eBusiness Weekly
The pressure to accelerate the introduction of a full-fledged Zimbabwean currency must be growing thanks to those business people who, through fear at best and greed at worst, are doing their level best to derail the economic reform programme.
It obviously would be better to move to a proper local currency in a series of careful steps with proper working markets and adequate reserves so that the monetary authorities can iron out daily and other short term fluctuations in forex supply and demand while being careful not to manipulate the markets.
But we are fast moving to a situation where even a “big bang” switch to a local currency, with the attendant volatile exchange markets, might well be preferable to suppress the nonsense that we are now seeing as far too many manipulate markets and engage in what can only be described as outright profiteering.
With a full local currency the multi-currency regime ends. All export earnings would be converted to the local currency at the prevailing interbank rate on arrival. There would be no retentions or allocations by the Reserve Bank of Zimbabwe; everyone, including the Government and the oil companies, would have to buy their forex requirements on the interbank market. That market would encompass all forex dealings, without exception. And if that sounds draconian it is exactly what happens in almost every other country on this planet. It is that state of affairs that is normal, not what we have been living through for the last decade.
At present a number of manufacturers, packers and processors are calculating selling prices in US dollars and then converting at the black-market exchange rate, despite the fact that many or even most of their costs are in RTGS dollars.
Many exporters, or producers of goods or minerals intended for export, and who thus have retained export earnings in a nostro account, are not selling what they do not use themselves on the interbank market. Instead they are hunting down people, often in their own supply chains, who will in desperation pay more by allowing the exporter to put on a significant mark up on the goods he imports for others.
Others with retained earnings, with more justification, are building up stocks of imported requirements beyond normal commercial good sense because they are worried about fluctuating exchange rates or even fearful over the announced intention of introducing a proper currency within a year. They feel themselves victims of the manipulators but their actions, while understandable, make the problems worse.
Many of the price rises we now see are not justified by normal margins. Many of those businesses that have pushed prices up faster than a proper costing model would suggest have seen the percentage of their costs payable in RTGS dollars fall; principally that means that the percentage of revenue that they pay in staff costs, utilities and taxes has fallen. Profit percentages are rising. A normal business model does not tie selling prices to a manipulated black-market exchange rate. It starts off with the costs then adds a margin for profit. Of course one problem faced by those pressing ahead with prices based on an exchange rate is that their revenue is falling, largely because they are pricing themselves out of their markets. Some respond by returning to good accounting; others respond with yet another price rise.
The biggest single error that so many make is an assumption that inflation must continue and that exchange rates must continue falling. They fear it will be like “last time”. But last time the fiscal authorities, the Government, were running huge budget deficits and the monetary authorities, the Reserve Bank, were printing banknotes with ever more zeroes to pay for this. In other words local currency was continually being created so there were ever more Zimbabwe dollars to buy the same amount of goods and services, feeding inflation, and ever more to buy US dollars, sending the exchange rate south ever faster.
Even after dollarisation there was accelerating growth in money supply at rates far higher than growth in the economy. That is why we hit the present mess.
But Minister of Finance and Economic Development Prof Mthuli Ncube has ended that. He is, rightly, proud of the fact that not only does his budget balance but that he is generating a monthly surplus, that is he spends less than what Zimra transfer to the consolidated revenue fund. That in turn gives him the required leeway to start fixing the mess in the State system. At the same time it means that money supply cannot grow.
In real terms, whether we calculate using rises in the cost of living, as we should, or the exchange rate for those who insist, the money supply has fallen sharply. In nominal terms it remains at RTGS$10 billion, about RTGS$700 for every man, woman and child in Zimbabwe. But using inflation since the minister was sworn in that is just now worth just under $6 billion in August 1918 dollars.
In US dollars the cut is even more dramatic. The total money supply is around US$3 billion at interbank rate and a paltry US$2 billion at the street rate.
So where is the pressure coming from?
One obvious answer is from the gross inequalities in Zimbabwe. Not many families of four have around RTGS$3 000, the average when you split money supply by population, in all their bank accounts and in bond notes. But there are a fair number of individuals, and a plethora of companies, who have ten times, or a hundred times, that amount in demand deposits. And with those surpluses not needed for daily expenses they can, and do, play the markets.
But that playing is what is most likely to accelerate the introduction of a local currency, whether we are ready or not simply because a premature introduction will be less damaging than what we are now seeing, or rather not seeing. If everyone used the opening markets the authorities have set up properly, we can progress properly. If people give into fears and listen to rumours in bars and on the wilder shores of social media, then other steps have to be taken.
