I DO not know what we have to say or do to get those in authority here to understand that if they do nothing, Zimbabwe is headed for a political storm which could change everything or even sink the ship. I am regarded as a perpetual optimist, I am not really as I think quite rationally, but I always try to put forward a solution or way forward that I believe is in the national interest.
What am I talking about? Right now we have fuel queues like I have never seen before, we have electricity outages for 18 hours a day. Last week I learned of massive corruption at the Grain Marketing Board which has revealed that the maize stocks are simply not there and furthermore, what is there is unfit even for livestock consumption. A real panic is on to get maize here and fast. But at the same time, prices of everything are being set at an exchange rate of 8 or 12 to 1 or even more. The rapid rise in prices had halted temporally following the rash of measures adopted 10 days ago with SI 142, but there is every sign that we are going to see it decline still further — the difference being that the so called interbank rate is now leading rather than the informal exchange rate markets.
Add to that shortages of key foods such as bread and cooking oil, both essentials in our national diets, and you have the making of a perfect political storm. Choose your basis for a decent riot and will a dispirited police and army be able to handle the subsequent events, I very much doubt it, that is why the army was used both in 2018 and 2019, in January, with disastrous results.
In the past two weeks, I have been saying to anyone who will care to listen that action across a broad front is needed to get markets operating properly and to get prices down to a more reasonable level and to fix the shortages. Sounds like a tall order, but it’s not.
The key is the interbank market for foreign exchange. Under pressure from the Minister of Finance, the Governor of the Reserve Bank of Zimbabwe (RBZ) has announced the formation of a Monetary Policy Committee and an interbank market operating on a willing-seller, willing-buyer basis. The former was announced as far back as December 2018, the latter in February this year — seven and five months ago. Nothing has been done to bring them into existence. I said at a meeting last week, attended by the Reserve Bank of Zimbabwe that no such market exists. The RBZ responded that the banks published an exchange rate every day — there must be a market. But there is nothing of the sort. No electronic platform and no open, transparent, physical market where buyers and sellers of foreign exchange can operate and clear demand on a daily basis. There is no formal market. Banks continue to trade on their own with what resources they individually control.
Let me repeat what I have been saying for months — we are on the right track policy wise, our macro-economic fundamentals are fine, we have a fiscal surplus and are holding down government expenditure and we now have a foreign exchange surplus. So why the crisis?
There should be no crisis, our foreign exchange earnings come from three main sources — exports of goods and services, income from tourism and what we call “invisibles” or net transfers and remittances from the diaspora. Last year, exports were US$4,3 billion, the other income about US$1,6 and the diaspora — who knows? What I know is that we have five million or more adult Zimbabweans living and working outside the country; three million in South Africa, the rest overseas.
Money transfer agencies have millions of Zimbabwean clients, and none report transfers on average below US$50 per month. US$50 x 5 million is US$3 billion per annum. Mukuru reported average transfers in 2018 of US$78 per transfer. In my view diaspora remittances are not less than US$3 billion. Look around you — queues of people collecting money, house building worth billions every year — three million tonnes of cement, school fees, groceries and chema payments. If this is the case, we have about US$9 billion in forex available to meet our needs for imports and other things. Our imports have declined nearly 25% because of low domestic demand at crazy prices.
These inflows of foreign currency are being managed by three institutional sectors — the banks, the Reserve Bank and the open market money traders. In each sector, they are motivated, not by determining the real market price on a willing seller/buyer basis, but by getting the highest return for the dollar — the banks are chasing their tails driven by their clients and the money changers make money on every turn and their clients want top dollar. So the exchange rate runs.
The major impact of the de-dollarisation and SI 142 was to bring the foreign exchange in the informal market more into the banks and this is what has reduced the exchange rate in the past 10 days from 15 to 1 to 8 to 12 to 1.
But the Reserve Bank remains at the centre of this brewing storm in its inexplicable reluctance to implement stated policy. Over the past two weeks they were supposed to have put half their retentions from exports onto the interbank market for trading purposes. That is nearly US$1,5 billion a year or US$6 million a day — a considerable sum. Banks report no such activity.
I can understand why, because we continue to see the Reserve Bank doing crazy things — they are issuing letters of credit to support purchases of fuel and electricity and raw materials for the food industry — all good you say. But if we are selling fuel at half the landed cost of the stuff, maize at 30% of its real value, wheat at the same rate and electricity at US 2 cents a KwH — we are going broke rapidly. When we give government US$21 million to buy luxury cars from Croco Motors at 1 to 1, we have bought that foreign exchange at 8 or 9 to one — the entire loss of US$150 million goes into the RBZ overdraft — the most inflationary form of borrowing that is available.
Despite denials, I see new bond notes in the market — still smelling of printer’s ink. What are they doing with that? They are buying gold and then using the gold to settle the banks external liabilities. It is months since we saw any significant statistics on anything from the bank. What are they hiding? The truth is the RBZ is totally out of control.
Why is this important? What has it got to do with the perfect storm? Everything. If we had an interbank market — say a daily gathering of traders of foreign exchange in the basement of the RBZ building in Harare; if all foreign exchange from all sources was placed on that table every morning at, say, 10am; if all banks came to the market with their client’s needs — a price would emerge from that table which would reflect real supply and demand. If I am right about the supply and demand of hard currency in Zimbabwe, the rate would come down immediately. My colleagues on the Economists Round Table, a local think tank, agree; it would fall below 4 to 1. We need to maintain a relatively weak local currency and if that happened we would recommend the Reserve Bank buys foreign exchange to keep the rate at, say, 4 to 1.
This would immediately send a clear signal to all other markets — prices would fall, inflation would be down to marginal levels in months, income earnings of all Zimbabweans would strengthen and we could bring all imported commodities, including electricity and fuel into free supply. We would then have to sort out the Reserve Bank and its liabilities, but at least it will no longer be able to poison the water that we all have to drink.
As for all imports — let’s use our powerful and effective private sector to sort out and undertake imports and distribution. Take the corrupt State-controlled institutions out of the equation.
Use the interbank market as the single source of hard currency for all users and we can all get back to work instead of sleeping in fuel queues or waiting for power for our machines.
Eddie Cross is an economist. This article was first published on his blog eddiecross.africanherd.com