[Update] Zim has dollarised and cash is king in USD world, EcoCash sees it too

When you walk down the streets it appears as if Zimbabwe has dollarised. Join a supermarket queue and you find that many, if not most, have their USD cash in hand. It’s all anecdotal but it does look like it.

That’s the thing with using USD, almost all USD transactions are in cash, especially when it comes to individuals. This means dollarisation comes with a decrease in the use of electronic channels.

This move to cash has massive implications for some businesses. We have seen e-commerce players tweak their offerings to include a cash-on-delivery option for example.

So, let’s look beyond the anecdotal and see if there’s any data to corroborate this notion that the streets have dollarised.

POS volumes decrease

The Reserve Bank of Zimbabwe releases reports on the state of National Payment Systems. The latest on is for the quarter ending June 2022. That may be over half a year ago but the trend towards dollarisation was already underway if we bank on the eye test. What does the data say?

First off, let’s remember that RTGS payments have a huge proportion of all transaction values in the country. However, those are mostly made by corporates. Individuals use Mobile and Point Of Sale (POS) terminals.

This is reflected in Mobile having 80.53% of transaction volumes in Q2 2022 and POS having 15.92%. These two channels were responsible for 96.45% of all transaction volumes. So, flatlining or decreasing Mobile and POS transactions would indicate that every day people have moved to cash.

Going from 2021, POS volumes fell by 14% in Q1 2022 and by a further 1% in Q2 2022.

We have to consider that as inflation raged and disposable incomes fell, Zimbabweans may have been forced to cut back on their spending. That is partly responsible for the drop in POS volumes.

On the other hand, it’s not as if Zimbabweans have been splurging on luxuries. It’s mostly staples that have to be bought no matter what. So, when we see POS volumes fall, we know they are paying using some other means.

Could that be mobile? It’s not mobile. Mobile volumes fell by 20% in Q1 2022 and by a further 5% in Q2 2022.

All this means Zimbabweans are using electronic channels less and less. They have moved to USD cash.

EcoCash Holdings says as much

We talked about how we only have data up to June 2022 from the RBZ. However, we can get a glimpse into what’s on the ground from other sources.

EcoCash Holdings released their trading update for the quarter ended 30 November 2022 and in it, they touched on the POS issue.

Said EcoCash,

Point of Sale transaction volumes dropped by 27% confirming the increase in United States Dollar cash transactions in the economy.

That’s the September through November period they are talking about.

Now, we have to remember that when they say there was a 27% drop, they are not talking about the whole economy. They are saying Steward Bank POS volumes fell by 27%.

Steward Bank does not represent the whole economy but it is highly likely that almost all banks have seen drops in those POS volumes as well. This would indeed confirm that there has been an increase in USD cash transactions in the economy.

Policy implications

The major thing is that we need to be honest with ourselves about what’s on the ground. When I say ‘we’ I mean the RBZ and the government. We have a habit of crafting policies based on what we wish was on the ground rather than accepting (admitting) that that’s not quite what’s out there.

It’s like some women that insist on wearing what they want and walking down whatever road they want at whatever time they want. They say they should be able to do this and not have anything crazy happen to them. Unfortunately, the reality is that there are bad people out there and they will strike.

In May last year, the Zim government made a bad situation worse when they doubled the tax on domestic USD transactions. The economy was dollarising and the government figured if they increased tax on USD transactions they would discourage USD use and Zimbos would use the ZW$.

That was not a good decision and they backtracked on that in January 2023. They saw that the higher tax only made people choose to pay in USD cash as opposed to Nostro accounts or USD wallet services. They really should have known this but we’ve had that conversation.

So, now that they helped move the economy to USD cash, they need to strategise accordingly.

Business

It’s doubly important because if we look at just banks, they will be feeling the drop in POS volumes acutely. Banks have been lending more and more and earning interest but they still very much need their fees and charges income.

Steward Bank, for example, had 70% of their income come from such fees, commissions and charges (non-funded income) in the year financial year ended February 2022. So, dropping POS volumes mean a drop in the all-important non-funded income.

It was always a risk to depend so heavily on non-funded income. Especially considering how Zimbabwe has a tendency to go all-in on cash owing to terrible monetary policies at any given moment. We had those conversations ad nauseum, we shan’t get into that now.

Banks could be in a bind if this move to USD cash persists, which is looking likely. As POS and Mobile volumes fall leading to drops in revenue, they will have to rely on interest income. The problem is that in a cash-only economy, it is hard to lend because there is no record to rely on when making those decisions.

If Kuda only ever deals in cash, how does the bank know that he can handle a $10,000 loan? A cash economy is not good for banks, especially when the cash in question is forex.

It’s not just banks that will need to adjust their business strategies. We talked about e-commerce players grappling with cash-on-delivery which has its own challenges.

That said, I think, save for banks and a few other businesses, most in the economy anticipated the move to cash and also welcome it. They are ploughing on and are only waiting for the government to come out and try and take us back to a cashless reality.

What do you think about all this? We have heard from many experts that dollarising would hurt our economy and yet the economy continues down that path. Is this going to bite us where it hurts or is it the lesser of two evils? If not USD cash then what? Electronic ZW$? No thanks.

Update:

Zimstat says 76.56% of spending in the country is now in USD. This figure was arrived at following a survey. I’m not saying the survey produced inaccurate figures but I find it hard to believe that only 76.45% of rentals are in USD. It may be the case but I just haven’t heard of ZW$ rentals in a while. That 97.7% of clothing is paid for using USD sounds about right.

When we consider just how difficult it is to know the exact situation on the ground in the informal sector, we have to consider that USD spending could be even higher than 76.56%.

The RBZ also chimes in and says 67% of bank deposits are now in USD. Of course, it is corporates that have no option but to deposit USD that are responsible for this. If we could include the deposits made into the National Mattress Bank, that 67% would rise significantly.

The solution

You may recall that the RBZ raised interest rates to 200% last year and that is believed to be one of the major reasons for the economy dollarising. The high interest made the local currency expensive and since there was an alternative, the economy moved to that.

The high interest was meant to stop speculative borrowing which was causing massive inflation. It has somewhat curbed inflation but it came with a dollarisation side dish.

So, the RBZ lowered that interest rate to 150% last week to remedy that. They may lower that rate again.

If it looks like we keep going in circles, that is because we are. Our YoY inflation was about 230% in January 2023 and that’s quite high. So, this means saving is not really an option, while inflation rages you will only get 150% in interest.

Won’t this just lead to the inflation rate rising again? It could but dollarisation of the economy is now the bigger enemy in the RBZ’s eyes. It robs the central bank of its monetary policy instruments, which I have to say, sounds like a good thing to me.

Also read:

Govt cuts tax on domestic forex transfers from 4 to 2%, too little too late?

Mobile money and POS transactions way down as Zimbabweans unofficially dollarise

It’s not Mukuru with high charges. All Domestic remittances are expensive and it’s by design