As part of the official exchange rate system comes into alignment with the black-market rates, we will be seeing a lot of changes in the business sectors, especially the retail sector and the black market moving from a central position in many minds , to a much smaller “convenience” market.
The first full alignment is between the what street dealers will pay for a US dollar bank note using Zimbabwean banknotes and what the banks will pay using banknotes for that same US dollar. The street dealers are offering $600, as they have for several weeks, and the interbank bid rate, what the banks pay, is $600,8788. So target one is now achieved.
There is still some trade in banknote-banknote deals, largely because of the bus fare problems, but basically only for pure Zupco buses, whose conductors will take US dollars but give change on the interbank rate rounded off; at the moment they use $600:US$1. The mushikashika and non-Zupco kombis use $800:US$1, the street buy rate since they need foreign currency for fuel and for spares in the depths of the informal market where the lengthening arm of the Financial Intelligence Unit still cannot penetrate.
This has seen over the past two or three weeks a lot of passengers offering a US$1 note for a “50c” standard fare, or the $400 they got in change from their last US$1. In fact, in that particular segment of the market it is now cheaper to buy the US$1 using $800 mobile money, even with the 2 percent tax, and presenting that rather than “buying” Zimbabwean banknotes with mobile money.
You can win a bit if you can find an ATM with money loaded, not easy, or if you can persuade a retailer to give cash back, which the best do if they have banknotes, but few have many now.
It gets better, the “till rate”, the interbank mid-rate plus 10 percent, and what the black market dealers offer holders of US dollar banknotes prepared to accept a digital transfer, are now not just in alignment but actually give a tiny advantage to the retailer once you factor in the 2 percent transfer tax and then the 1,5 percent or a bit more in transfer charges when you use mobile money or a bank card at the till from the money the dealer sent you.
As of Thursday the black market dealers hanging around outside supermarkets and in suburban car parks are still offering holders of US dollar banknotes $700 in a digital transfer, allowing you to spend $676 and still have money to pay the tax and the transfer fee.
The odd dealer might go to $750 when there is some demand for petrol or something like that, but that still only gives you less than $724 to spend.
The interbank mid-rate was $621.8788, taking the till rate to $684,06668, so there is now an advantage of just over 1 percent in favour of just paying with the banknote and even if you lucky even on a US$10 bill you will not be able to buy half a loaf of bread on the gap.
Admittedly you win slightly if the transaction is small enough to miss the tax, but that allows a loaf of bread and some tomatoes. And at that level you hit a major change problem in any case so it is likely that the dealers will have some business.
They might also pick up a bit when people living off a foreign relative need to pay Zesa and so need local cash in a bank or mobile account. But we are down to the “convenience store” business, not a fundamental service to oil the works.
The net result of a greater flow of US dollar cash from those in receipt of diaspora funds means that many retailers, even the respectable ones who do not cheat, will no longer have to hold their noses and go to the black market. They can just use their own money.
The one area where the black market will still be accessed by a lot of people is that sacred cow of the fuel business.
Technically some petrol and diesel is sold for local currency but you are unlikely to find it unless you are a major company with a strong relationship with your supplier. So service stations and the sellers of liquid petroleum gas, a booming business with the Zesa power cuts at present levels, need US dollars.
The black market sells these for around $800, about 28 percent above the mid-rate. You might be able to buy from a friend with a rich foreign relative for $750, a premium of about 20 percent. If the interbank market was selling for fuel purchases, which it is not, the banks would charge you $643,1219, giving the practical premium of 24 percent on the $800 or 16,7 percent on the $750.
Compared to what premiums were like a couple of months ago this is low, and the combination of all these sorts of transactions no doubt explains the latest statement from the Monetary Policy Committee that the premium is now between 5 percent and 15 percent, which does not involve much stretching of fact.
More interestingly, the committee reckons the 5-15 percent premium is pretty well built in regionally, which assumes that in most countries have black markets that are small and offer the convenience service, of changing money at midnight in the middle of nowhere for example. Outside the fuel business the Zimbabwean market is now largely in that bracket.
The interbank market is meant to become the dominant market in time, although at the moment it is largely a market that sets rates without the Reserve Bank of Zimbabwe interfering with the process of willing sellers striking deals with willing buyers. But as it becomes more useful the margin that banks can charge between what they pay for foreign currency and the price they sell this at will become a major factor.
At one stage it was over 9 percent, and even now it is just above 7 percent. Traditionally that sort of margin was around when it was banknote to banknote, to cope with a lot of extra costs. But as we move towards digital to digital money then 7 percent is outrageous and introduces more distortions. Even for banknote to digital it is far too high and with the growing stability needs to be adjusted.
It might just be tolerable if it continues to creep down, but it needs to creep a bit faster.
The Government and the Reserve Bank are slowly opening that interbank market, having taken the daily limit from US$1000 a day to $5000 a day in two steps, but are concentrating on expanding the daily total rather than opening the rather limited options to what the willing buyers can actually spend the money on.
To a certain extent this is ameliorated by the continued auction market and the exceptionally close alignment that the Reserve Bank and the banking system have created between the auction rate and the interbank rate.
For a start the weekly auction return now includes in the list of notes the bid interbank rate of the previous Friday, and it has become very clear that anyone bidding noticeably below that is not going to win. Secondly the Wednesday morning adjustment to the interbank mid-rate now matches the previous afternoon’s weighted auction average to within 10 Zimbabwe cents, which counts as a perfect match.
Presumably those willing sellers are not willing to be cheated, and the willing buyers are grateful to be close to the auction rate, so the system used by the banks to calculate the interbank rate should automatically now do the reset each week. This is normally the largest daily adjustment each week, but even so it is only a very few Zimbabwe dollars at last count as these official market rates move so much more slowly with the growing stability in all markets.
One of the most fascinating aspects of the alignment of the interbank and black market rates has been the total stability, or small decreases, in the actual black market but the daily upwards creep of the interbank rate, without prices rising.
This implies that the black market rate was being used far more often than most admit for costing, although the forward estimating of what the black market might be like in a month’s time has been eradicated by the gun-toting Ministry of Finance and Economic Development and the FIU.
The practical alignment of exchange rates to that 5-15 percent the Monetary Policy Committee calculates, depending on how you use the bid and sell rates in the interbank and black markets, means that other changes will soon have to be considered.
Already the daily creep in the interbank rate has gone very small, although still there. But the 10 percent addition for retailers at some stage will have to be carefully and slowly eliminated at least enough to align the till rate with the bank sell rate. The 10 percent was designed to cope with the higher daily creep and the modestly higher banker margins between bid and sell rates.
With creep reducing and the margin coming under more pressure, at some stage we are likely to see this till premium inch down, perhaps one percent or even half a percent at a time until it is close to the bank sell rate, which at present is around 3,5 percent above the mid-rate.
Above that we need to include a couple of weeks of creep, so we are not starting the reduction process tomorrow, but in a couple of months, especially if the interbank market expands, we will have to.
What we are seeing is a large basket of market driven measures that have slashed local currency liquidity, transferred a lot more currency dealing to official channels, even if this uses shop tills, and have made the black market ever more small potatoes. We need to be careful, but we are on the right road and the authorities seem to realise that dramatic gestures are no longer needed but rather small adjustments.