Why Zig-arising diaspora remittances will not work!

There was a video that circulated on social media platforms a few weeks ago regarding diaspora remittances. Whether this was a real video or a product of generative artificial intelligence, the subject matter in that video is of much interest and it got the whole market talking.

Essentially the person in this video was explaining how big the informal market in Zimbabwe is and the fact that once diaspora remittances get to the final beneficiary, they are not coming back to the official banking channels. The speaker went on to suggest that it might be necessary at some point to devise mechanisms to make that money stay longer in banks or be liquidated into local currency.

Well before we get ahead of ourselves, let’s start by explaining what diaspora remittances are. These are funds sent back home by Zimbabweans living and working outside the country. These funds are generally of a subsistence nature, unlike foreign direct investment and or export proceeds. However, with an increase in the number of people leaving the country, this number has become more and more important by the day.

In fact, in 2023 the daily average inflow from diaspora remittances was slightly over US$5 million and diaspora remittances alone accounted for 17% of total foreign currency receipts. Diaspora remittances were only US$294 million when the country dollarized in 2009 and have been growing at a compound annual growth rate of 14% over those 14 years. Labor has been one of Zimbabwe’s biggest exports and the remittances number is projected to keep increasing as more and more workers leave the country.

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On the other hand, Zimbabwe has been having currency challenges for over two decades now. The Zimbabwe Gold, ZiG is the latest local currency which is said to be backed by commodities and currencies. The ZiG is currently co-circulating with the United States Dollar with the majority of transactions in the country concluded in the greenback. However, the authorities have made it very clear that at some point they will have to make the local currency the sole currency in the economy.

With the level of informalization in the country, which the Zimbabwe National Chamber of Commerce estimates at 64%, the de-dollarisation agenda will not be easy to fulfil. In fact, it was once tried in mid-2019, only to be reversed a few months later. Although de-dollarisation might be achievable in the long run after ticking some boxes, one mistake that the monetary authorities should not try to make is to force beneficiaries of diaspora remittances to liquidate their foreign currency.??

Excluding diaspora remittances and other free funds, if you are an exporter, your proceeds are subject to liquidation. This means that the moment the money hits your account, a portion is immediately converted into local currency. Exporting companies like the Amalgamated Regional Trading (ART) Corporation have expressed that this liquidation is posing viability threats to exports. One of the largest dairy companies in the land also expressed that in some instances they had to prioritize local sales at the expense of exports, given that most domestic sales are in hard currency.

It is a public secret that the official exchange rate is different from the alternative exchange rate with the former undervaluing the hard currencies. This difference effectively becomes a tax, which will be paid by anyone who has their foreign currency liquidated into local and during the ZWL days the difference between the exchange rates was 50%, meaning a mandatory 15% liquidation means a 7.5% liquidation tax.?

According to the RBZ Monetary Policy, in 2022, 76% of the Diaspora remittances came from South Africa, the UK and the USA and South Africa alone accounted for 40% of these remittances. Given South Africa’s proximity to Zimbabwe, it is very easy to switch to informal ways of remitting. Anyone who studies the diaspora remittance numbers will realize that their increase coincided with the pandemic and a reasonable explanation is that during the lockdowns, formal channels became the convenient option to send back money back home.??

Well, corporates might be in a tight spot where they have no option but to continue paying this tax, however the same is not necessarily true for diaspora remittances. The moment the authorities try to force liquidation of diaspora remittances, both the beneficiaries and the remitters will look for ways to run away from the formal channels and it will result in an overall loss to the economy.?

Is it a fair assessment to force diaspora remittances to stay longer in the formal banking channels? Well, there is no denying that the overall goal of having more money circulating in the formal banking channels is a noble one. It is the “how” part which is debatable. Would a rational economic man in the country right now prefer to keep their money in the bank??

Let’s look at some numbers to understand this well. According to the latest monetary policy statement, the average loan-to-deposit ratio in the banking sector for 2023 was 49.27%, down 13 percentage points from March 2023 numbers. This means for every dollar that banks are holding as deposits, they are only churning out 49 cents as loans. If that’s the case, so how are banks making their money?

The same monetary policy statement will also review that 84% of banks’ profit came from non-interest income. Close to 20% of that income came from fees and commissions. The honest truth is that banks in the land are not serving their purpose fully, instead they are becoming a burden on economic agents which as a result is increasing informalization. More can be achieved, if efforts are channeled towards making banks attractive to customers rather than forcing remittances, or any money for that matter into the banks.?

In conclusion, both forcing remittances to stay in the banking channels and forced liquidation will be terrible ideas and the good thing is that the Central bank distanced itself from that video. Rather the authorities should work on making ZiG a currency of choice and banks should offer products that attract clients to them.