eBusiness Weekly
It looks as though the interventions by the monetary authorities, the Reserve Bank of Zimbabwe and its monetary policy committee, and the fiscal authorities, the Finance and Economic Development Ministry, are starting to work in the taming of the black market for foreign currency.
Exchange rates in this unregulated, manipulated and somewhat odd market are stabilising and in some cases are falling, at both the buy level and at the sell level as not even the most hardened manipulator can defy the new market forces set up by the two authorities to diminish demand.
The Reserve Bank and the Treasury first made a number of attempts to fight the market purely by regulation. These must have limited the damage, but largely failed to bring the market under control and the black market exchange rate kept reducing the value of the Zimbabwe dollar.
Then the two added market forces in a more intelligent attack, figuring out the weak point was the supply of Zimbabwe dollars into the top end of the market, where the demand for US dollars being fed into the bottom end of the pyramid the dealers had built was created.
Some of the earlier interventions, limiting the use of Ecocash and other mobile payment systems, limiting the amount that could be transferred on Zipit, and the like had been circumvented by the dealer network. This does not mean that they were useless. If nothing else they probably prevented some sort of meltdown in mobile money with all the unbacked suspense accounts and finally allowed the Financial Intelligence Unit to see where the money was flowing, how it was flowing and who was providing it and who was getting it.
That data gave them, along with the data they already had from transactions within the RTGS system involving movement between formal bank accounts, a good idea of where the serious inflows of local currency were coming from and just who was providing that money. Some listening to rumour and some far better pure intelligence gave them the reasons for the movements.
Some of these were pure speculation, the worst of the damage. These were those moving in and out of the black market at both ends arbitraging between official and black market rates and arbitraging over time, thus making them the primary beneficiaries of inflation, the higher the better for this group and preferably accelerating. Inflation does tend to move money from the poor to the rich and this temporal arbitrage was a principle method these reverse Robin Hoods were doing this.
While they were doing this they were creating Zimbabwe dollars, adding to the money supply. The Government had turned off its own taps, but the private sector was still adding to supply and the speculators were the most serious culprits. Each churn of their holdings at either end of the black market produced Zimbabwe dollars almost out of nothing without adding to the supply of US dollars.
In many ways they were creating the inflation that they profited from.
A second group of major buyers in the black market were holders of large sums of local currency who while avoiding playing the market, although there were temptations that some must have succumbed to, wanted to preserve as far as possible the value of their cash holdings especially as monthly inflation rose.
They took a knock when they bought US dollars since the value of those foreign dollars immediately fell significantly thanks to the huge margins, up to 40 percent then, between what they paid for their US dollars and what they could sell them back for. Inflation moderated that knock, since the margin was on the rates of the day of sale, but still it showed the sort of risk that people were willing to take.
The third group were simply those who needed to spend US dollars but only had local currency. These were major importers, minor importers, people needing petrol and those faced by landlords demanding hard currency from lodgers, car dealers and car parts traders, and far too large a section of the health sector.
The attack on speculators was broadband, but the main thrust was making it hard to make money. The reforms in the ZSE helped a bit, but the surge in interest rates to 200 percent plus bank margin was a serious attack. The heavy effort to get banks to be more responsible over lending was perhaps useful, but considering that this relied on the bankers and their customers, who were likely to be lying, was not going by itself to solve the problem.
The attack on those building up large holdings of local currency took two roads. First the data showed a significant number of the really big buyers were Government contractors who received payment in blocks, not by the day. The size of this group is almost certainly exaggerated in rumour, especially by those who like a single source of black market inflation, but was significant.
So the Treasury moved to a 50-50 payment in foreign and local currency and spread these payments out a bit. That reduced their demand for foreign currency a lot, and stopped financial officers having such severe heart attacks when they saw their local currency bank balances and gazed at prevailing inflation rate.
The second was the introduction of the one ounce gold coins. We are not getting updates on the take-up but we know the coins were successful and that in their first week they took $1 billion in local currency out of circulation and out of bank accounts, only noticeable in M3 money statistics and not in the reserve money statistics released regularly.
At the same time the Financial Intelligence Unit, with Treasury backing, started breathing heavily on those refusing to take local currency for their products or services, and it has been the law for some time that all currency must be accepted.
They were still playing the fool by pricing at black market rates, although legally allowed the interbank rate plus 10 percent, but still it dried up some demand for US dollars or more likely transferred it from the many to the few.
By most accounts the combined effects of all these measures has stabilised the black market sell rate at around $800 to $850 for a US dollar. This is still high but has not been getting worse for three weeks and more “special offers” are available.
More interestingly has been the effect on the buy rate at the other end of the market. At the beginning of the latest developments the dealer network reduced its margin to around 30 percent to maintain a premium on the interbank rate at the bottom end of the black market so people with foreign currency would continue selling on the black market.
But the interbank rate has not been manipulated so is rising slowly but steadily and that was reducing the percentage premium offered by black market dealers. So the next effect of the sell-rate stability, plus the rising interbank rate, has been some reduction in some areas of the buy rate. Cutting the margins allowed some maintenance of the buy rate but in recent days some dealers have been shaving this as well. But in any case they could not longer maintain their premium percentage.
We have now reached the interesting stage that in many cases the cash-to-cash rate offered on the black market is below the interbank rate plus 10 percent offered by shops, so the only buyers of Zimbabwe banknotes are those wanting bus fares, not those wanting to shop anonymously.
Even the premium on the till rate to mobile money rate has fallen to below 20 percent depending on dealer and that will result in more people spending the money they get from their foreign relatives directly.
The black market is not in danger of immediate collapse but the cut in the margins and the premium percentage is piling on the pressure and the market is likely to get smaller as a result. It will never disappear, as the banknote dealers at bus terminuses show the usefulness of some functions, but will become less of a market that seemed to rule to one that helps grease wheels and then finally becomes just a convenience store.
This shows the effectiveness of using market forces such as high interest rates, alternative stores of value and stopping or at least limiting the worst of the speculative deals.
We saw monthly inflation fall, to a totally undesirable 25 percent, last month and the August figures will be awaited with a lot of expectation. They should fall again, probably not dramatically as stocks are still in the system, but each percentage point is useful and helps to reduce the pressures.
