eBusiness Weekly
The growing bubble in foreign exchange markets is becoming more and more puzzling, considering the economic fundamentals and the strict monetarist culture in the centres of economic power.
There are those, as always, who reckon the Government and the Reserve Bank of Zimbabwe, are possibly lying about the fundamentals or that they will suddenly switch to the print-and-spend policies that so bedevilled Zimbabwe since independence and which got us into the mess we are now having to deal with.
To be fair, most Zimbabweans have spent their entire adult lives in an economy where print-and-spend was the standard and budget deficits were given as read, with large budget deficits being the norm. And the hyper-inflationary era has left larger scars than those with longer memories might feel are justified.
But when countering the conspiracy theories, the authorities have an obvious answer. The International Monetary Fund, hardly the home of bleeding-heart lefties who care nothing about practical economics, has been invited back to do what amounts to a continuous audit of Zimbabwean national finances. This implies that the troika who run the Ministry of Finance and Economic Development and the Reserve Bank of Zimbabwe are fairly confident that they are doing something right and that the national accounts will hold up to a very bright light.
Obviously the IMF will be offering advice and will have a critical view of some aspects, but generally the Government’s agreement that it can monitor Zimbabwe’s economic progress from the inside strongly suggests that there will be nothing revolutionary in that advice or criticism, probably nothing more than sage advice on further improvements rather than wanting a U-turn.
So we can assume the economic fundamentals as reported are accurate. The Government is running a budget surplus on recurrent expenditure, that is paying its monthly bills out of tax revenue with a bit left over each month for capital expenditure and paying off debt, and has been doing this for nine months so the days of print-and-spend are over. The money supply must be growing through internal growth, but very slowly without the injection of Government debt and is still around $10 billion. At present interbank rates that means Zimbabwe’s money supply is the equivalent of less than US$2 billion and the last time it was at that level anyone could draw US$1 000 a day in American banknotes from an ATM and importers could pay foreign suppliers cash with order.
So what is continuing to drive up the exchange rate on the ever more functional interbank market?
Not surprisingly there is no single or simple reason, but rather a number of factors all of which push demand and stifle supply of forex.
The first is the accumulation of US dollars in the nostro accounts of net exporters or primary producers of export commodities, basically the miners and the tobacco farmers. The total in nostro accounts is approaching the US$1 billion mark, roughly five times what it was towards the end of last year.
While industrialists are allowed a higher retention rate than these miners and tobacco farmers, the continuing sorry performance of Zimbabwe’s industrial exports and the destruction of so much primary industry in the 1990s and hyperinflation era means that almost all in industry are still net buyers of foreign exchange and thus spend their retained export forex rather quickly on imported raw materials. There are welcome signs that Zimbabwean industries are becoming more interested in export markets but most still need to sort out quite a few constraints before their products are on supermarket shelves in quantity in, say, South Africa or Zambia.
So the bulk of accumulating nostro money comes from the primary producers of export raw materials. They, for obvious reasons, are very reluctant to sell their retained forex until they really need to. Some is being sold to pay local bills, such as wages, electricity, fuel, taxes and so on, but as these same producers already have a reasonable flow of RTGS dollars from the forex earnings they are not allowed to retain and, we understand, are willing to borrow. At the same time while the Reserve Bank has banned commercial banks from arranging buyer-seller dealers, most net exporters know suppliers or those whom they dealt with in the past and can arrange their own deals without assistance from a bank. So long as exchange rates continue in their present course a net exporter might be considered daft not to delay selling US dollars so as to gain a higher price next month.
A second pressure pushing up the exchange rate is untangling of the mess many importers were forced into in the last months of the old system. Foreign suppliers were giving credit, and now want their money, and so a significant batch of importers want extra forex, above their ordinary needs, to pay off those suppliers.
A third pressure comes from the same industrial importers of raw materials. They have been badly bitten by shortages and quite a few want to build up buffer stocks of raw materials, abandoning just-in-time procurement. They realise that the exchange rate could fall, but really want the insurance that they can continue in business regardless of vagaries in the markets.
A fourth contribution is the very uneven distribution of the $10 billion. While there are growing anecdotal reports that some importers do not have the RTGS dollars to buy allocated forex, there are also large pools of RTGS liquidity. This means that it is possible, so long as you have security, cash flows and profits, to borrow RTGS dollars at interest rates way below the inflation rate. Net exporters wanting to borrow to preserve their nostro holdings obviously have the security of those same nostro holdings. Net importers who are profitable probably have a reasonable pool of RTGS money and even in the worst cases can pledge the stocks they are importing as partial security. This is yet another result of that unjustified explosion in money supply in past years.
The fifth pressure is the black market. Too many see it as something fundamental, rather than as a different market from the formal interbank market. The rates are set by sellers of US dollar banknotes, largely diaspora money coming through Western Union and a significant fraction of the buyers of the notes are people needing medication following the only successful industry to switch to US dollars, the pharmaceutical cartel. But the Government is moving to end that cartel by opening up competition and in any case a growing number of people with chronic complaints are finding that drugs are cheaper in neighbouring states in US dollar terms. Pressures could ease.
All five pressures are essentially limiting, because there are simply not enough RTGS dollars in existence, or likely to be, to keep the bubble growing indefinitely.
As a class CFOs are yet to stay awake at night worrying about a forex bubble: they have other problems to feed their nightmares. And those that do have slight worries still reckon that if rate inflation reverses it will be very gradual and there will be time to adjust. And quite possibly they are right.
But the bigger the bubble, the more likely there will be a sudden pop rather than a slow contraction. There are signs aplenty, but most obviously in the falling demand for mass-market non-essentials. Which is why Delta is adjusting its pricing formulas. Sales of essential products are holding up better, and high-end luxury goods for the tiny group of the really rich might not be too badly hit yet. But that large middle market is contracting noticeably as even modest price rises lead to more serious falls in volumes. Shortages are not the problem for most goods; the lack of customers with fat wallets is more serious and is sending warning signs of limits.
So perhaps CFOs need to stay awake a bit more at night.
