After months of relative stability and marginal movements on both the parallel market and the formal exchange rate, things were starting to give more hope to the nation of better times to come. However, a series of events since May has led to our cyclical September-October parallel market rate madness once again.
In such an event, everyone turn their heads to Treasury in search of answers. Is the government at fault for the recent spiral in the exchange rate? The answer is a simple yes, but if they could have done any better under the circumstances is debatable.
The Dutch Auction System
It was a solution brought in to solve a complex problem of foreign currency availability to the market. It’s been 15months since it’s introduction and to be fair it has reigned in some of the chaos before it’s existence. The problem with the auction is the tight grip that the Reserve Bank of Zimbabwe has had on the exchange rate as it is preventing it from freely floating on a supply and demand basis. This has led to a rate stick at around 88 to the Dollar, although it clocked 90 at the recent auction.
Of the 15 months in existence, the Auction has begun to fuel parallel market since it began delaying disbursements of allotted funds in mid-May. This has since seen some companies that need urgent cash going on the black market to quench their thirst for foreign currency.
A closer look at the auction figures will show you a rapid decline in bids for fuel and gas funds as these are usually urgent payments which do not need delays. The return of ‘Letters of Credit’ is a true testament to this effect, but companies do avoid them due to the ‘Legacy debt’ problem currently going on.
The easy solution is for the central bank to fund the auction adequately and let the market rate be determined by true forces of the market with little intervention to defend the currency when in free fall.
Ongoing infrastructure spending
It is widely agreed in every corner of this country that we need to repair and construct new infrastructure in order to move with modern times. Infrastructure has been neglected for close to three decades since ESAP stalled the Mugabe infrastructure drive. The current leadership has taken it to task to repair and construct roads in places which were overdue touch ups.
Dams which were planned over 30 years ago have begun to be constructed, some which had stalled in the past 6 or do years ago being resumed and some planned during the Rhodesian era being implemented. These are all developments we are applauding as they were overdue and could ease pressure on business and serve the ever growing city population.
However, these developments have come at a cost, a cost of money creation and inflation. The parallel market is also feeding from the construction industry as these companies do need parts, equipment as well as savings in foreign currency. With the recent delays at the Auction, some have resorted to the black market to source funds for spare parts and additional equipment which needs no delay in order to beat targets.
Even if the Auction was working perfectly, they still would have been in the parallel market looking to convert their profits into foreign currency and defend their position.
Treasury now has a headache and has since chosen it’s path if the continued ground breakings are anything to go by. The solution was simple, stop money creation and stall all projects to defend the currency, but it chose to move on with the infrastructure drive, and assume minimum currency depreciation at different intervals, which in all fairness has been working with a working auction system.
To be fair on Professor Mthuli Ncube and his brigade, they took the rational decision which any progressive minister would have taken.
Bumper harvest conundrum
‘We need to build grain reserves in order to reduce imports and serve the little foreign currency we have,” the statement every expert loves to say. The problem is how do we achieve such a point, without Treasury funding such an exercise?
The grain reserves building and the bumper harvest we so dearly brag about has led to an injection of ZWL$32 billion in the economy since mid-May, and we still have ZWL$3 billion owed to farmers. The figures could grow to around ZWL$45 billion if we factor in maize, green mealies and wheat to be delivered till the end of the year.
We have seen reserve money grow at a rapid rate, in the first week of September 2020, reserve money was around ZWL$15 billion, a year later it was up to ZWL$27 billion, which is over 80% growth. Simple economics will tell you that every percentile increase in M0 leads to a certain increase in inflation.
I’m sure the Governor and the Minister do know such economics, but what should they have done? Some have suggested that they should have stopped funding grain buying, and let millers buy straight from the farmers, which on its own is a brilliant idea to be honest. However, there is a catch 22 on such a solution.
We have all heard about Indian farmer suicide rates at some point in our reading, and one major cause of such a high rate of suicides is due to high debt amongst small holder farmers. These millers we dearly love will in turn exploit farmers especially in these times of bumper harvests.
We all love to see farmers repay their farming loans in order to survive and continue farming, but with direct buy from millers, prices will be dampened during bumper harvest times, leaving most small scale farmers with grains in their homes, leading to decay for some and loss of income as well as high debts.
It is no secret that the grain buying exercise has also fueled black market rates as farmers buy foreign currency in order to preserve value of their profits as well as buy ‘discounted’ inputs.
To be fair to authorities, they know how to keep this parallel market rate arrested, and they can surely do that, but to what benefit they ask themselves. Should we forego infrastructure development and have a steady exchange rate or should we stop grain buying and risk high farmer debts and have a stable exchange rate?
As proven in the past 15 months, Treasury and the central bank should focus on a constant supply of foreign currency on the Foreign Currency Auction and most of their problems will dampen, but not vanish. They should not grip tightly on the market rate as they end up chocking it, but they should just intervene a little in order to keep it within reasonable movements and avoid it to run away and hit consumers as is the current case. With how positive the Auction was, over zealousness has now caused the economic targets to be shifted around with inflation targets being missed due to delays in foreign currency disbursements.-HARARE