Gold shift not start of redollarisation

29 May, 2020 - 00:05 0 Views

eBusiness Weekly

Black markets are notoriously difficult to deal with, and the Zimbabwean black market is one of the huge burdens on the country’s economy that creates artificial shortages and drives inflation in a feedback loop that makes its suppression almost impossible.

The Ian Smith solution of criminalising mere possession of foreign currency and using bureaucrats to decide who can import what worked to a degree, but cannot work now. For a start the economy is far larger and more sophisticated, so micromanaging imports is simply impossible even if thought desirable, and secondly there are all those human rights that Smith never thought about, let alone worried about.

And centrally planned economies do crash. The UDI solution of total central planning, like similar schemes in the old Soviet Union and its client states, produces huge production gains at the beginning, and then as the decades roll by the wheels come off. We saw this in Zimbabwe where the post-independence Government largely maintained Smith’s closed economy, simply opening up opportunities for the majority. But by 1990 economic growth had stalled, industry was grossly undercapitalised since new equipment was never on the top of the priority import list, and market distortions were so gross that progress was impossible.

The First Republic tried reform, the famous or notorious ESAP, borrowing from the IMF and setting everything up and then chickening out, converting all that borrowed money to imported consumer goods and allowing corruption to get its grip on the country. So we had failure with huge debts. And trying to get out of that failure by running the printing presses was the weirdest and silliest path to choose.

We tried dollarisation, which casually wrecked most of the surviving remnants of manufacturing and created commercial fortunes as our import bill soared, the whole thing financed largely by printing again, but this time pretending that what we were printing were real US dollars.

The Reserve Bank of Zimbabwe increasingly took on the role of allocating foreign currency, a bit like Smith’s bureaucrats, but that was just a holding operation until reforms could be launched. And they were launched late as the First Republic staggered to its end. The Second Republic saw the reforms, after the damage was near fatal, and has been trying to reintroduce markets. But the inherited black market was perhaps the most flourishing.

Several steps were taken to bring it under control, starting off with raids on the pavement dealers, the bottom of the food chain.

But trying to control the black market for foreign currency by rounding up the pavement buyers is a bit like invading Russia in the 19th and 20th centuries.

Every time you defeated a Russian army you lifted your head and looked up from the battlefield and found another 20 divisions, all brand new, ready for the next battle. And eventually, like all invaders from Napoleon to Hitler, you have to retreat and think again.

And it is a bit like that if you are trying to control the pavements of central Harare. You can arrest for unlicensed currency dealing, although the proof takes time to collect since standing on a street corner with a pile of banknotes is not, in itself, a criminal offence.

Lately you arrest for lockdown violations, and as a truckload disappears the doorways fill up again. The dealers move to where the cops are not. But regardless of temporary success the fact that so many rely on the informal economy means that these foot soldiers of the blackmarket are easily replaceable.

Now a smarter set of solutions is in place. First the Government and RBZ have fixed things so the is a positive balance of payments, we export more than we import. That in the end will reduce pressure on foreign currency. Even the lockdowns are balanced, cutting demand since so many have only trivial or no income while the major exports of tobacco, gold and platinum continue, even if world prices are a little lower.

At the same time the RBZ has launched an assault on the black market system, first going for the bureaux de change and micro-finance companies breaking the rules and then going for the middle tier, the mobile money agents. This will not break the market, but possibly make it more expensive and more difficult.

More importantly is the extra US dollars that will inevitably flood the black market over the next few months. Tobacco farmers are getting half their payments in free funds US dollars, admittedly into nostro accounts but they can transfer that money to whoever they want, with zero permission from anyone. And small-scale gold miners are getting 80 percent of the world price for gold in cash, or at a push free funds nostro, which should end the side-marketing of gold since blackmarket buyers have to pay less since they have their own costs of collecting, legal risk and smuggling bills.

With more supply, no change or a modest drop in demand thanks to the lockdown, and transaction charges rising economic laws suggest that the blackmarket will react quite strongly, with a probably fall in the exchange rate, perhaps even a crash. It will never reach the interbank rate, but should come a lot closer.

We do not know the next stage, but we would be stupid to believe that there is no next stage.

There have been suggestions that this release of free funds from gold and tobacco will result in redollarisation. It cannot. The original dollarisation was preceded by a total currency crash and Gideon Gono very carefully paying off the entire local currency national debt in full, for a small handful of US dollars, basically repudiating all debt, and converting all bank balances to something close to zero. We need to remember the very low levels of economic activity in that liquidity crunch of dollarisation, only helped by the Government creating new money as it run its huge budget deficits. That is not on the cards.

There are simply not enough US dollars floating around to make dollarisation a possibility unless we are prepared to go through another severe recession to cut demand down to what we can supply.

But if the black market breaks, then a lot of interesting possibilities arise.

For a start the real market that handles the majority of foreign currency, the interbank market, can move to becoming the real market and without the pressure of blackmarket exchange rates starts reflecting economic realities rather than speculation. A few months, perhaps a year of this, and people start seeing the US dollar as what it is, the American currency not something that God uses to pay the angels in heaven.

It would all have been so much easier if, like most countries getting serious for economic reform, Zimbabwe had access to IMF and other funds that would allow the RBZ to break the blackmarket using pure p market forces.

But sanctions, and a bad track record even if there were no sanctions, make this option a non-starter. But those who wonder if we can go it alone should reflect on the largest single purely national reform, the Peoples Republic of China. And that is perhaps the most successful reform in history.

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