Editorial Comment: Forex manipulators driving disruption

The Sunday Mail

Hoarding of foreign currency by net exporters, rent seeking, a proliferation of middlemen, and manipulations by cartels and monopolies are threatening to derail the monetary policy reforms that were intended to move Zimbabwe forward into a normal economy and are a prime force driving unnecessary price rises

These undesirable trends are compounded by the well-known economic fact that high inflation concentrates wealth into fewer and fewer hands as money moves from the poor and middle classes to the rich and so gives incentives to the ever smaller group who can manipulate the economy to do so.

The multiple problems now call for more action by the monetary and fiscal authorities. Blunt attacks on the final results, such as price controls or arresting street currency vendors, will not solve the underlying problems. The authorities need to continue tackling the  sources, as they have been doing since the start of the Second Republic. This will probably mean stricter enforcement of existing policies, heavier monitoring of how money in nostro accounts is actually spent, and perhaps an acceleration of monetary and fiscal reforms already moving Zimbabwe to its own currency.

Most foreign currency entering Zimbabwe comes from export earnings; free funds are largely remittances from the diaspora and hardly dominate the currency markets. Export earnings are split fairly evenly between the Reserve Bank of Zimbabwe and the exporters’ own nostro accounts although as part of the reform process the percentage bought by the Reserve Bank is declining.

When the interbank currency market was introduced it was designed to create a market for willing sellers of retained export earnings and willing buyers, who had to be businesses needing to import raw materials and some finished goods.

The diminishing share of export earnings bought by the Reserve Bank is earmarked for essential imports, such as fuel, and for the Government’s own forex needs.

The initial policy announced in February gave exporters 30 days from receipt of retained foreign earnings to use that money in their own operations or sell it on the interbank market. After 30 days the Reserve Bank would buy whatever was left. Many businesses submitted that the 30 days was too short as they needed to accumulate funds for some purposes or hold funds until they had a seasonal surge in demand  that would trigger a surge in import requirements. The Reserve Bank indicated it would be flexible and so far as we know has yet to enforce the 30-day ruling on any net exporter.

Those running the interbank market report it has been starved of willing sellers, implying that many net exporters are holding onto their retained earnings. So one step would be to enforce the 30-day rule, or negotiate another time limit that can be enforced.

A second problem is the indirect leak of retained export earnings into the parallel market, a polite name for the black market, which seems to be remarkably well-organised. There is nothing so crude as net exporters taking out their cash in the nostro account and selling this on the street. Rather it involves the net exporters “diversifying” and importing stuff that they will never use and selling this to others at a price fixed by that organised street rate. Sometimes they are commissioned by a middleman and sell to that person, so there are three bites at a profit cherry before the consumer is fleeced.

Here, greater monitoring and control is required. For example a tobacco farmer using her nostro account to buy fertiliser, agricultural and irrigation machinery and spares, or even stockfeed and soya seed for her other farming operations, is one thing. Buying, say, raw materials for a plastics factory must raise questions and controls. Here the authorities can issue stricter guidelines to banks on what nostro accounts holding retained export earnings can or cannot be used for. And even here quantities can be checked; a tobacco farmer with 20ha should only be buying enough fertiliser for 20ha, not for 200ha.

There are probably other manipulations, but these two are bad enough and can be controlled.

Forex rates should not be in free fall. The major fiscal reforms of the second republic have, for the first time since independence, put a limit on money supply. With the Government only spending what the taxes bring in, new money is not being created. That in turn creates limits as to how much inflation there can be and how far an exchange rate can fall. Sloppy Government budgeting throughout the First Republic created too much money chasing too few goods and too little forex. That was hidden for most of the last decade by the fiction of the 1-1 exchange rate. The inevitable collapse of that fiction caused almost a decade of hidden inflation and exchange rate pressure to surface, giving us a very uncomfortable six months.

That correction process should be over but we have those who manipulate systems or apply costing models that make unwarranted assumptions. This is compounded by the relatively small size of the Zimbabwean economy which has given rise to monopolies and cartels, or “gentlemen’s agreements”.

Sometimes limited competition works. For example the entry of newcomers into the cooking oil and rice packing industries has produced a spread of prices and products. But sometimes we have something different. Despite smaller independent bakers and supermarkets baking in-house, the bread business is dominated by three companies who, although there are modest differences in taste that must arise from differences in recipes and processes, charge exactly the same prices and raise these in unison on the same day. Reforms require greater enforcement of existing anti-monopoly policies and upgrading these to cope with new loopholes.

The transformation of the Zimbabwean economy from tight State controls to open markets can be undone by those who seek to impose their own controls and manipulations to replace those of the State. That has to be countered, and countered by enforcing openness at source not by controls at the end point, if we are to win the full advantages of the reforms of the Second Republic.