Action is being taken to clear the build-up in auction allotments that have yet to be converted to actual foreign currency in bidders’ bank accounts, largely using the Reserve Bank of Zimbabwe (RBZ)’s share of the growing flow of foreign currency receipts.
The backlog at times for some bidders has extended to two months and the Monetary Policy Committee last week set the amount in the backlog at around US$175 million, about four weeks supply of auction bids at the present levels of bidding.
While the committee recommended that the central bank clears this backlog in a month, it can be safely assumed that as RBZ Governor John Mangudya chairs the committee and his two deputy governors, Dr Kupukile Mlambo and Dr Jesiman Chipika sit on the committee, that this recommendation is in fact the bank policy.
There was no suggestion that there was a 5-3 split on the committee between independent members and three top RBZ officers.
However, the statement after the meeting did suggest that a fortnight delay was not unacceptable, although in a perfect world bidders who succeed on Tuesday auctions should see their bankers get the foreign currency on the Friday in the same week and then be processing promptly the approved payments to the foreign suppliers.
The committee also tightened the auctions, although this should have little effect on the economy.
For a start pressure is now on banks, who act as the agents of bidders, to be more thorough in checking out their customers. Secondly these banks are now very strongly discouraged from authorising any overdraft facility to fund an auction bid except in “exceptional circumstances” and then only for the productive sectors.
This presumably replaces the standard rule that the Reserve Bank put in place some months ago that overdrafts should not exceed 50 percent of the value of a bid, a rule put in place when the Reserve Bank reckoned some bidders were over-ordering and building up stocks to unnecessarily high levels. Now that is basically zero.
The bank was probably right about over bidding. With inflation very high, and the fact that bids are funded in local currency, some importers must have decided to borrow cash and hold onto high stock. Normally this would be shot down by the sort of fees and interest that banks charge on overdrafts, but when borrowing rates were in real terms negative you can see the temptation.
But interest rates are now moving close to positive as inflation falls and the policy committee agrees to keep rates at existing levels.
However, the delays in converting allotments into cash must also have been a factor in overbidding by the prudent. If it takes two months to pay your supplier there is pressure to ensure that you have at least two months of stock physically in your warehouse. But since there are extra net costs when it comes to maintaining high stock levels, prices do have to rise. That does not help push inflation down from the low monthly rates to something under 1 percent a month.
The other change was the maximum bid in some areas. While primary producers can still put in maximum bids for US$500 000 on the main auction and US$20 000 on the SME auction, which are bids for raw materials, plant and equipment, secondary users and bids for services and consumables are now subject to a maximum of US$100 000 on the main auction.
Both measures, the near ban on overdraft funding of bids and new limits on main auction non-production bids will reduce the pressure on the auctions.
More importantly is to build up trust in the auction system so that something far closer to “just-in-time” ordering is possible and producers do not have to maintain huge stocks in their warehouses. Admittedly “just-in-time” in Zimbabwe does not mean a few days. Being an inland country near the bottom end of Africa means there is a significant transport delay between an order being placed and a truck driving into your factory yard.
This means that there should be a better match between what funds are available to be auctioned off and the total valid bids. In theory an auction should manage this automatically. In practice it is not really possible for the sort of bidder allowed onto the auctions to reduce their bids without wrecking the economy. So the demand would remain, and all a “pure” auction system would see is rising exchange rates.
Rates are drifting up, but at with modest movements largely in line with monthly inflation. There are those who suggest they should be allowed to drift up to the black-market rate, so there is equilibrium in all currency markets. Unfortunately that would not happen. The black market rate would simply rise further since that small market feeds a totally different group of buyers.
Those using the black market are not just importers. There are importers dipping in, but these tend to be those who want to bring in stuff not on the two priority lists that govern the auction. In addition the market feeds those who wish to export capital, possible only in very limited areas when it comes to auction money. And of course there are those who are determined not to have their dealings monitored by the authorities. A drug dealer, for example, would not want the Reserve Bank nor the tax authorities to know what they were doing, let alone their own bank who might just pass the word to the police.
This all means that the black-market is not a free market as some suggest. It is a different sort of market to the official markets funding different requirements, and for it to operate it must always offer a premium, usually a significant premium, over the official rate. Thus the convergence sought by some between the two rates is impossible to obtain at least in the present economic conditions.
There was a degree of convergence right at the start of the dollarisation, but that came at the cost of the near destruction of Zimbabwean industry and very low standards of living.
It was only when pretend US dollars were being created by a spendthrift government, and measures were put in place to bar a range of imports, that dollarisation even sort of worked temporarily. But the strains of those fiscal measures and trade measures were self-destructive.
The long-term process is doing what the RBZ and the Finance and Economic Development Ministry are now doing, severely limiting the growth in money supply using the monetarist policies of setting targets and adhering to these through massive fiscal discipline and careful monetary controls.
In time economic growth, especially growth in local production for export or import substitution, will lower the premium on the black market, but it is impossible to eliminate it unless we are prepared to live in absolute poverty with the few rich keeping their money in overseas banks.
So we are back to where we are now. The Reserve Bank can manage the auction flows a bit. But as everyone recognises, we have to put our growing private reserves held in banks by the net exporters to better use. Locking up $1,7 billion of export earnings is not viable, especially as that accumulation continues to grow.
Finance Minister Mthuli Ncube is now looking at using part of that influx of foreign currency official reserves that arose from the recent grant of the International Monetary Fund (IMF) to grease the wheels of a proper banking system. He has rejected just pumping it into the auctions or selling it off to importers, and as it is less than a fifth of our annual exports such a policy will provide only very temporary relief. But he is interested in assigning a bit to guarantee banking operations tapping the private pool and basically tapping the retained export earnings, which are continually replenished by far large sums than the IMF grant.
Obviously a careful set of banking policies need to be in place, so cowboy bankers, speculative exporters and greedy importers do not take advantage of what they might see as a party time, however brief that might be.
But with everyone being disciplined, this would work rather well, so the rules have to be built around prudent banking and strict enforcement of the priority lists.