eBusiness Weekly
Continuing stability in the Zimbabwe dollar exchange rate has moved up the economic and social agendas as perhaps the most crucial factor to taming inflation and measuring the success of the Government efforts to control very strictly the growth in money supply.
It is something that can be achieved, but a series of other policies have to work.
It goes almost without saying that the Government has to maintain its positive budget surplus and ensure that all spending is within the budgets Parliament sets.
The quasi-fiscal activities of the Reserve Bank of Zimbabwe, that have caused so much harm over the last two decades, have now stopped, to the relief of the RBZ, but have to stay stopped. The responsible attitude of the Government to move all subsidies and other fiscal interventions into the Treasury, where they are budgeted and audited, has been along with the fiscal discipline the main driver to ending the RBZ’s unwanted role. But that discipline has to be maintained.
But there are two other sets of policies that need to be pushed.
First the management of the demand in the interbank market. Zimbabwe has an uneven monthly range of export earnings and there are minimal official reserves for the RBZ to perform the normal central bank role of interventions to even out dips and peaks. We only have to think of the reliance Zimbabwe places on tobacco exports to see the problem. The crop is sold in a fairly short time and while initial processing and packing can stretch out the time taken to export the crop, it still produces a bulge in exports.
To a certain extent it is obvious that the resort to letters of credit for things like fuel payments is a tool to even out the peaks and troughs in expected export earnings, but there is a danger that the tool will be over used. What letters of credit actually do is postpone the day when the foreign currency has to be made available and paid to the holder of the letter of credit.
It the letters of credit are correctly used to, for example, spend a little of the tobacco bulge early then there is no problem. They allow the monetary authorities to maintain a fairly stable exchange rate. But if they are overused they could trigger a serious fall in the exchange rate when the day arrives for them to be redeemed giving Zimbabwe two headaches, having to accept the fall to actually find the money but at the same time having bought imported goods at a price that this fall shows was too high. So careful monitoring of the letters of credit is required so they are kept as a useful tool but not used in imprudent quantities for imprudent purposes.
As part of the management the RBZ does need to also keep a very beady eye on the black market rates. It now seems to have learned to move a lot more swiftly when something weird happens. The last sudden move was caused by a major foreign company wanting to convert its holdings of Zimbabwe dollars to US dollars outside the formal system and willing to pay to do this. The RBZ investigated and froze the account being used while other pressures were brought to bear. And this was done a lot faster than the last such intervention.
Unfortunately the black market is seen as a signal for those who do deal legally, or at least are brooding about it, on the interbank market. So the RBZ will have to continue exercising some degree of oversight over the illegal trade.
The second set of required policies are already in place, to push production of exports and figure out ways to reduce imports, both by market forces and by producing more stuff for the local markets so reducing the need to import.
The trade statistics show that this policy is working. Last year exports reached US$4,3 billion, the second highest in the last decade and only a whisker below the 2018 record, which basically shows the problem we face when we go from a good rainfall year to a drought. Far more importantly was the crash in imports, to US$4,8 billion, the lowest total since 2010 and the gap was just US$0,5 billion, easily the lowest again since 2010. In percentage terms it was just the lowest in the decade.
Even more importantly this rise in exports and fall in imports was more pronounced as 2019 progressed, so that we had months with a positive balance of trade towards the end of the year.
Exchange rates follow supply and demand. If there are more Zimbabwe dollars chasing fewer US dollars the rate will rise and the US dollar will become more expensive. If more US dollars appear for sale, and money supply growth is curbed, then we get stability and, if we push it, we even see the Zimbabwe dollar strengthening. This is not impossible. But optimists need to remember that our foreign debts are huge, and there is a probability that as our balance of payments goes positive that the trade surplus will have to be dedicated to making at least some serious effort to reduce our debts. Debt relief, or at least a serious slashing of accumulating interest, is possible even in a sanctions regime, but is more likely if we are showing we are not a bunch of wasters.
Export growth is in the works, but regrettably there are lead times. For example, a major new platinum mine has moved from signatures on a piece of paper to actual cuts in the ground, and hs done this in less than a year. But there are still two more years before there is a significant boost in exports. Other mines are in the pipeline, but again we have to calculate the time to put in infrastructure and dig a hole.
So we can expect exports to creep up slowly, with the new pro-business policies of the Government, but the real fast growth will not be this year.
The other side of the coin is reducing imports. Here we can expect faster progress since there is still spare capacity in many Zimbabwean factories. And fiscal policies can do a lot as well to reduce import demand. Our membership of regional trade blocs, and even our acceptance of the World Trade Organisation, means we have to watch protectionist policies. But simply getting our exchange rate right, as we have done, we have given Zimbabwean industrialists a large leg up and we can do more.
Fuel is our largest normal import, with food up there in the same level in drought years. But we can cut food imports, even in drought years, with better investment in irrigation and better planning. Some things, like a new dam, might have long lead times. Other things, like concentrating more of our farm loans on farmers with irrigation, can show dramatic results much sooner. Even growing the right crops can change the equation. Everyone now talks about planting small grains, and for rural families these will be eaten. But we also need to do a lot more to change urban mindsets. Small grain products are available in supermarkets, but oddly enough in the upmarket sections. However, that market for specially prepared small grains, including the toasted and malted products that sell to food faddists in northern Harare, must be developed. Maize sadza, after all, only started being popular in the 1920s and only dominated from the early 1950s. We can go back.
Fuel consumption can be reduced. The Government, with its new tax policy that makes large company cars so dramatically expensive in tax payments, is signalling that gas guzzlers are not desirable. And such policies can, in the 21s century, be justified on environmental grounds and so do not run foul of trade deals. More ethanol production is needed, and again this is something that a tax regime can encourage. Even the revival of Zupco helps. While this was put in place to help the poorest, a growing percentage of car owners would like to use Zupco services more often, and will leave their cars at home as the service grows.
Negotiations for revival of some of our basic heavy industry have been interminable for years. But again the very pro-business and pro-market policies now in place, and the abandonment of old-fashioned policies talking about “strategic industries”, means that investors are keener, a lot keener, with David Whitehead likely to be the first revival.
Production that cuts imports has another interesting side effect: it creates jobs and builds wealth in Zimbabwe. So of course does export growth, but the lead times can be shorter.
So exchange rate stability can be maintained, although we still have to accept some management while we continue to build a real economy.
