eBusiness Weekly
The essential success of the first foreign currency auction on Tuesday shows that the system works and that the Reserve Bank of Zimbabwe is not some sort of evil manipulator, but there are still questions related to the bidders.
For a start everyone is wondering who bid at a rate of $100:US$1 and how did that bidder get it so wrong, since if the bid had been at half that rate it would probably have still been successful.
This is not just a question for those wanting a good laugh, but it opens up important inferences and important assessment of company owners or top managers in the corporate sector. It also raises queries about what sort of advice bidders sought from their banks and what advice banks gave.
The biggest single problem is that this bidder will be expecting the eventual customers of the imports the bidder was funding to pay for that mistake, pushing up prices of some set of goods. This suggests that the bidder holds a monopoly, or near monopoly, in some sector and that the imported goods are considered essential.
If that bidder has a competitor who bought auction currency at, say, 60:1 then the high bidder is going to find a lot of market share going down the tube. If the goods being bought at that rate are so expensive that hardly anyone can afford them then they have to be some special luxury that only the rich can afford or something so essential, perhaps medical supplies, that even the poor will go without something else to pay the resulting high retail price.
That high bid, and also the ones of $90:US$1 and $85:US$1, the next wo down according to RBZ Governor Dr John Mangudya, also dramatically displays that not everyone at the top of the business world is as competent as they believe, or as competent as those who appoint chief executives believe.
There is a tendency for business managers to quote each other to back up certain beliefs, because there is safety in numbers. If everyone makes the same mistake then your job is safer than if this was your bright idea. In this case it will be difficult to show that safety factor, and if there are other shareholders in the bidder’s company they might be somewhat irritated that the decision maker threw at least $2 million away.
If you assume the bidder went for the minimum bid, for US$50 000, then that would have cost $5 million. Yet a bid of 60:1 would not have been unreasonable and still dead certain to be allotted, at a cost of just $3 million.
It is fairly obvious that the top three bidders see the blackmarket as a real market and so expected the auction to produce very similar rates. This means that they just make assumptions that might be excusable in the person who makes their tea, but is not excusable in the person who is supposed to have the capacity to analyse markets.
The blackmarket is not, in its essential form, a market for importers and exporters. It is a market that basically sells diaspora remittances, combines these together and sells large blocks of currency to those who want to accumulate foreign cash balances, speculate on future exchange rates or preserve the value of their cash holdings.
Admittedly those needing what the South Africans once called their commercial rand, foreign currency needed for commercial imports or paying foreign shareholders or even paying foreign college fees, have been forced in recent months to dip into the blackmarket to pay essential bills. In theory, and now in practice, the auction system is supposed to fund that. The old and now dumped intermarket was, as everyone recognises, not the most efficient nor the most transparent system possible and was largely an interim measure to move away from fixed rates. Calling it a managed float of the Zimbabwe dollar suggested that there was more management than floating. The auctions cannot be manipulated like that.
But it is impossible to escape the conclusion that the top three bidders were assuming that the auctions would mirror the blackmarket, although the two markets are very different with the auctions trying to efficiently match export earnings and import requirements while the blackmarket is more of an unregulated financial market. Muddling the two is not expected from people at the top of any corporate ladder.
There have been queries over the amount of information that is given. Some want to know who the bidders were, but there are good reasons for the RBZ to keep that confidential, not only because bankers are not supposed to publicise their customers but also because no one wants to see the top 10 bidders meeting for a few drinks at a gold club or someone’s mansion and fixing the exchange rates. When looking at Zimbabwean business ethics it is sometimes and regrettably necessary to be paranoid.
The other piece of information most would like to know is the amount on offer each week. But that could cause major fluctuations in the rates. However, after the first few auctions patterns will be emerging, since the amount on offer and total of the bids is published after each auction, and those averages will be of far more use in the medium term than very short term guesswork built around knowing the amount on offer at each auction in advance. Averages and trends will smooth out the ups and downs.
Along with the auction system the RBZ has now almost entirely moved out of the quasi-fiscal realm. Fuel imports, paid for out of those sums that are not retained by exporters but kept by the Reserve Bank, will now be bought at the auction rate. This will mean, presumably, weekly price changes for fuel.
That, in turn, will mean more efficient use of fuel, especially by private motorists although most businesses that are tightly managed will be looking at ways of saving a litre here or a litre there.
More importantly using the auction rate, and then more than doubling the retail price through taxes and dealer mark-ups, makes arbitrage very expensive. Diverting taxed fuel into the untaxed blackmarket will be a lossmaker, so those missing tanker loads become a lot less common.
However, as transport costs are a small fraction of business costs, except of course in the transport companies themselves, the fuel price rise should have little or no effect on prices, although some suppliers will be trying to prove otherwise.
This is one of those cases where we desperately need more competition and an end to collusion.
Collusion must exist, but is difficult to prove. But when, for example, all three major bakeries sell bread at exactly the same price regardless of quality and taste differences and regardless of actual costs that must be different, there will always be suspicions, perhaps not of price fixing but certainly of two following the lead of the first one to adjust a price.
Generally spoken or unspoken policies are of not competing on prices are hardly part of any free-market and competitive capitalist economy. The system of relying on markets should include some fairly dramatic differences in pricing of competitive products, rather than everyone following the leader.
In the retail sector there is far more competition than in the productive sectors, simply because there are far more people involved. Retail price fixing would need the Harare City Sports Centre to be hired for the meeting fixing prices while for most products a simple golf game could bring together the main players in production.
The auction system should make these cosy, if unspoken, price arrangements less and less viable. The company with a management that can bid on the low side of the predicted ruling rate can get inputs significantly cheaper than the company that tries to mirror the blackmarket. And at some point someone will start using their greater acumen and better analytical skills to break ranks, undercut competitors while still making very healthy profits, and seize market share.
As this happens Zimbabwe joins the capitalist world, rather than a managed corporist world, and starts using market forces properly by allowing the efficient to grow and the inefficient to go under or sell-out to someone who does know better.
