BSR: EcoCash Agents Saga - It’s the economy, simple!
The current saga over the closure of EcoCash agents’ business goes some way to confirm the shortness of our government’s memory. Let’s go back a few years so that we understand the enduring character of the liquidity problem which the government has tried but failed to solve. As usual, however, the government is fixated with symptoms and scapegoats instead of confronting the problem. Sometime in late 2013, towards Christmas and just a few months after the controversial elections, Zimbabwe began to experience cash shortages in the banking system. Banks had reportedly suffered a cash flight shortly after the elections, itself a sign of market disapproval. At the time, Zimbabwe was using the US dollar as the main currency with the ZAR a close second. Early February 2014, the then acting Governor of the Reserve Bank of Zimbabwe, Charity Dhliwayo announced that additional new currencies would be included in the multi-currency pot. They included the Australian dollar, Chinese Yuan, Indian Rupee and Japanese Yen. The authorities claimed this move would ease the liquidity challenges being faced in the market. It was much ado about nothing because those currencies had never been banned in the first place. The market had always been free to use them since it was a multi-currency environment since 2009. Needless to say, nothing else was heard of this policy after its announcement. It did not solve the liquidity problem. The problem of cash escalated throughout 2014. People spent hours in bank queues, hoping to get their wages or savings. They came from rural areas and spent cold winter nights in long queues, desperate for cash. The banks rationed the little money they had in their vaults. Sometimes, after waiting up to 8 hours, they would only get a maximum of just $20, barely enough to take them back home. The fact is there was not enough hard cash to go around and satisfy demand in the market. Zimbabwe was not earning enough foreign currency from its limited exports. But it needed foreign currency for the ever-growing import bill. The RBZ rationed the foreign currency it had, preference being given to importers of essential commodities like fuel and medical drugs. However, political elites took advantage of these facilities to get foreign currency for their business and personal interests. The government tried to encourage the use of plastic money as an alternative to cash. However, there were parts of the domestic economy which remained cash dependent. The gospel of electronic money was not enough to convert participants in these parts of the economy that demand cash - commuter transport, vending, retail, etc. Platforms for electronic money transfer, such as EcoCash, OneMoney and Telecash, offered by mobile network operators were useful and convenient. But they did not totally replace the need for physical cash. The situation became dire by the day. The scarcity of the US Dollar increased in severity throughout 2015 and 2016. Workers were earning their wages “USD” and these reflected on their bank accounts as such. But there wasn’t enough cash to back up these USD balances. If a worker was earning $400, he could only get $20 at a time from the bank. This fiction survived for a while because everyone believed the bank balances were actually USD balances. They had no incentive to believe otherwise. In 2016, the government made a dramatic move by introducing a pseudo-currency which it called bond notes. It was a controversial step which attracted much resistance from citizens. #ThisFlag a citizens’ movement led by Pastor Evan Mawarire rose to prominence at this time. Citizens challenged John Mangundya, the Governor of the RBZ who backed the bond notes by making an undertaking to resign if they failed. (He never kept to his word.) The government claimed each bond note was equivalent to the US Dollar on a one-to-one basis. In essence, Zimbabwe had filled the void in US Dollar cash by printing its own version, calling it the bond note. The government also claimed that the bond notes were backed by a facility extended by the Cairo-based Afrexim Bank. This was meant to reassure the market that the bond note could be trusted. However, details of this or further facilities from Afrexim Bank have never been made public by the government contrary to constitutional requirements. The government was warned that the one-to-one fantasy was unsustainable. The bond notes would sooner or later create opportunities for arbitrage, with elites that had access to the RBZ taking advantage. It was also warned of Gresham’s Law, namely that bad money would soon drive out the good money, making the US Dollar scarcer. Nevertheless, desperate for cash, the market took to the bond notes and went along with the pretence that they were equal to the US Dollar on a one-to-one basis. People had become accustomed to the US Dollar and if the government promised them that the new bond notes were equal to their US Dollar, who were they to dispute it and prejudice themselves? It was safer and more beneficial to believe in the fantasy, however as baseless as it was. Still however, the supply of bond notes remained limited. They did not solve the liquidity problem. If anything they became so valuable that just like the US Dollar because they were in short supply. Soon, a brisk underground market for buying and selling bond notes emerged. Cash was more than cash for trading purposes. It was a commodity that could be bought and sold. This was driven by the scarcity of cash and the demand for it in parts of the economy that require cash. This trade in cash was funded by large electronic (RTGS) balances which were accumulating in the banks. Electronic payment systems had always existed in the banking system through VISA, Mastercard and ZimSwitch. However, following the successful Kenyan M-Pesa model, new mobile phone based money transfer systems had emerged. EcoCash was by far the biggest and most successful but there was also OneMoney and Telecash from the other networks. The use of EcoCash and others was encouraged as an alternative to cash. The hope was that it would ease the liquidity problem. EcoCash works through a vast network of agents dotted across the country. A customer can pay for goods or services at retail shops using their EcoCash facilities. A person can transfer money from their EcoCash account to another person’s account. If they wanted cash, they could go to an EcoCash agent to “cash out”. This worked well as long as the agents had cash at their disposal. However, because cash was still scarce, it wasn’t always easy for EcoCash agents to acquire cash to meet demand. They had to hustle to get it, often at a cost. The demand for cash pushed its price, making it more expensive. Naturally, this cost was passed on to the customer. In order to get cash, a customer had to pay a premium. This cost could be as high as 60% in recent months. This meant paying $60 for every $100, or ending up with just $40 from $100. That’s a high price to pay. Customers complained that EcoCash agents were robbing them and that EcoCash was not policing them well enough. They said the agents were unscrupulous. The agents on the other hand pointed to the costs they incurred to find cash. EcoCash argues that the problem was not of their making; that they were merely a payment system. If there is a cash shortage, it is not their fault, they argued. Still, however, customers had no choice because their options are very limited. Banks have never been able to satisfy demand for cash, a problem which, as we have seen, is long-standing. If banks were meeting the market demand for cash, there would be no need for people to rely on “unscrupulous” EcoCash agents, subjecting themselves to extortionate charges. They do so because the government has failed them leaving them at the mercy of profiteering businesses. Therefore, we are where we were in 2016, if not worse, when the government thought it was solving the cash shortage problem by introducing bond notes; when it tried unsuccessfully to encourage the use of plastic money believing it would ease cash shortages. We are where we were in 2014, when the RBZ announced “new” foreign currencies, believing this would solve the liquidity problem. It didn’t work. Neither did the printing of bond notes as pretence US dollars. Eventually, in 2019, the government gave up the pretence and allowed the exchange rate for the pseudo-currencies to float against the US Dollar. The pseudo-currency has lost significant value since the start of the year. Since June, it is now recognised as the Zimbabwe dollar following a decree. But the government has not printed cash to alleviate shortages. It’s not just EcoCash agents who have been selling cash. Anyone who has access to cash has been selling it for a profit. This is because there is a shortage of cash but there is also demand for it. This means shutting down EcoCash agents will not solve the problem of cash shortages. If anything, the outlet that people have been relying upon is now closed. This will exacerbate conditions of scarcity and raise demand for cash, pushing up the price and making it more expensive on the black market. Of course, this would not be the case if Zimbabwean banks were like banks all over the world which dispense cash on demand. The situation is Zimbabwe is so peculiar that it’s a worthy case study in the world’s oddest economies in the history of nations. In any other country, if customers approached their bank and failed to withdraw their money, news would spread rapidly, causing a bank run: customers stampeding to withdraw their money from the banking system. In Zimbabwe on the other hand, the market has long accepted and become accustomed to the fact that their banks have no capacity to dispense cash. There is no need for a bank run because no one gets shocked anymore by liquidity challenges. Meanwhile the government has no incentive to improve the cash situation. Last October, it introduced an electronic money transfer tax charged at 2%. It has raised vast amounts of revenue for the government. The Minister of Finance regards it with much pride as an achievement. More use of electronic payments systems is to the government’s advantage whereas cash would reduce it. Yet the contradiction is that the step taken by government threatens one of the biggest electronic payments platform which has provided a base for the 2% tax. It is easy to blame the companies, agents and individuals but the problem is in the government’s court. The regime has failed to steer the economy in a positive and productive direction since taking power in November 2017. All efforts to deal with the cash situation have so far failed. Going after EcoCash is a populist and opportunistic move but it does not solve the problem. It might make it worse. Is printing cash the solution? Of course not. Zimbabweans have enough experience to know why that hasn’t worked before. The point is this; the problem is worse than cash shortages and consequently the solution is deeper than printing cash to fill the void. What’s happening are mere signs of a deeper economic malaise. As it is, thousands have been put out of work at the stroke of draconian pen. Livelihoods affected in the most drastic way, but without providing an alternative.
The much sought after foreign investors look at this circumstance and can only retreat. If this is how business rules change, at the stroke of a decree, they lose confidence. Meanwhile, EcoCash has gone to court, through its parent company. A lot of lives, livelihoods and indeed investors' decisions hang on the decision of the court. But the issue is bigger than the courts. It is a political and economic challenge which the government refuses or fails to confront. The economic reforms required to transform Zimbabwe from its parlous state must be anchored in deep-rooted political reforms and a restoration of trust in competent government. Without such reforms and competent government, everything else is merely cosmetic. A pig does not suddenly become pretty because someone has applied lipstick to it. WaMagaisa