eBusiness Weekly
Banks are reporting increasing totals of foreign currency deposits, and this means that while Zimbabwe’s foreign currency reserves are continuing to grow the bulk of those reserves are in private hands, rather than being managed by the Reserve Bank of Zimbabwe.
Zimbabwe has a net currency account surplus, meaning that inflows of foreign currency are greater than outflows. This is made more complex by the fact that there is a negative balance of trade, meaning we import more than we export although exports are rising. The gap is filled, with surpluses, from other inflows with the largest being diaspora remittances, although foreign direct investment is growing.
If we had a single currency pool and single market we would be in the good seats with the current account surplus, and that surplus is the reason why we are in any case in good shape. But there is no single pool, and that is possibly our largest single problem. We in fact have three main pools: the retained export earnings held in private hands, the surrendered export earnings forming the pool of the Reserve Bank, and the free funds, largely fed by the diaspora remittances although dispersed quite quickly since the receivers quickly spend their money.
This dispersal is important because it changes the trade equations significantly. Our largest single category of imports is, by a fair margin, petroleum products, being about 50 percent higher than the number two, machinery and capital equipment. Up to date figures are not easy to obtain and fluctuations in the global petroleum markets do not make calculations easy, but a reasonable estimate is something in the region of US$1,5 billion a year.
While a good slice of those petroleum imports are paid for by net exporters using some of their retained export earnings, and another slice is paid for by Government from its own foreign currency warnings, mainly taxes and royalties, the majority of petroleum imports come from free funds, that is originally from diaspora remittances although these might pass through a lot of hands before being handed over to a service station and eventually to an oil company.
Foreign direct investment can arrive as transfers of cash, and some must, but a lot comes in the form of machinery and equipment needed to set up the mines, blast furnaces and factories of the direct investor. Investors are putting in money, but spend while the books show an inflow of investment cash and an outflow of foreign currency to buy the equipment, in actual fact the inflow is containers and large items of machinery on the back of flat-bed trucks.
So from our largest two categories of imports, petroleum products and machinery, a substantial fraction, and with the petroleum an easy majority, are not paid for from import earnings but from the other inflows. This means, once we factor out imports that are paid for, directly or indirectly, from non-trade inflows rather than our exports, we are running a surplus on our trade account.
For a start that explains why the petroleum industry is treated as a sacred cow that is allowed to charge and collect payments in foreign currency. Those petroleum imports break down walls between those separate pools of foreign currency and ensure a decent fraction of the non-trade inflows end up on the trade account.
While those huge petroleum imports have to paid for in foreign currency, Zimbabwe’s petroleum industry is not a forex monolith. A significant if moderate fraction of fuel is sold for local currency. Some because the imports are paid for out of auction allotments, which are small, some because of Government intervention, again not a major source. But the main source of local currency fuel must be the need of those in the industry to covert some of their margins into local currency to pay staff costs, rates, company taxes these days, and other local currency payments.
In effect they are converting through local currency sales using a better exchange rate, although still a legal rate, than the bid rate offered by banks. But the main buyers of local currency fuel are established customers in the net-importer business sector, which keeps the wheels turning.
It works, so no one is going to mess with it until we are well advanced on creating the single currency pool, something that is not going to happen for some years yet since it requires proven stability in exchange rates.
A second path for the non-trade foreign currency inflows to move into the trade accounts is a result of the drastic but effective assault on the black market.
This assault was effective at long last because it was based on market forces. For a start an official rate was generated outside Reserve Bank and Government diktat by the interbank market, so it is a real rate not something generated by someone writing down a number. Then the speculators were removed from fouling up the currency markets by making borrowing too expensive to play games profitably and then by removing a large chunk of surplus local currency liquidity, generated by the private sector this time since the Government is sticking with fiscal discipline, by the gold coins.
The result of that effective assault has been to reduce the premiums on the black market to less than 20 percent, and once we add in the small 10 percent premium on mid-market interbank rates, about 13 percent on the bid rate, and the transaction taxes and fees those with free funds are able to pay retailers direct rather than mess around with a dubious dealer.
Those accepting the direct payments of free funds obviously spend them, and probably very quickly since almost all are net importers, but it does mean a decent flow of non-trade inflows of currency now move into the trade statistics without going through speculator hands in the black market, reducing costs and making the wall between the free-funds pool and the import pool a lot more porous.
For some, and Simbisa for example boasts about this, the wall is so porous that they manage to fund all foreign currency needs from what they collect from the free funds pool rather than use the banking system and auctions, so it is worthwhile to continue pushing with the present policies.
But we still remain with what amounts to an imbalance between the retained earnings trade pool and the surrendered earnings trade pool, and that is where those rising foreign currency deposits in the banking system come from.
Most exporters are not net exporters. They sell off the required percentage and then spend what they retain on importing what they need. Some are net exporters; after they import directly what they need and pay dividends if they have foreign owners, and after they pay royalties and other foreign currency taxes, they still have a pile of US dollars which they must keep in nostro accounts.
And they are, even with US inflation now hitting 8 percent. Some is being removed into the general pool with the Government insisting on income and company tax in local currency, so they have to sell to pay these. And this month should start seeing the first sales of currency that has been unused for six months since it was earned in April. So the wall between the two trade pools is developing doors, even if these are just cat flaps.
At the same time the demand for currency for imports is falling. Oil expressers were a huge buyer on the auctions, but farmers are now growing more soya, sunflower and cotton so local supplies are building up, with self-sufficiency now an attainable goal. Steel is still big, but likely to fall from the middle of next year as Dinson blast furnaces are switched on. Pharmaceuticals are still very big, but efforts to restore and then grow local production are in progress. Grain imports are now zero.
These moves to reduce imports of primary products, which should outside petroleum be close to zero considering Zimbabwe’s mineral and agricultural potential, is probably a major reason for the low number of auction bids, coupled with the change made in many consumer sectors to rake in free funds at the till.
But that still leaves those foreign currency reserves in the nostro accounts. Zimbabwe, like every country, needs foreign currency reserves, especially as our largest export is agricultural, in the form of tobacco, which has seasons. Merchants spread out the initial processing and exports, but still.
Some form of inducement is needed to convert what amounts to US dollars held in a secure safe, a bank account, into the sort of reserves that can be tapped, grown and managed for all is needed. Forcing a quarter sale of new earning that are unused after six months will help, although perhaps those made to sell will just buy gold coins, which will probably work out better than US dollars with current inflation, but is still not converting the reserves to productive use.
Changing the percentages on retained earnings is largely out because most exporters need their cash, not being net exporters over the medium term at least. It looks like we need some sort of investment deal. This worked to a degree in the closed UDI economy when foreign investors could not export profits and so spent them on industrial production, but in our more open economy we need market forces to do this.
We are slowly drilling holes in the walls between our currency pools, We must now look at what new markets, real markets, we need to continue the process as well as advancing the recent markets further.
