eBusiness Weekly
The continued rapid rise in the value of the Zimbabwe dollar compared to the US dollar, but the resulting very slow reduction in prices, is causing most consumers and many businesses to start hoarding their local currency until prices of goods start matching the changes we have seen in the exchange rate over the past three weeks.
This is generating a false state of tight liquidity, with warnings even coming from the business sector, which is most responsible for the tightness.
If businesses made it worthwhile for consumers and others to spend local currency there would a lot more being spent within the formal economy.
But we cannot blame people and businesses from showing reluctance to untangle the problems that so many in the retail and manufacturing trade pushed themselves into when they decided to try and guess forward exchange rates and then either just break the law and make a conversion or try and stay legal through raising US dollar prices.
Many have been resorting to the black market to beat the price problems.
It is now possible to buy US dollars on the street, even with the premium charged by the dealers plus their additional premium to sort out the fact that most are stuck with some more expensive money bought before June 27, and still be able to buy goods at prices below what many businesses are still charging in local currency.
That, as an aside, is probably what is keeping the black market solvent. Street dealers now do seem to have mobile money again, and they had run out two weeks ago. This means that they must be selling their US dollars to someone.
The seeking after black-market dollars to get cheaper products seems counter-intuitive and daft, but arises from the fact that some retailers and many manufacturers were using their guesses for future exchange rates to grossly overprice in local dollars, with an effective conversion rate of $10 000:US$1 not being unusual as the investigation into pharmacies discovered. Some, including one medium-sized manufacturer, even went further.
But it is now common to see some brands selling in local currency for more than twice the price in US dollars that we see in tuckshops, although other brands are far closer to the real exchange rate.
This variation in brand prices tends to support the stance taken by retailers that most of the price distortions come from manufacturers, especially when retailers exercised their right to pay in local currency and were hit by a huge price jump.
Retailers say they were following the law, and the problem arises from their suppliers. That may be true to a degree, probably a large degree, but retailers are not total innocent angels.
They do face competition for ordinary rivals as well as from the informal sector and especially the tuckshops with their very low overheads and their insistence on US dollar prices. That competition, rather than pure ethics, possibly keeps them more honest.
There is some justification for some stickiness in prices.
Manufacturers may have bought foreign currency to pay for imported materials when the US dollar was at its most expensive; retailers may have bought goods when the interbank exchange rate was close to $7 000 allowing retailers a conversion of almost $7 700. But in many local currency value chains higher rates became the norm.
Sometimes these arose from rises in US dollar prices.
This particular trick, and some manufacturers are guilty, involved starting off with the real US dollar price, converting it to local currency at say $10 000:US$1, then converting back at the official rate to create a new and higher US dollar price and then charging that one.
Other manufacturers simply chose a much higher local currency price based on a forward, and completely illegal and plain wrong, estimate of what the exchange rate would be in a few weeks.
This stickiness has been seen in the banking sector as well. Banks are just about the only business that does not use the interbank rate.
Each bank has its own rates for buying and selling US dollars, and the interbank rate is simply the weighted average of those daily rates along with the amount of transactions each bank does.
But there were banks paying significantly over $7 000 for a US dollar, and while they might have been trying to dilute their stock of foreign currency by buying cheaper US dollars on subsequent auctions are still reluctant to reduce the selling price of their holdings of foreign currency.
They can cope with the most losses arising from their failure to read markets correctly, and it seems as if more banks are now reducing their sell rates.
Again they are facing a competitive market. A reasonable sized business usually has dealings with more than one bank, and if one is trying to sell a US dollar for something close to $7 000 and another is offering them at a little over $5 000, guess which bank manager gets the order.
The banks need to raise the extra local currency they need to bid at auctions so they can buy cheaper US dollars to dilute their expensive holdings.
Yesterday, for only the second time since banks took over the role of supplying the bulk of extra foreign currency businesses need, the interbank rate came down without an auction result.
That meant that banks were finally starting to shave their own rates without the help of an auction, at least on the weighted average, and seem to have accepted that the Zimbabwe dollar is continuing to rise in value.
The fall in the weighted average price of US dollar was still more than 7 percent in this week’s auction, and that was with the bottom two bids rejected for being too low.
Retailers and manufacturers are going to have to co-operate to sort out the overpriced consignments floating around too many selves.
We need the same general policy, but in reverse, as the more honest were following as the value of the Zimbabwe dollar sank, that is getting the replacement prices each day and adjusting the prices in their computer and on the shelves.
This might well need credit notes for goods already paid for and other similar steps.
But unless something effective is done we are going to have certain brands of certain products gathering dust on the shelves, while more nimble producers manage to sort out their pricing and get the prices of their brands down.
That in turn will hit the manufacturers, who suddenly see orders from what were their major selling outlets totally dry up.
What has been happening over the past 18 or so days is for the first time in Zimbabwe, a rapid rise in the value of the local currency.
With both the fall in US dollar prices as fake price increases are removed, and the rapid fall in local currency terms, we are going to see negative monthly inflation in the August figures, and probably quite significant negative monthly inflation.
This presents new challenges for most businesses; neither CEOs nor CFOs have had to deal with this sort of currency and price movements before and they need to do some very hard thinking as they work out how to maintain profit margins and do correct pricing.
But those who do manage will be the businesses that will get the sales and make the money.
When we look at shop shelves in Zimbabwe, we can see even in a single supermarket that some manufacturers now have prices less than half those charged by others, for products that are so very similar that it would take a major laboratory performing a battery of tests to find the very small variations.
This will become increasingly important. A lot of manufacturers are banking on brand loyalty, and this is important, but “wallet loyalty” will increasingly dominate as consumers get smarter.
When money is tight people will go for the cheapest brand so long as quality remains acceptable, and will at least try the cheaper brand to test it.
When prices are rising frequently people rush out to spend their money as soon as they get it. When prices are falling frequently people hang fire and go shopping less often, at least for non-perishable items, and keep more of their money in the bank to get a better deal later on.
In many ways consumers are smarter than their suppliers in coping with deflation.
Businesses now need to rethink. The very modest competition in the manufacturing sector, and the far greater competition in the retail sector, will give rewards to those who figure out how to ride the graphs the earliest, and hammer those who try to do business as usual.
