider range of stakeholders to find lasting solutions.

What really backs the ZiG, is a question that has been asked a lot in the last few months. We believe it is the combination of the gold and forex reserves as designed and presented on April 5, 2024. We again call upon the Dr Governor to take up our suggestion to install streaming webcams in the gold vault to calm some skeptics.

But jokes aside, we need the ZiG to succeed. We need the Dr Governor to succeed. That means we have to come together and ask each other those difficult questions like “what exactly is the ZiG”? Why is it continually depreciating, despite the solid anchoring? How do we secure it from further loss of value?

What really backs the ZiG? The answer should be the productive energy of our country’s citizens. To build a thriving and sustainable middle-income economy by 2030 and beyond all citizens need to understand and know that they are on solid foundations that will not be needlessly tinkered with and that their financial requirements are secured and will be met by a strong and stable monetary system that protects their efforts through a well-designed and functional “structured currency” called ZiG (ZWG).

We believe that the RBZ should change the engineering or rather buttress it by issuing exporters with fully transferable (no vesting periods), fully convertible Gold Backed Digital Tokens (GBDT – the original ZiG) into exporter CSD accounts instead of funding retentions through the RTGS payment system.

This would immediately bring stability to the exchange rate on all markets as the exporters will enjoy the full benefits of backing the ZiG with strong anchors like our gold and precious metals.

The creative architect in me also believes that exporters would be open to receiving other “store of value” representations such as Zesa electricity tokens if it guaranteed them uninterrupted power supplies.

Zinwa water extractions “tokens” perhaps for those in agriculture who depend on getting adequate water. Such arrangements would incentivise anyone needing guaranteed forex, power or water supplies into becoming exporters, thus boosting overall productivity.

We also believe that the RBZ need to address the high bank charges, if not remove monthly service charges entirely in favour of allowing banks to profitably intermediate between depositors and borrowers with depositors getting rewarded more for the risks they take in keeping their money within the banking system.

Credit and especially bank credit creation for small businesses and households remains a key requirement for increasing productivity and Zimbabwean banks are not lending leaving large sections of the economy unserved & vulnerable to sources of credit outside the formal banking systems. Credit provision is a foundational aspect of currency stability and this aspect is somehow missing from the ZiG debate.

Perhaps the RBZ plumbing department will be able to correct our understanding of the nature of the ZiG’s design and the mechanisms by which the RBZ intervenes in the forex markets and their overall thinking around how banks can increase lending safely.

‘Do not let us down Dr Governor! PART 2’ is an unfortunate naming of a continuation of our previous article. This article was actually meant to highlight the opportunities for the evolution of the ZiG despite the serious confidence challenges it currently faces.