Zimbabwe’s largest mobile money transfer service operator, Ecocash is being accused of perpetuating rent seeking and economic sabotage by exploiting cash strapped citizens through cash out premiums, but is this accusation justified? The service which carters for 90% of the total adult population of Zimbabwe, handles the highest number of financial transactions per day than any other payment platform in Zimbabwe including banks. The service is infact linked to all, except 2 commercial banks. It is so central to Zimbabwe’s economic activity to the extend that business literally stands still when the service is down as was the case not so many weeks ago.
For a more holistic view of the scenario, since the emergency of the cash crisis in Zimbabwe 3 years ago, the economy has moved to cash-lite, tending to high utilisation of digital payment platforms particularly mobile money, attributed to a large extend, to Ecocash’s innovation through investment in Hitech. Although banks have improved their digital offerings significantly over the last 4 years, Ecocash, being a mobile money service, catalysed the process, through offering end to end convenience and a wider reach through the agency network. It is reported, against this background, that Zimbabwe now ranks among the world’s highly digitized economies financially.
The emerging accusation on the local front is that the service through its agents is now charging a steep premium for cash. This premium charged on top of the service charge is for receiving or withdrawing money send by a third party or stored on a subscriber’s wallet, more of conversion of electronic balances to hard cash. The premiums ranged in the region of 20% at the end of 2018 and have since widened to 60% as at September 2019, heightening the outcry. Government and even the Zimbabwe Anti Corruption Commision (ZACC) has taken interest on the matter.
A confused and misinformed populace has been carried away by the wave and swayed into believing Ecocash an Econet baby, is the culprit. But here is how it works. Ecocash has an established agents network totalling 5000 across Zimbabwe built over the last 6 years. These agents are independent operators facilitating transactions on the platform for a fee or commission. They therefore have rights on Ecocash’s infrastructure to complete transactions as solicited by users. The agents’ payments for facilitating transactions are predetermine at a certain rate depending on the transaction volume and transaction value commonly known as commission.
Now this system was free flowing and only service fee based and without premium up until mid 2016. Premiums began to emerge at this point and it imperative to study why. I vividly remember a year later at the end of 2017, while sitting with the Governor of Reserve Bank at his offices and discussing about the currency issue when he said “Respect, if the Bond Note has failed, why are people not also saying Ecocash (implying the mode of payment) has failed because both are being discounted against the US dollar?” He highlighted that Ecocash is a both a platform and a mode of payment, and as a mode of payment its financing stems from RTGS balances, similar to bond notes which are withdrawn from the same RTGS balances. He argued that the Note has not failed, it is pressure emanating from the growing RTGS balances chasing scarce US dollars, he quipped in his usual honest talk. Should he be elated today now that the Bond Note is firming against Ecocash money, no I don’t think so.
My guess is that he remains a worried man because the root cause of the crisis remain unabated and that is broad money supply relative to forex receipts. But what we are experiencing today between Ecocash and Bond Note is a reverse order with exactly the same impact. Ecocash as a mode of payment has its own supply and demand function which is not congruent to Bond Note. The rate of demand and supply of both as a mode of payment is different and the difference stems from mostly from the supply factor. While all forms of local money have lost value to the USD, the bond note has been more resilient and this is because it is more scarce compared to RTGS money. Ecocash’s supply on the other hand is limited only to the extend of RTGS balances in the economy and this aggregate has been growing, implying supply to Ecocash has spontaneously risen as it is highly permeable and synchronised to RTGS. This variance has created an own rate between the Bond Note and Ecocash, based on exclusive fundamentals.
The fluidity and convinience of cash coupled with supply scarcity relative to demand naturally attracts a premium to other forms of money and if I’m to quote the governor again a hard cash ratio of below 10% is unsustainable. There is about $600 million in bond notes total against a total of $15 billion in money supply (RTGS) which results in huge demand for cash. It is also common knowledge that in an inflationary environment one would choose to hold physical forms of cash. The expectation of further loss in value of local currency would discourage circulation of notes which economic agents already know are in low supply and likely to preserve value better than bare RTGS. This is the crux of the matter, simple! Faulting the operator of an infrastructure who does not benefit from the premiums is a lack of appreciation of how money moves on the network. Even as blaming the rent seeking agent for taking advantage of the cash crisis, is to disregard the very essence of capitalism, which exists not for benevolence but for profit maximization.
It is not a secret that a hyper inflationary environment breeds speculation and such speculation hurts the innocent hard working citizen. Ecocash has done more good to this economy than most companies through its robust investment leveraging on an already established Econet infrastructure and this cannot be overemphasized. The solution to the unwanted premiums is simple. Fix the economy. Authorities have to increase the levels of hard cash in circulation, but it is not all that simple. We all know the government desperately wanted a new currency as soon as yesterday but there is jittery lately given the carnage in forex markets, where the Zimdollar has just been on a freefall since its second coming. The strategy at the moment is to keep filtering bond notes into the market at a lower rate but the gap is just too wide and the expectation of inflation so alive such that one would prefer to hold on to hard cash than electronic, which has had high tolerance to devaluation. So to effectively solve this government has to solve the currency crisis and the arbitrage will disappear in a flash.
Indeed Ecocash is actually a villain in this matter, in that it is losing out on the cash scarcity. Its business is facilitating movement of money and its cashing out. Given low quantities of bond notes, the company is actually being deprived of potential income from cash out. Even so a highly inflationary environment results in loss of purchasing power for the consumer thus reducing use of services such as Ecocash.