eBusiness Weekly
Chris Chenga
The decision by the GMB to hold grain prices at $390 has received skeptical response from some observers. Most arguments against the price is that regional prices, and that of previous years on the open market reached levels as low as $280.
Notes in the IMF’s Article 4 Consultation on Zimbabwe queried government’s expenditures into the agricultural sector, warning that unmitigated credit financing poses a systemic threat to the banking sector whilst crowding out the private sector. This report seemingly affirmed the position already held by skeptics. But there’s an alternative case to be made for holding the price at $390 and government taking the bold decision of credit financing.
Initially, Zimbabwe has sustained a balance of payments deficit. Not only is this balance detrimental in payments, but particularly so as it was in the form of foreign currency. Grains were a considerable proportion of imports. By the end of 2015, a balance of trade of $3 billion was 20 percent of the economy’s GDP. As long as exchange rates are free-floating, trade imbalances never really exist in the long run.
Usually, a nation with a trade deficit would simply be exchanging currency for holding assets. For instance, a trade deficit for South Africa would be exchanging capital equipment for Rands. That capital equipment stimulates long run growth justifiable in exchange for Rands. But this was not the case in Zimbabwe. Firstly, grain is consumptive not assets. Secondly, exchange rates for the USD in a Zimbabwean context were not free floating, thus there is an argument that the dollars exchanged were done so at a premium. More precisely, Zimbabwe imported grains using a USD that had a significant real exchange rate (RER) disparity. So the GMB offering a price of $390 must be weighed against the amount of foreign currency lost in previous years; a foreign currency that has a real exchange rate factored in.
By importing grains at a currency premium, Zimbabwe was importing inflation. This did not reflect as Zimbabwe’s internal currency was not free floating.
However, the real exchange rate for the USD, which the RBZ and IMF estimated to reach as high as 45 percent with trade peers, meant that Zimbabwe was importing inflation. This why in world trade, nations fight to devalue their currencies, it is the premium put by the higher real exchange rate (RER) which they try to avoid in the long term. Just because GMB will no longer be importing, it does not mean food prices will not rise. Instead, there is a significant likelihood that they will.
There is no free lunch in trade, albeit it may not be paid for on that day. The nuance, however, is that food prices will now rise because we have failed to produce beyond the premium of the real exchange rate lost. More developed economies actually disaggregate the trade balance down to the commodity level, permitting them to weigh the effect of changes in real exchange rate on the individual industry trade balance.
Think of it in this manner; the way trade balances even out long run as in the aforementioned South African example. Capital equipment would produce goods to incite economic activity, which is willingly given up Rands and has a long run positive effect. However, the grains imported by Zimbabwe for USD did not stimulate any economic growth, and the premium loss will reflect in hiked food prices now.
Looked at in this manner, the higher $390 doesn’t look so bad. The higher price is stimulus to the economy on multiple fronts. There are a lot of stakeholder, private and public involved in the grain value chain. Consider SeedCo making a record $20 million profit through the command agriculture programme. This is one of the numerous seed and input companies within the value chain. As already witnessed in previous months, higher demand for inputs has ignited downstream economic activity.
Lastly, the $390 paid by GMB is going towards local economic agents. These farmers will spend that money within the economy and hopefully contribute to its circulation within formal channels. The problem in previous years has been government debt going to wastage or unproductive activities. This is not the case with GMB paying farmers $390 for produce.
