eBusiness Weekly
Zfn Capital
Sir Winston Churchill, in the aftermath of World War II, had no shortage of challenges to transition to peace and rebuild.
The great leader, in his endeavour to make the world a better place, unlikely to descend again into global conflagration was involved in the formation of the United Nations and famously quibbled: “Never let a good crisis go to waste”. Many analysts and commentators have asserted hysterically that the country has been in crisis continuously since the end of the Government of National Unity (GNU) in July 2013.
These claims, however, do not comport well with the data. Our nation has in fact faired relatively well in spite of the Covid-19 pandemic with improved agricultural output and the consumer facing sector reporting healthy recovery from the lows of 2019.
There has also been notable progress in infrastructure development with significant road works having been commissioned.
There does seem to be consensus that the current situation with the local currency is a crisis. The Confederation of Zimbabwe Industries (CZI) recently released a statement in which it indicated that there are companies that have been allocated foreign currency via the auction system that are yet to receive proof of payment up to 15 weeks later.
This is clearly not an administration issue as it speaks to a fundamentally more severe problem: the allocation of foreign currency that is not there. The auction itself, to put it politely, is not an efficient price discovery platform by any stretch of the imagination and has not been since its inception. The exchange rate has been a de facto managed rate, with the central bank dictating the rate and allocation on a weekly basis.
The gap between the official rate and the parallel market rate has been growing with the current black-market premium recently reaching 100 percent.
This development notwithstanding, the economy could hardly be described as on the brink of coming apart at the seams. Also, Zimbabweans are acclimatised to living and working in a hyper-inflationary environment where the Zim dollar (ZW$) is losing value on an ongoing basis, sometimes quite dramatically.
Clearly, the movement in the parallel exchange rate since the beginning of September, has caught the attention of the Government of Zimbabwe (GoZ), which has made no secret of its displeasure at the assault on the local currency.
GoZ is sold on the narrative that the debasement of the beloved ZW$ is primarily the work of economic saboteurs and malicious illegal currency traders bent on scuttling the gains of the Second Republic. Instead of debunking this vacuous narrative, I think it’s useful to explore what would happen if GoZ got all its wishes vis-à-vis the parallel market i.e. it just went away and all currency transactions in our country happened at the official rate. Would Zimbabwe be inundated with foreign direct investment (FDI)? Would Zimbabweans holding US$ notes under their pillows rush to the formal financial services institutions and offload their hard currency at the official rate? Would exporters aggressively expand their operations and production so that they supply the auction with more US$? Would our import bill shrink relative to our exports leading to a current account surplus?
Arrests are certainly going to discourage trading in the parallel market and pricing based on rates other than the official exchange rate. If the answers to the questions asked in the preceding paragraph are no, then what is life likely to be like in a Zimbabwe without a parallel market? Allow me to make a few predictions. Profit is reward for taking risk and no one is in business to lose money. It is illegal to refuse payment for goods and services in ZW$ and at official rate it will always be cheaper to pay in ZW$ than in US$. Therefore, in very short order, across the spectrum of law-abiding tax-paying formal businesses, US$ sales and receipts will go POOF! and disappear. The import requirements that were being met by these US$ sales will now have to be satiated by the auction, which is already failing to meet current demand. Therefore, demand for the imported goods and services that was funded by these US$ cash receipts will either be ameliorated by substantial price hikes or consumers will have to contend with shortages and queues.
In either case, at a marco-economic level, volumes of goods and services with a substantial import component will contract and with it aggregate demand, tax receipts, fees and commissions for financial services, resulting in a recession that renders most Zimbabweans poorer.
How would exporters fair in such a scenario? The assumption here is that while parallel market trading ceases completely, GoZ would continue its profligate printing ways which are inherently inflationary.
Exporters would therefore see their expenses track inflation upwards while the auction that is not an auction ensures that their revenues are tracking downwards in real terms.
Eventually, the cash costs of their exports would exceed the revenue and exporters would go bust and shut down their operations – exacerbating the net currency deficit on the auction.
We watched this movie before when many gold mining houses were driven out of business by producer prices set by the central bank that were not viable in 2007 and 2008.
Would tourists visit Zimbabwe and effectively pay twice for everything compared to Cape Town and other regional destinations because GoZ has determined a value for the ZW$ that is untethered from reality? And foreign investors – do fund managers sitting in London, Johannesburg or New York believe the fair value of the ZW$? Are they determined to lose money on entry into Zimbabwe?
To their credit, the Second Republic ran a successful experiment with fuel. For the longest time it was priced using “voodoo” economics and the nation suffered endless shortages and queues.
Eventually, there was consensus amongst the powers that be that everyone would be better served if all things fuel were denominated in US$. No more queues and shortages. No more arbitrage.
The state would be well advised to run more experiments of this nature for other imports. For example, why should GoZ have an interest in the effective exchange rate used for luxury goods if they are collecting all the requisite taxes? Technically, luxuries are not priority items for importation.
Therefore, in an environment in which there is no parallel market, luxury goods would not be available legally anywhere within the jurisdiction. How about that, a country where luxuries are illegal? No matter how hard you work and successful your career or business, no Mercedes-Benzes, seafood, or iPhones? The absurdity of the idea that all foreign currency should be allocated by GoZ at a price determined by bureaucrats insulated from market forces becomes clear when we run the thought experiment of a Zim that prints money without a parallel market nor free-floating exchange rate.
To the extent that what is happening with currency today can be characterised as a crisis, it should be an opportunity for the central bank and treasury to do things differently.
It’s the state’s prerogative to have exchange control and a managed exchange rate in spite of what free market capitalists like me might think. Perhaps they can meet us half-way and have a legitimate interbank rate for non-essential imports with a genuine price discovery system that lets willing sellers interact with willing buyers? Why should government subsidise forex purchases for people going on holiday or importing perfume when Parirenyatwa Hospital does not have all the essential drugs and medical consumables it needs? What we know for sure is that arrests are not going to arrest the problem. .
