Back on course, but we need to learn

10 Dec, 2021 - 00:12 0 Views

eBusiness Weekly

Business Weekly Last Word

While the economic indicators are now settling down, monthly inflation falling again after a spurt, the official exchange rate set by the auction system stabilising and even the black-market rate settling down, the problems of the third quarter of this year show that there is some fragility in the system that needs to be addressed.

Much of this fragility comes from beliefs and perceptions, rather than from economic fundamentals, but the authorities, both fiscal and monetary, should be careful not to assume a good theoretical knowledge of economics among either the general population nor among many running the productive enterprises. 

Even accountants tend to seek advice when it comes to economic trends, and the nature of the advice that is on offer is varied with professional pessimists tending to have the louder voice and stronger followings.

The problems we saw in Zimbabwe, which delayed progress on what had been a fairly smooth fall in inflation rates until mid year, seem to have arisen from a single source, the delay in payments from the Reserve Bank of Zimbabwe auctions after the allocations had been made. 

The auctions had been working well and, in general, the productive sectors had come to depend on these and had moved into pricing policies that, again generally and regrettably not universally, were built on costs rather than external factors. 

But the growing delays did start putting a strain on the legitimate productive sectors. While no one in Zimbabwe would dream of working on the “just in time” model for supplies, few keep months of stocks of raw materials and the like, and in any case spares are sometimes needed at the most inconvenient times.

So businesses that had been relying on the auctions started dipping into the black market, or buying supplies from people who were dipping into the black market. This started driving up black market exchange rates. We need to remember that the black market is far smaller than the official market, being largely supplied through diaspora remittances, either directly by beneficiaries selling what they get, but more often indirectly by the money passing through a large number of hands in the informal economy before coming to rest in the hands of black-market dealer. The size of the market means that fairly modest changes in demand can have a large effect.

This had obvious knock-on effects, pushing up monthly inflation for a start, but also changing perceptions and causing expectations of further sliding of local currency value on the black market. 

Of course there was cheating in progress, more than had been assumed, and the larger operators in the black market were doing their level best to manipulate things. Certain sections of the economy, and the medical and pharmaceutical sectors are perhaps the largest offenders, always using black-market rates even when their priorities are so high they get their needs on auction.

Other sectors, and the importers and sellers of non-priority consumer goods are an obvious group, have always had to source their money directly or indirectly on the black market. In one sense, the black market performed a valuable service in this area, pushing up the costs of imported consumer goods and so applying extra pressure for local manufacture without breaching trade deals. A dual exchange rate works just as efficiently as a high customs tariff regime to grant protection to local manufacturer.

At the same time this sort of dual system does create the problem of withdrawing liquidity from consumers who can afford it, normally quite a good thing, but unfortunately increasing the liquidity available to the market dealers, and that created more opportunity for them to speculate and to offer more. So the net result was negative.

Human greed, being what it is, also tempted many, even if they were getting official currency, to price according to black-market rates because “everyone is doing that” although fairly obviously everyone was not doing it. But enough were doing it to set a bad example and create an attitude of work with the flow.

The methods used by the authorities to combat this spell of higher instability were varied. The least effective were the threats of action to be taken against those who priced outside the legal formulas. This could have been expected. Many of the most important retailers and final suppliers are not, in fact, dealing in the black market. They buy their goods and supplies from others and apply standard mark-ups. The fact that these “others” may be using black-market currency, or pretending to get their higher price, is the problem.

Far more effective was what was described as ring fencing the long delayed allocations, while transferring the foreign currency fairly promptly from new allotments. As a decent swathe of the ring-fenced currency allocations had already been replaced, quietly, by black-market alternatives this did not create a major dislocation in supply chains and the return to near instant allocations on allotment stopped the rot proceeding.

The fact that the ring-fenced money is now being paid out as well has helped calm down productive importers.

But the main lesson from all that problem is that the Reserve Bank must, under all circumstances, be able to pay out what the auctions allot. Because the auction system only fund priority imports, it is difficult to limit the amount that needs to be allotted each week without causing major disruptions, so more needs to be done to ensure the supply of currency is adequate.

The economic fundamentals suggest it should be, with foreign currency inflows exceeding outflows, and in most months exports exceeding imports. Even the trade balance this year shows only a tiny bias in favour of imports. But export retention schemes and the like impose their own barriers. This is why it would be better to lower retentions or start some system of making exporters use their retained earnings or selling at least some within a few months of stashing them away, rather than let the allocations fall behind again.

At the same time, as the exchange rate was being allowed to move more than usual, the Reserve Bank started letting the auction rate slip significantly. It moved from around $88 to $108 in two months with most of that change in the first five weeks. Among other things this caused some inflation catch up, and did in the end lower the black-market premium.

Another intervention that applied some cooling water into an overheated black market was the decision to allow ordinary people to buy US$50 a week. This is not a simple operation for most people, but enough go through the process to what in effect is to increase the supply of foreign cash into the black market. 

A far larger flow is now coming as the civil servants share what we have been told is US$120 million in bonus money. Some of this will be used productively, and some will get stored in trunks. But the majority is likely to be entering the consumer economy, some being sold on the black market to buy local dollars to buy groceries and some being spent directly on imported consumer goods.

But the result should be to cool down the black market further. Greater supply and lower demand must have some effect. The greater supply is obvious, but the lower demand will come from all those sellers of consumer goods who will not be buying foreign currency in the first place to build up stocks. 

A final problem is money supply, that old cause of so many of our economic problems and past inflation. These days the Government is quite determined to run something exceptionally close to a balanced budget, and has been for more than two years, but money supply does grow for other reasons than Government debt financing. 

The Reserve Bank has done a lot to limit this growth, but has been operating using the reserve money definition, as is quite common now among world central banks. And in Zimbabwe’s case this was where the growth in money supply took place in the past. But the Monetary Policy Committee now wants broad money to be included in the monitoring process and policy calculations.

This recognises that the Government is not the only source of growth in money supply. The private banking sector can do quite a bit itself. There are a number of things that can be done to control that, but obviously the authorities need to know what is happening before they select the tools that will control it. But missing out a set of controls because it was not thought a primary problem could not be continued. Technically controlling just the reserve money supply should work, but such is the history of Zimbabwean banking and business that curious things can happen at the side, so the MPC was correct in wanting the broad money monitored as well and with policies to control growth there.

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