One question being asked about this week’s foreign currency auction, which saw bidders seeking a record US$60,35 million, is where the Z$100 billion plus came from that these bidders had to use to back their bids, for even in these days that sum is significant fraction of the local currency money supply.
It gets even more interesting when we look at the main auction, where the 467 accepted bids, those that met all the requirements of the Reserve Bank of Zimbabwe, were bidding for US$54,24 million. Considering that the 125 successful bidders bid an average of Z$1 888 each, and anyone who bid less than Z$1 801 for a single US dollar missed out, we can safely assume the average bid must have been around Z$1 600.
That would mean those 467 acceptable bidders had at least Z$87 billion in total in their bank accounts, or an average of Z$187 million each. Some, obviously, of the successful 125 must have had a lot more. We are talking about very large sums here. The SME auction has similar figures although a smaller proportion of successful bidders and the highest bid at Z$2 100 instead of the Z$2 000 of the main auction, a combination that suggests a wider spread of bids.
Trying to figure out the amount of local currency in circulation is a near impossible task because of the way statistics are compiled. According to the Reserve Bank latest charts the total M1 money supply at the end of March was a little over Z$2,8 trillion. But a large majority of that would have been in US dollars converted at the interbank rate of the day to Zimbabwe dollars.
This factoring in of the huge foreign currency sums held in the nostro accounts of net exporters tends to cause major distortions in how statistics can be interpreted, as well as distortions in the economy as a whole. The Reserve Bank in April suggested that around 70 percent of the reserve money supply, the M0 measure, was in foreign currency.
Assuming the same proportion in M1, which combines the tiny amount of actual cash in circulation with the huge deposits in bank call accounts, we would have around US$2,1 billion in foreign currency accounts at the end of March when the interbank rate of Z$929:US$1. That sum is probably on the low side but at least gives an idea of the sort of dominance that exists and suggests that local currency at that stage was well under Z$900 billion.
Again this is probably on the high side. The largest block of reserve money is the 10 percent of deposits banks must keep with the Reserve Bank, and in mid-April the local currency reserve money was around $74 billion, suggesting that the total M1 local currency was around Z$740 billion, or at least in that ballpark. The total sum of local currency notes in circulation can for many practical purposes be ignored. The continuing fall in value of the local currency means that total notes in circulation are a minute fraction of the total reserve currency and the M1 and so have negligible effect on money supply.
For all practical purposes Zimbabweans do not use local bank notes for anything except bus fares, and the difficulty of getting hold of them makes it impractical for most people to use them for anything else. Even when an ATM has some notes loaded, the queues are trivial. Most of us accept the 2 percent transaction tax, effectively making consumer taxes, VAT plus the transaction tax, 17 percent.
The pair of calculations thus suggest that seven weeks ago the total local currency M1 money supply was somewhere between Z$750 billion and Z$900 billion.
Previous monetary policy statements, when they bring up money supply, have tended to fix increases to the continual revaluation of the foreign currency component, with only modest increases in the local currency component.
There are three major potential sources of supply increases for local currency money supply: the Government, the Reserve Bank and the private banking sector.
The Government continually stresses that it is not responsible with fiscal discipline at very high levels and almost zero borrowing, and certainly no Reserve Bank overdraft and even treasury bills outstanding continually falling. In any case Government borrowing has to be approved by Parliament these days, so it is published.
The private banking sector was a major contributor to growth of local currency supply. High loan figures and the high interest rates create money. Although the percentage of total deposits that are lent out is low, there is almost no lending of the foreign currency deposits, so the percentage of local currency deposits lent out is actually very high, another factor hidden by the unified statistics for a dual-currency economy.
However, since interest rates were shoved right up in the middle of last year, there has been a very sharp reduction in new local currency loans, although the falling interest rates, while still high, make this more possible and could have provided some of the Z$100 billion bet at the last auction. Any bidder seeking a bargain might have calculated that a one or two month loan could be wiped out by a cheap allocation of foreign currency for goods to be sold at a much higher figure fairly soon, and adding a 10 percent or 15 percent interest charge for such a short term loan would still make that profitable. The Z$1 801 minimum allotted big probably wiped out that profit.
The Reserve Bank is less open with statistics. It these days buys around a quarter of the foreign currency earned by gold and other miners in the formal sectors, the main source of exports, and 15 percent of the tobacco, cotton and manufactured exports. There is the question of where it gets the local currency to buy that foreign currency.
The Reserve Bank has stated, several times, that it finances the auctions from these surrendered portions of exports. If everything was stable the bank would get the local currency it needed from what it received from successful bidders. When the value of local currency falls fast there could be gap. Some of that gap, perhaps all, could be filled by the rapid fall in the percentage of export earnings exporters have to surrender, and a bit more could come from the sale of gold coins and tokens. But in the absence of data this is difficult to judge.
However the Government has now taken over the foreign debt repayments and already pays the foreign currency component of what farmers earn, except the tobacco farmers who are paid their foreign currency from the financing of the tobacco industry through offshore merchant banking. The Government earns its own foreign currency. Customs duties are in foreign currency and with 70 percent of transactions in US dollars then 70 percent of VAT should be in US dollars.
An extra factor, that some economists like to talk about, is the accelerator effect of Government spending. This is a technical description of the lumpy payment outlays of Government, that while it has the money from taxes to pay without creating money from nothing, it sometimes makes single large payments to a contractor, causing a single bulge in money in circulation from a single payment or small groups of payments.
Here the evidence is largely anecdotal, that a major contractor will rush out as soon as the Government payment arrives in the company bank account and buy US dollars on the black market.
This may or may not be true, but with modest co-operation between the Treasury and Reserve Bank it could be checked. The Treasury would simply tell the Reserve Bank when payments were being made and the Financial Intelligence Unit could then watch the affected bank accounts and track the cash. If it was being used improperly it would be easy to see vague payments made to strange people.
In fact, along with more splitting of data between foreign currency and local currency statistics, the need for better co-operation between the fiscal and monetary authorities is a major area for improvement. While theory suggests they should be largely independent, they should certainly be telling each other what they are doing and how, and it would be a positive advantage if the high-powered economists on each side of Sam Nujoma Street were using the same hymn book, although it is probably a bit much to expect them to be singing from the same hymn sheet.
It is common around the world for the two authorities to be suspicious of each other, but they should at least have the same overall goals, and that requires at least contact and informal debate and, from rumour and leaks, it appears we have swung too far from one extreme to another in our effects to fix the mess that caused the hyperinflation meltdown.