eBusiness Weekly
With most of the economy now open again, either explicitly or through toleration and with the major exception being the entertainment industry, business people need to take a good hard look at what they have reopened into.
The first three months of lockdown saw the worst inflation we have seen in Zimbabwe since the first decade of the present century, driven almost entirely by the de facto collapse of the interbank market following an exchange rate freeze and the consequent reliance on diaspora remittances fed through the black market.
With the limited pool of diaspora remittances, and even then lockdown enforcement meant it was difficult for people to get their money at first and economic downturns in other countries meant there was less being sent, the black market rate took off. Businesses started drawing trend lines, or just picking up predictions from social media, and started pricing at what they thought the rate would be when they needed to restock, and that in turn was feedback towards higher rates.
Then came the big bang. With nothing now to lose, since prices had already rocketed, the authorities quickly implemented the auction system that had been planned but held back for fear that a real exchange rate would lead to serious inflation. With the inflation already there, a real rate would at worst stabilise prices and at best reduce them.
And Reserve Bank of Zimbabwe quickly dumped almost all the remnants of allotments of surrendered foreign exchange by edict within a few weeks as the new exchange rates stabilised on the auctions and moved Zimbabwe into the real world.
That dumping of allotments by Reserve Bank edict explains the anomaly of the market for petroleum fuels, which for ordinary motorists has now been dollarised, although probably only temporarily as fuels do appear on the auction allotment lists and presumably will in time be fully funded via the auctions instead of by recycling the diaspora dollars that are paid in on the forecourts.
By the middle of August the auction system became fully functional, with all bids now within a tight range. Market forces had pushed down the top bid to around 5 percent above the average and the RBZ software had persuaded those trying their luck for a bargain with the odd scattered low bid to move the bottom bid into the range that almost all bidders reckoned was the correct narrow band of prices. So all bids are now accepted with, according to the weekly statements, just a little pro-rata allotment at the bottom end of what must be the category 2 bids, to keep those within the 30 percent total allocation.
The fact that the Zimbabwe dollar has firmed marginally, 2,34 percent in total, during the last five auctions could have been predicted once stability had been achieved since most bidders in the upper half would be shaving their subsequent bids a whisker, keeping within the band set by the majority of bidders but trying to shave their own costs.
The important point to note is that this narrow band of bid prices was not set by the authorities but by the herd mentality of bidders. In fact the little comment that has been made by the RBZ suggests that the bank was surprised at how high the rate was set by bidders considering the economic fundamentals. The problem in Zimbabwe is not a shortage of foreign currency but the reluctance of exporters to see more than a minimum of their retained export earnings and to keep almost all their liquid cash in a non-interest nostro account instead.
It will take, probably, several months of stability and acceptable interest rates for depositors before we see any significant moves to keeping at least some cash in local currency.
For a start exporters are going to want to see if the RBZ and Government can find the currency needed to power the continued reopening of the economy after the lockdown, although the figures for September, with the record allotments, raises hope that authorities are being truthful when they say they can. Equally obviously they are being careful, and are still thinking how to bring the largest block of imports, petroleum fuels, into the new system.
It needs to be remembered that the RBZ and Ministry of Finance and Economic Development do have access to more currency for the auction. Just because the rules on selling retained export earnings within a set time are not being implemented does not mean that they cannot. And the percentages of export earnings that exporters can retain in foreign currency accounts were set by edict and can be changed by edit.
It is unlikely that anyone in authority is going to go for another big bang, but we could see little changes, increasing by a small percentage what must be sold to the RBZ when export payments arrive for example, or saying that retained earnings older than some large number of months must be liquidated.
It is likely that the authorities would rather market forces and business confidence did the job for them, but small tweaks to the system of retentions are there in the background. On the other hand enforcement of the tax rules that taxes on forex earnings must be in forex is being pursued with vigour, and that is going to automatically increase inflows of foreign currency into the official systems.
While fuel is still treated as a sacred cow, the fuel taxes must be in forex if the fuel is sold in forex, and that is easy to enforce at the pipeline terminals and at border posts. Other sectors are trickier, especially the private health sector which seems to believe it is exempt from everything, but enforcement of exchange rates being used, especially as pharmaceuticals and medical equipment are so obviously in a high priority category in the auctions, should see that sector having to accept a lot more payment in local currency. Market forces and the abolition of the bargains possible using forex will see to that.
All this sorting out of exchange rates brings up the more fundamental problem facing businesses, the drop in sales volumes. Part of this is the reduction in purchasing power through the inflation of the first six months of this year. That is being addressed through pay rises, although in the new real world of real currencies, which now include the Zimbabwe dollar, it will need productive growth to reach the levels we saw when we were printing fake US dollars.
But part of it is mispricing. WE are now seeing price reductions by some businesses of some brands, as they exhaust stocks bought at black-market rates and start using stocks bought with auction dollars. But there are still many who think they can get away with costing their products at levels that assume black-market rates are the real rate, even when they buy at the auction.
In some areas competition, good old capitalism if we remember how that system works, is already having an effect. Spar, for example, have pushed a loaf of bread down to $55 and stocks of bread from the major bakers are either no longer on the shelves, because no one wants them, or are occupying just a small space on the bread shelf. And we have seen this in a growing range of products. Price, rather than brand, is tending to dominate, thanks to that problem of reduced purchasing power.
If anyone doubts this just talk to a friendly supermarket manager. They will tell you want people are buying, and what effect price reductions are having on volumes.
This is pretty basic. If we take one of the greatest capitalists ever, old Henry Ford, He took over the mass market for cars, in fact created that mass market, through a three-pronged approach. We all were taught about his standardisation and mass production with systems that boosted productivity.
We often forget the other results of that productivity gain. He cut prices, and continued to cut the prices of Model-T cars throughout the long production run, sharing some of the higher profits from higher volume with his new customers. He also shared some of the productivity gain with his workers, pushing up salaries so they could afford the cars they made.
His entire business model was built on building volumes, through price cuts and wage rises, but he could afford to do this by so pushing productivity that he still cut his costs faster than his prices or his wage rises. That three-pronged approach needs more careful study than many need to study.
