The implication of RBZ move to gag Ecocash

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A directive has been given by RBZ’s National Payment System to immediately stop mobile money agency service across all telecom networks. The directive specified cash in and cash-out transactions which entail withdrawal and deposit of funds into and outside a mobile money wallet.

Part of the directive reads “It has come to our attention that some economic agents are engaging in illegal activities abusing the cash in, cash out and cashback facilities, thereby compromising the public objective of national payment systems in the economy” it further reads, “Notable activities include the buying and selling of cash through mobile money agents at high rates … In view of the above, all mobile payment system providers and merchants are hereby directed to discontinue cash in and cash out with immediate effect”

Zimbabwe’s 3 main mobile networks which include Econet, Netone and Telecel all offer mobile money services within their network. Ecocash a subsidiary of Cassava, Econet Wireless’ spinoff, dominates the sector accounting for 95% subscription market share and almost 100% in value of transactions processed.

Its service is utilised by 9.8 million Zimbabweans according to its latest financials while its mobile banking agency network stands at 50000 spans across the breadth of Zimbabwe. Mobile money has become so pivotal to the integration of the financial sector through increasing access to banking among economic agents.

The mobile money innovation was introduced to Zimbabwe at an even opportune time, just a few years before the cash crisis emerged. It has therefore given room for substitution of cash transactions while offering more convenience that any such product before it. Beyond convenience it has catalysed financial inclusion spurring banking in Zimbabwe to levels beyond some of the most advanced economies. In the first 6 months of the year, a total of $30 billion worth of transactions was processed via mobile money services which accounts for 26% of the total value of money transacted via various platforms on the National Payment System.

Ahead of any other payment platform, mobile money has recorded the highest number of transactions having processed 166.5 billion transactions in the first half of 2019 alone. It has therefore covered the gap which cash has left and even doing more by offering convenience.

Government has likewise exploited the innovation, having raised a significant portion of the income from intermediated money transfers since October 2018 a huge component emanating from mobile money transfers. Given the estimated 50%+ informal sector, it follows that most transactions conducted in this sector are either in cash or via mobile money and therefore harnessing taxation could only be done through high mobile money utilisation.

Despite these positive statistics, the platform has in recent years been taken advantage of in pursuit of rent-seeking and speculative exercises.

Agents have taken advantage of the allowance for high volume and value of transactions to maximise on the cash shortages in the economy by selling cash at a premium. It is apparent from this basic explanation that it is not the platform which has loopholes, but the monetary policy regime at play in Zimbabwe.

The Central bank has long admitted that the current hard cash levels are beyond expected thresholds of circa 10% of total deposits in the economy.  At about $650 million total bond notes and coins in circulation, the ratio for hard cash to total deposits comes in at less than 1%.

The ratio for bond notes ineffective circulation is even lower than that. Of cause, there is hoarding of cash which has been ongoing since 2017, due to shortages and this is rational behaviour. Be it as it may, there is no functional economy anywhere in the world which operates with such low levels of hard cash, even for the most advanced (total money supply $15 billion).

This disjoint also demonstrates that the pace of general liquidity growth in the economy, as measured by money supply has been ahead of production, because bond notes up to $400 million were released based on exports. The widening gap also reflects the impact of currency weakness, which demands that more of local dollars have to be paid in exchange for forex and as a consequence spur the demand for cash.

This matter needs no further emphasis and the authorities are well aware of these dynamics which point to structural weaknesses in the economy and not mere infrastructure facilitating payments. It is my view that although the premiums charged on mobile money were very exorbitant, the government rather is targeting forex dealers by instituting this latest move.

Forex dealers are believed to have received huge flows to facilitate the purchase of USD by some blacklisted players. A raid on the service would lock funds instantly and thus avoid diversion of funds to bank accounts to trade on Zipit for Ecocash. Such a move would sure rattle markets and see the exchange rate firm in favour of the Zimdollar, below levels seen when certain oligarchs’ accounts were raided about a fortnight ago.

But is this so much of a smart move? To a lesser extent it helps drive the message that the government is getting tough on exchange control and will not hesitate to take action against those that break its laws. It would have an impact particularly on recent exchange control regulations on the use of USD in invoicing and transacting.

Adhering to the local currency by players will reduce currency volatility only to the extend that the government ceases its open market operations, which drives money supply up. The odds for this happening are very low, the government is already planning to fund the upcoming agriculture season and there are no discernible non-inflationary ways of funding the same. It is these expectations based on known and proven behaviour that will push market participants to device hedging alternatives against further Zimdollar value loss.

There is no economic sabotage going on in Zimbabwe at the moment. Government is deliberately empowering mobile money agents and dealers through porous and ill-conceived policies which drives inflation up while shedding the value of its own currency, thereby increasing the occurrence of speculative moves.

A government which truly believes that economic fundamentals are in place, will not be scared to release the new Zimdollar note, neither will it be afraid to let market forces determine the price of commodities and even that of its own numerous currencies.

The bottom line is that while currency reforms are tough particularly that of reversing dollarization, it is apparent that Zimbabwe’s economic fundamentals are shaky and weak and this scenario will increase currency volatility and perhaps lead to a currency collapse. No amount of tinkering on the periphery by focusing on demand will solve a supply-side crisis. This is true of fiscal as it is for monetary policy at play.

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