eBusiness Weekly
The tobacco selling season opened this week and over the next few months farmers will be paid the equivalent of more than US$500 million, minus the cost of their inputs regardless of how their crop was financed, with 75 percent paid in foreign currency that is treated as free funds.
The actual exports come to more than what the farmers get, with a fair amount of value added by the merchants who make their profit from the initial processing raw leaf, doing detailed grading, getting moisture content right and assembling and shipping the precise orders they have received from their foreign customers.
Because of changes in tobacco deliveries and marketing as a result of Covid-19, we are now in the third season of decentralised delivery, and the result when you look at the swathe of small and decaying colonial towns across the tobacco areas of Zimbabwe has been spectacular.
New businesses have been opening; major commercial chains have been buying cement and bricks and getting their branches in place; the businesses that manufacture and supply inputs and equipment have made a special effort to ensure that these are readily available in this swathe of towns, for that is where the money is.
Farmers are quite happy to buy local, at least from suppliers who charge the same prices in the small towns as they charge in Harare.
And that is good for the national economy, as well as the provincial economies of the Mashonaland provinces and the northern half of Manicaland where the bulk of tobacco is grown, and now delivered. With the GMB and Cottco also now pumping money into these areas development has been spectacular.
But one of the most interesting effects of the tobacco money will be on the black market, and the black market exchange rates.
A fair chunk of the US$500 million the farmers get from selling their crop is absorbed by recovery of the inputs, or repayment of loans, or in a few cases savings for some financing of next year’s crop. But three quarters of what is left will be US dollars in free funds, meaning it can be spent on what the holder wants, without any permission whatsoever being required, when the holder wants.
And the holders will be several tens of thousands of families making their decisions very rationally to maximise their earnings and make the money go as far as possible.
A lot of people see the black market as a real market, driven by supply and demand, but when directly and indirectly more than US$100 million is dumped into that market, fairly obviously even the manipulators will have problems distorting and controlling the result, since that is a lot of money.
Obviously rational farmers will be spending the 25 percent in Zimbabwean currency very quickly. Inflation, while down from the 2020 record levels, is still high and the present 12 or so percent decline in Zimbabwe dollar value on the official auction market means it is not to decline a lot more in the next couple of months.
The US dollar balances are also subject to inflation, but US inflation rates; these are rising but to levels that Zimbabweans will hardly notice.
And a lot of that 75 percent retained earnings will be entering the black-market in one form of another. Some will be spent directly in shops and on goods, but only when suppliers through all their manoeuvrings are offering something fairly close to the black-market buy rate, what dealers offer holder of US dollars.
But those same suppliers will then not be dipping into the black market themselves at nearly the sort of level they might be doing today, so demand for black-market foreign currency is reduced.
This direct spending is indirectly affecting the black-market.
But farmers will be looking at the rates, and will be checking out the rates that their trusted dealer is offering, and if the street rate is higher than the effective shop rate they will sell their US dollars, in dribs and drabs, and spend the resulting Zimbabwe dollars in the shops.
That increases the supply of US dollars in the black market.
In any market any joint addition to supply coupled with subtraction of demand should result in downward pressure on prices, and in this case that price is the exchange rate in the black market.
In practical terms the rate will prove sticky to changing to a rate that sees sellers of US dollars get fewer Zimbabwe dollars, although at some point that may happen. But at the very least we can expect to see the black market rate stabilise under this sort of pressure when more than US$100 million is the sort of force being exerted.
The black market is a far smaller than the official market, so the sort of money that can be applied will have a greater effect and depending on what sort of time frame those US$100 million plus are hitting the market the result could be a lower exchange rate, that is buyers from the market get more US dollars for their Zimbabwe dollars.
At the same time the Reserve Bank of Zimbabwe is running the auctions with less intervention. While the total amount of valid bids not allotted is low, less than 3 percent of the total, this is keeping bargain hunters out of the auctions and as result the auction rate is moving down about $4 a week, hitting $142,4237 this week.
From hints dropped by Finance and Economic Development Minister Mthuli Ncube the authorities think that the exchange rate has yet to find its true level, and the Ministry’s Permanent Secretary George Guvamatanga suggested that at some stage the rates could come close to converging. Technically both markets are supposed to be driven by supply and demand, although the Reserve Bank was applying some management to the auction market, although is now doing less, and those who manipulate and speculate in the black-market do distort the market forces.
And in a market environment that is even reasonably efficient although not a perfect market the joint pressures could see something closer to convergence soon, with the official rate falling and the black-market rate at least stable and possibly rising.
There will always be a premium on black market rates while there are controls of capital exports and while those with a criminal bent, like drug dealers, need foreign currency.
Along with the farmers there is another group that will be directly, or indirectly, pushing US dollars into the black market, the civil servants with their US$100 a month that they were being paid from March, so they have now all received their first monthly payment.
Most will be selling this money, at least towards the end of the following month, in the week or two before payday for many.
That again when you look at the large number of State employees comes to a fair amount of extra free funds entering the markets each month, and again it does not really matter whether the civil servants use the money to buy petrol and other US dollar payments or if the switch to selling their US dollars to dealers on the street.
Once again we will have a net reduction in demand for black-market US dollars and net addition to the supply of US dollars in that market.
Combined with the farmers this should be an interesting large enough block of cash to start making the black market a far more realistic market.
