The black market in foreign currency. What causes it, what drives it and why does the exchange rate it generates keep declining?
The Reserve Bank of Zimbabwe and the Ministry of Finance and Economic Development have come up with a long line of answers over the past couple of years.
We have had Ecocash blamed, that is people with large holdings of local currency putting these into Ecocash business wallets, spreading it through a large network of dealers and buying up the US dollar banknotes available, mainly those coming out of money transfer agencies from diaspora remittances. These were hacked right back and there was not that much effect.
We have had the Zimbabwe Stock Exchange blamed, people using the fungible stocks quoted on multiple exchanges. That was stopped. And it did not have a lot of effect.
We have had businesses blamed, traders taking in US dollars using black-market exchange rates and selling them off while, in all likelihood, using the auctions to resupply for their imports. This is a simple piece of arbitraging using the black market to create the pool of local currency to buy the auction currency. That loophole has been largely plugged, and to little effect.
Most recently we have the monetary authorities noticing that money supply in local currency was being created by banks making large unproductive loans, although at interest rates that were in real terms negative or close to negative, and the borrowers were then arbitraging. This created an additional pressure from the borrowers to retain high levels of inflation, to keep their interest rates negative, and to be able to make money simply by holding their foreign currency for a couple of months to get round that rather appalling 35 to 40 percent margin in the black market.
A similar although more legal ploy was being used on the stock exchange, using borrowed money again, to create a bubble that would produce a profit over a short period.
Efforts were made two months ago and more recently to make this temporal arbitraging less profitable and less likely by ensuring that the stock exchange was far more transparent at the dealing level, by shoving the interest rates right up into what could be a real rate, and by making banks take more care over what they lent and to who and for what purposes.
The jury is still out on those moves and while there are indications that they might have slowed the rate of decline in black market rates they certainly have not stopped that decline, yet.
Now Reserve Bank Governor Dr John Mangudya is telling a Parliamentary committee that one major problem was local companies supplying the Government, or contracted to Government, being paid in local currency and rushing to the convert this on the black market as fast as possible. The attack here is to pay half the charges in foreign currency and spread the local payments. Again it is too early to see what effect this change has.
Fairly obviously it is not a case of a single cause, but rather all of the above. But the main two common factors in all these “reasons”, and most of them of ways of moving cash rather than a cause, is that more people want access to the diaspora remittances than there are remittances and that a lot of people reckon they can make money playing the black market.
But each intervention by the authorities seems to have more in common with plugging a hole in a dyke. Those wanting currency and those wanting to profit from exchange rate declines and inflation will drill a new hole, that then needs to be plugged.
The most curious factor in the exchange rate volatility seen in Zimbabwe is that there should not be volatility when looking at the gross levels. Our current account is in surplus, that is inflows of foreign currency are greater than outflows. So where is the problem?
We need to move down a level into market structures. We do not have a single currency market. We have three main ones, as we have said before. Around 40 percent of our export earnings go into the auctions for the productive imports. Because exports are topped up with remittances that is well below 40 percent of our foreign currency and there is general agreement it is not a high enough percentage.
The diaspora remittances just go into the black market, and will continue to do so until the buy rate on the streets falls below the buy rate in the banks. This is not impossible, even with a black market premium, since banks run a margin of just over 8 percent between buy and ask rates while the black market runs something closer to 40 percent.
But the pressures in the system explain why that black market premium has to be higher at the buy rates than the bank rates to attract money into the black market. That in turn generates those incredible sell rates that everyone loves quoting, and using. We suffer both from a premium and from a huge margin. But the premium keeps the black market fuelled. The margin makes it a serious driver of inflation.
The third pool of foreign currency is the 60 percent of export earnings retained by exporters, a scheme pushed very hard by Gideon Gono in the days he was inflating our old currency into waste paper. The obvious problem is that while there are good reasons for this retention scheme, to encourage businesses to push exports, it creates another major distortion and entrenches inefficiencies.
For a start some net exporters do not have to be as careful as they could be when spending, the inefficiency angle. But the bigger distortion is that the exporters, as a combined group, do not need 60 percent. Some, probably a lot, of exporters need at least that but others have managed to build between them a stockpile of US$2,3 billion in nostro holdings in less than four years, and there is the practical hole in our currency markets.
The Reserve Bank, through its monetary policy committee is making a stab at a balance by changing the rules so that 25 percent of retained export earnings unused after 120 days must be sold in official markets. That only takes effect in November when you count the days from the announcement to the action.
This should help, although it also increases pressure on some exporters to spend more or even to play the multiple rates by setting up import middleman subsidiaries with high mark ups, probably equal to the black market premium in a “coincidence”.
The maverick economist Eddie Cross has seen this fundamental problem of three independent currency pools and in his blogs pushes hard for a dramatic big bang of simply combining them into a single market and converting all inflows into local currency as they arrive, having the banks setting the exchange rate without interference. Exporters would then buy currency for their imports as they needed them, rather than running their own accounts and diaspora remittances would enter the single pool.
With positive current account all would work. He acknowledges that fiscal discipline and a positive balance of payments are the two requirements, hence his soapbox. Maybe it would, but the conversion from one system to another is the elephant in the fridge.
He is right in one respect. That is how, if we had no history, we should have done the system, right back in the 1990s if we had the determination then for fiscal discipline and a positive current account. We had neither and so we have something different now. Admittedly Ian Smith did this, but he did not have to worry about acceptability and public opinion. He had near dictatorial power and plenty of jail cells, as well as a tiny economy compared to what we have now. So he could convert.
The Second Republic does not have that option and has now made it clear that accelerated dedollarisation is not an option, at least until the end of 2025. However, bad the present system is there is too much history for any major group of businesses or voters to sanction or accept such a switch.
But the goal of integrating the pools must remain the long-term objective and so we are back to what is being done, a plethora of small changes, some plugging the holes in the dyke, some more fundamental.
So we have decisions to use diaspora remittances to supply the fuel industry by cutting it loose, to dry up the demand for black market currency, to make it a lot harder to find the pools of local currency to enter that market as a buyer, to make it harder to move local money you already have into that market, and more positively and fundamentally to find a better balance between the pool of currency for productive importers and the pool managed by net exporters.
This last secondary objective is the most crucial. We have seen it actually work when the auctions started. That switch to auctions did stabilise currency rates for a while but also grew the economy so demand at the auctions rose while ever larger sums, from growing exports, were locked away. The process of one brick at a time should work, and at least it will allow the changeover without a dramatic collapse. And meanwhile each small intervention has to be right.