The black market is one of the most opaque and spread-out “so-called markets” in Zimbabwe with a very wide range of drivers, a range of manipulators and despite the fact that it can only work where there is a reasonable degree of trust, a difficulty in getting information, or at least accurate information.
Yet, although it is not a transparent market with enforceable contracts, many regard it as a real market, reflecting true value. You get this implicit assumption when you hear people talking about bringing the official and black-markets into alignment. Even the frequently used expression “parallel rate” implies that the two rates have a degree of equal validity.
To get through the basics, the black market will continue to exist so long as there is no total convertibility between Zimbabwe dollars and US dollars, on demand at a bank with no questions asked. And we are a long way from that point and even then we need to remember that just about the only currency that you can spend on any street corner in the world is the US dollar.
No one expects the black market rate to equal or be that close to an official rate. There are extra demands on the black market. If you want money to buy supplies to maintain your cocaine habit, to carry cash across a frontier, to import rare scotch whiskey, or even to import a small second-hand car or a bale of illegal second-hand clothes, you need US dollars and no one in the formal system will give you the time of day, let alone sell you any.
So the black market will exist for all these sort of things plus, even if the auction system works perfectly, for the low priority consumer goods. The auctions are there, and efforts are being made to restore the near instant link between a successful bid and the allocation of currency for your banker to pay the invoice used to back the bid, but the two priority lists mean a lot of things that some people want to buy cannot be funded from official markets.
Another pressure in Zimbabwe is the feeling that to preserve value you need to stockpile money you are not using into US dollars. A lot of this arises from the bouts of inflation we have seen. Even now, with inflation rates so much lower, the local rate is higher than the US rate. So if someone estimates that the average monthly inflation rate is going to be 3 percent for the next six months, they might well feel that paying a premium of 20 percent to convert cash they will not need for those six months makes sense. And many feel that a premium for security is worth the extra.
When we climb into the bits of the black market we can see, or which get uncovered by the Reserve Bank of Zimbabwe as it tries to track what is happening by looking at the flows of local dollars through the banking system, we find we do not see that much. The market is so far from transparent that it makes a mafia money laundry look clear.
But what we can know is the flow into that market. The new money is largely the inflows from the diaspora. It circulates in all sorts of strange ways and eventually leaves the country to buy imports or to be squirrelled away in a foreign bank account, but the money that flows in is known.
There are the nostro accounts built from retained export earnings, but these, being in the formal banking system, are open to at least Reserve Bank inspection and there is a degree of control over how they can be spent. There is a market to move from nostro to cash, with a premium of 5percent to 10 percent, and there is a middleman business that the Reserve Bank tries to control. This involves a nostro account holder importing stuff for someone else, although the actual process is importing on their own account and then selling the goods to the final customer at a mark-up that corresponds to the black-market premium.
One major problem in Zimbabwe arises from these retained export earnings, which creates in effect two official systems. Retentions were introduced as an incentive. Basically they are there so that net exporters do not have to worry about how they will source their imported requirements, or even pay their dividends. And if this was all that they did there would be no discussion.
What has happened is that not all the earnings are spent. Quite a bit, 10 to 20 percent of the export earnings in fact, are stockpiled. This is where that US$1,7 billion sitting in the nostro accounts in the banking system comes from. That is a total. Each account might be in active use and money spent each day, but the total is continually rising.
This couples with the other factor, Zimbabwe’s balance of payments. Our exports and our imports are roughly in line with, over a year and taking into account the cycles like tobacco earnings and the need for certain food imports, exports are modestly, very modestly, above imports. So if we were dealing with a pure trade environment we would be fine. Even if the imports continued to be paid from retained export earnings by net exporters with net importers using the auction, funded from the surrendered export earnings, it would still work out. However there are those retained and stockpiled export earnings. So on the trade account there is in fact a potential shortage.
This can and has been funded from other sources, Government’s inflows being one, things like the IMF one-off grant, investment inflows and some of the diaspora money.
In a normal system, and even looking at what we had in the UDI era, when possession of foreign currency was a criminal offence, and what we saw in the first 15 years or so of independence, is something different. All export earnings would be automatically banked in local currency and exporters would get, quickly and automatically, their foreign currency requirements when they needed them. This is what happens in most countries and if we were setting up a system from scratch in Zimbabwe it is what might well happen here. All imports would be funded from the auction.
There is, however, the inherited system and at the moment the Government and the Reserve Bank are not keen to disrupt it, as it works. But those who see a revolution whereby the auction rate will rise to the black-market rate to create a single rate are missing the two critical points. First, as explained, the black market fuels more than the required imports and payments, so we would not win. Secondly the authorities have an interesting option of reducing export retentions, even eliminating them, and pumping more export earnings, or all export earnings, into the auctions.
They could even do this by reintroducing and enforcing the older rules that retained earnings not spent within a particular time limit had to be sold on the interbank market, which is supposed to be running with the auctions and even taking the bulk of deals, with the auction setting the prices.
This might well have to be matched by some sort of system whereby exporters are first in line for auction dollars when they need imports, but generally such a system would not have strains so long as exports matched or exceeded imports. No one is suggesting this, yet, but rather than see a black market run the economy in an unsustainable manner it is certainly an option.
One of the more interesting questions when we look at the black market is who sets the rates. These come out on web sites every day; the web site owners are careful to explain that they are not dealers, just a sort of journalist reporting facts, but someone is setting them and passing the word.
And those someones are making very large profits. The margin between buying rates and selling rates is huge, at least 35 percent and can be as high as 50 percent. There is general complaint about Zimbabwean bank charges, but when we come to the kingpins in the black market those are trivial.
The profits are obviously not being made by the thousands at the bottom of the black-market. Many street traders find it hard enough to raise their bus fares and buy a little bit of food to take home. But move up the line and we find wholesalers with fancy addresses, new motor cars and the like, and even this group cannot be compared to the those who occasionally come before the courts for the big-time financial transactions involving hundreds of thousands to millions of US dollars.
Considering the size of the black market, much smaller than the official market, it is fairly obvious that those big time dealers can exercise a lot of control and can manipulate the markets and rates to ensure that the gap between the street buy rate and the bulk sell rate remains very large indeed. The fact that the initial sellers and the final buyers are two quite different groups with zero intersection makes that manipulation even easier.
The authorities have been trying, with a reasonable degree of success, to tame the black market by creating a better official system, which now needs to be upgraded and improved, and hitting the liquidity of the black market, with a scattering of arrests of the larger players to apply pressure.
But in one sense those who seek an amalgamation of the official and black markets have a point, They can be largely amalgamated, but downwards into the official market. And those who worry about that should thus be working to reduce the black market, not grow it.