eBusiness Weekly
Monday this week saw a determined co-ordinated effort by the Government and the Reserve Bank of Zimbabwe to puncture the bubble created in the black foreign currency market and its attendant inflation, with that inflation required to help create the bubble as well as being the result of that bubble.
At lot of attention was put on President Mnangagwa gazetting SI 2022-118A Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations, 2022, the amendment to the Exchange Control Act that did five things in just over three A5 pages of snappy and very clear legislation.
It upgraded the modern willing-buyer willing-seller interbank exchange rate to be what amounts to the official exchange rate; it made it a civil offence to use any other exchange rate in commercial transactions; it made it a civil offence to repay a foreign currency loan or accept repayment in any currency except that denominating the loan,; it imposed serious civil penalties on breaches of those two provisions, and it said the existing multi-currency regime was entrenched for the life of National Development Strategy 1 which ends on December 31 2025.
It was pure addition to the existing law. It repealed nothing. So all those laws about quoting prices in Zimbabwe dollars, accepting Zimbabwe dollars, allowing payment in foreign currency but only at the official rate, now the interbank rate plus 10 percent, banking money, paying taxes in the currency the money was earned and the criminal offences remain.
Civil penalties are almost instant. You get 48 hours to explain, and if that explanation does not make sense then they are imposed, with 5 percent levy each day they are not paid. Designated officers of the Reserve Bank make the decision.
But these new sections of the Exchange Control Act are just the front end of the co-ordinated effort, the bit that affects the market place for goods and services and basically tries to stop the black market exchange rate being a factor in commerce.
On the same day the Monetary Policy Committee of the Reserve Bank met, and made four decisions to fix the fundamentals at the back end. Two of these are of fundamental importance: the raising of interest rates and the decision that 25 percent of retained export earnings not used in 120 days have to be sold at the prevailing interbank rate.
The other two were more mundane: the decision to mint gold coins and the decision to start developing an exchange for forward pricing in foreign exchange.
The two major changes have two obvious effects. The raising of the Reserve Bank policy interest rate from 80 percent to 200 percent and doubling the medium term accommodation interest rate to 100 percent should cause a major decline in the amount of local currency entering the black market.
Those interest rates are market forces to back very recent Reserve Bank regulations that make the 16 commercial banks responsible for ensuring that all loans are for normal business.
The new interest rates will also hit businesses wanting to borrow for capital equipment and those needing to borrow to smooth out the cycles in their revenue and expenditure. Presumably they will be reset once inflation recedes and banks show they are not fuelling speculation; both will be required for any drop.
Having hit the demand side for foreign currency bought for speculation, the committee then finally, after a two-year delay, did something about the supply side of foreign currency for productive business.
Zimbabwe’s foreign currency is adequate for all normal needs. Inflows are greater than outflows, at least once the cycles are smoothed out over a year. The problem has been that the inflows are split into three blocks: the 40 percent of export earnings surrendered on arrival, the 60 percent of export earnings retained in private nostro accounts, and the free funds, largely from the diaspora remittances and farm earnings.
This has resulted in huge total nostro balances being created with net exporters building up staggering reserves, basically hoarding foreign currency forever. The original thinking was that net exporters would sell money as they needed to through the banks, and they were even invited to be suppliers for auctions. That did not happen.
Last year there were efforts to see if banks could tap some of these deposits for onward borrowing; but the holders were not interested. While exporters obviously use some of their foreign cash to buy what they need, and some also need to buy more foreign currency since they do export enough, a lot were net-exporters and managed on what they received from the 40 percent they had to sell to pay local currency bills, including their wage bills.
Now if they do not spend their foreign currency in four months, long enough to place orders and pay invoices in anyone’s book, they have to sell off a quarter of what is unspent. This is obviously a lot better than reducing the percentage that exporters retain, as some need to spend almost everything. But it should provide a lot more cash for the auctions or for sale through other means, including an enhanced interbank market.
Original proposals more than two years ago that everything left over after a month should be sold off were found to be unworkable, but the idea that everything left over could be hoarded forever is equally not tenable. In any case long term depositors in local currency can now get 80 percent interest, and even in demand savings 40 percent, So we will have exporters moving into the group who really want inflation beaten.
In many ways those playing the black market as speculators, and enriching themselves at the same time from inflation through arbitraging, have been playing a Ponzi scheme. These schemes do not need a Mr Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi at the centre, or even be organised, but they are characterised by evading economic fundamentals, so doomed to collapse, and enriching the few at the cost of the many.
The Zimbabwean black market did include many not in the scheme, people who just had to buy currency for legitimate needs, but the twin monetary policy measures and the Presidential follow-up action should remove most from the market, since there will be more foreign currency flowing into official markets from the 25 percent sales after four months and in any case buyers can no long cost on black market rates.
The speculators should now find that the cost of the money they borrow is too high to make a profit, so we should see the bubble start to deflate as less local currency flows in and more legitimate buyers move to the official markets.
The gold coins are in some ways a fun addition but on a more serious note they could be a useful and safer way to protect value than trying to keep bundles of US$100 notes in a safe, and certainly a lot safer and more stable than playing the markets for decentralised digital currencies, Bitcoin and its copies.
Presumably the Reserve Bank will be minting coins containing one troy ounce of gold, similar to the Krugerrand and the later Canadian, Chinese, American, and Australian coins, plus those in Britain, the only non-gold producer on the list. A troy ounce is 31,1034768g, a bit heavier than the 28,35g avoir-du-poir ounce used to sell vegetables in the US, Liberia , Myanmar and a few decades ago in most of the Commonwealth.
A Krugerrand contains an additional 0,09 troy ounces of copper, to harden it, so weighs 1,09 troy ounces. It is a smallish coin, 32,77mm in diameter and 2,84mm thick, so even with its case is easily portable. Holders still have the problem of robbers faced by those with stacks of US notes but not of fire, water, mould or rats. Perhaps some imaginative bank could set up a holding service to remove theft risk but still letting owners remove their coins on demand.
While all the existing gold coins remain legal tender no one actually spends them in shops, but they can. So it is not really a new currency, more a store of value and a way of investing in gold. South Africa even mints and sells half, quarter and one-tenth Krugerrand coins, so even tiny investors can join in.
On the serious side, the advent of these coins should see more foreign currency flow into the markets as people who want to keep value in a safe turn to the more convenient gold, especially with rising US inflation. It is safer than paper and legal, a pleasant combination. And a black market in gold coins being sold for local currency, and you can bet someone will start one, does almost zero damage, unlike a black market in US dollar notes.
Essentially, the double set of measures, introduced on the same day and so obviously tightly co-ordinated, should hammer the black market and so push back inflation. With our essentials basically sound, and sounder than most countries since we have tight fiscal discipline and a positive current account, the weird black market that so bedevils our economy should go south.
