Cash, also termed fiat currency, has always been a medium of exchange for trading and exchange of value. It is in this regard that we see some economies going through a lot of turbulences when this value is disturbed. In Zimbabwe, we note that the country went through this turbulence from early 2000 to date, resulting in decades of financial instability across all sectors of the economy. According to the World Bank about 5.7 million people, nearly half the population of the country, is now under extreme financial hardship due to the non-performing economy. In a period of just under a year, inflation rose from 5.4% in September 2018 to 230% in July 2019, a very steep rise as observed in the 2000 – 2009 hyperinflation era where we also observed the Gross Domestic Product declining from USD11.34bn to USD6.71bn.
In the late 1990s the Agricultural sector was contributing 9 – 15% to the Gross Domestic Product with 20 – 33% of export earnings. The introduction of the Land Reform Program, which aim was to equally distribute the land between the white minority and the black majority, coupled with drought and natural disasters like cyclone IDAI further disturbed the once powerful and enterprising agrarian structure. The national food reserves dwindled as there was no production from the once productive commercial farms. Agricultural exports that once used to support the economy with the much needed foreign currency disappeared. Mismanagement of public funds (e.g. income tax) and corruption resulted in the public sector over-borrowing both on the local and international market. Manufacturing sector output dwindled by 47.5% from 1996 to 2006 – again affecting the exports. Mining sector performance declined with the introduction of the Indigenization and Empowerment Act where investors were coerced to relinquish 51% shareholder value of their businesses to the local majority.
Although the government tried to control the hyperinflation environment by applying unscrupulous measures that included printing money which was not backed by anything, the economy plummeted. Basic commodity prices would rise two or three-fold in a space of a few days and the value of the printed money deteriorated as expected. The then fiat currency (bearer cheques, agro-bills, bond notes) was printed with denominations ranging from 1 cent to one hundred trillion notes for use as Zimbabwe experienced a very steep world record financial crisis. The funds that consumers had in their accounts were simply worth a one-way ticket to work. Basic commodities disappeared from most shops as the environment became a hostile one to trade in.
The worsening financial situation in a way motivated the introduction and uptake of digital financial services across the market. Digital money and digital payments were no longer just an option, but a must have for everyday financial transactions ranging from P2P, B2B and B2C. A fairly robust and stable national switch called Zimswitch was already being used to drive and process ATM and PoS transactions. The switch was further developed to allow push and pull transactions with the introduction of Zimswitch Instant Payment Interchange Technology (ZIPIT). ZIPIT was integrated with all the mobile network operator’s mobile money services namely EcoCash for Econet subscribers, OneMoney for NetOne subscribers and TeleCash for Telecel subscribers to enable consumers to move funds from wallets to accounts and vice-versa at very reasonable fees.
By Q1 2019, the value of transactions processed via the National Payment Systems increased by 0.2% to USD44.96b (Q4 2018 value – USD44.89b) whilst the volumes declined by 6% to 503.76m (Q4, 2018 volumes 534.43m). Comparing the National Payment Systems volumes of Q4 2018 against Q1 2019 there is a slight decrease on the digital platform’s volumes – Real Time Gross Settlement (RTGS) – 9%, Mobile – 13%, Internet Banking – 1%). We expect another decline on mobile money fueled mainly by the extra Intermediated Money Transfer Tax of 2% that was applied by the government on 1 August 2019. The Reserve Bank of Zimbabwe also issued another Cash In, Cash Out and Cash Back Facilities statement in October 2019 to cap Cash-In and Cash-Out to only Z$100 to try restricting the ever-rising fiat currency black market. PoS volume transactions recorded an increase of 45% with Cash decreasing by 20%.
The ongoing fragile socio-political environment shows that the financial situation in Zimbabwe is still far from recovery. There is no sight of favorable reforms that can attract foreign direct investment and unlock tools and possible funding to resuscitate the ailing economy. With no solid pure fiat currency that can be trusted and traded on the local and regional market, digital payments remain the only pillar for consumers to exchange value in their trading. The impromptu regulatory changes applied by the government and the regulator have had a very negative impact on the usage of digital payment systems, yet these platforms are the only available channels to trade. Consumer favorable regulation is key to instill discipline and confidence in the digital financial services. Could decentralized ledgers like ZIMBOCASH bring hope to such an uncertain environment whilst the Reserve Bank of Zimbabwe still maintains its position that virtual currencies are not regulated by any law in Zimbabwe?
This blog post was written Edmond Machengete, Acquiring Manager | Technical Lead at Bank of Kigali. He completed this research as part of his journey to become a Certified Digital Finance Practitioner with DFI.