The foreign currency auctions this week reached their first signs of “normal stability” with a movement of less than half a percent in the exchange rate, although more auctions are now needed to see if this element of normality can be sustained.
Even more important is the continued narrowing of the gap between bottom and top bids. This is now around 10 percent, which by Zimbabwean standards is stability, but in normal currency trading is far tighter. Currency values move up and down, but the top and bottom bid prices move in unison with a very small gap.
While that last auction saw a 10 percent gap between the bottom $80 and the top $88,38, knocking off the top and bottom two or three bids quite possibly chopped that gap to something nearer $6 or even slightly less so the market, in general, is getting the pricing right but more progress would be welcome. When you consider the first auction which saw a gap of more than $50 between top and bottom successful bids, that is huge progress, but we still need to inch ourselves closer to normality.
In the modern world of floating currencies there will be, and must be, movement but generally there should not be large jumps, especially when speculative behaviour is barred, as is the case in Zimbabwe, and when trading in currency is limited to actual requirements needed for trading in goods and services, rather than for capital transfers or for trying to make money out of exchange rate movements.
Two Reserve Bank of Zimbabwe rules directly eliminate currency speculation: the requirement that importers must present invoices or other proof that the money is being used for actual purchases or payment of normal trading bills, and the requirement that foreign currency bought on auction cannot be retained, and that in fact any currency already in a nostro account must be committed to the required purchase first before being topped up with an auction bid and then spent almost immediately, with no time to look at it, let alone give it a farewell hug.
This does not eliminate all hedging. An importer with adequate cash reserves can indulge in some hedging simply by building up stocks of raw materials and spares. It is unlikely, at this stage of Zimbabwe’s progress, that many manufacturers believe just-in-time orders and deliveries are the best way forward, and in any case being an inland country with trans-border trade routes militates against such a system, even if payments can in almost all circumstances be made within a few days.
But even that stock hedging has limits. It simply means that a higher percentage of working capital is tied up in stock control than a Japanese company, for example, would consider prudent but while stocks may be measured in months, rather than days, no one can afford years, or even keeping stocks and their attendant risks of spoilage and damage in storage for longer than a few months. Even agricultural products, which sometimes have to be in stock for a year until the next harvest, generate storage costs that have to be factored in.
Net exporters can perform some hedging, simply by retaining as much as possible of their retained export earnings in their nostro accounts, although at some stage the Reserve Bank is likely to start intervening and expecting spending or liquidation of retained export earnings within a time limit, even if requests for longer periods than 30 days are agreed.
But the stability that the foreign currency auction has brought to exchange rates, with these rates finally reflecting market forces and market perceptions, removes the major inflation driver at long last from the Zimbabwean economy. Our inflation has not had much pressure from demand-pull factors, since few in Zimbabwe have the liquidity to ignore pricing, despite the small minority of cash-rich companies and individuals.
Demand-pull was tamed by the Government, to be precise by the present team in Treasury, determined to impose the fiscal discipline so lacking for 38 years. Obviously that effort must not only be maintained but shown to be maintained if attitudes and fears are to be reversed. The Treasury is about to reach its second anniversary of regular monthly budget surpluses, and there is growing confidence that this is the “new normal” to adopt the cliché.
We can all say that in retrospect it was a pity there had not been a big bang switch to full market systems, at least for commercial purposes, at the start of the reforms two years ago.
There are still other perception problems, the main one being a belief in some quarters that we can achieve full convergence between the official and black-market rates. That belief is not driven by a full analysis of just what the two markets represent and instead is generated by the fact on ground that while the official rate has been rising in ever smaller advances on the auction market the black-market retreated first from the assumed jumps expected just before the auctions and then largely stabilised.
Economist analysts who expect further pressure on the black market rate, now that almost all industrialists and importers of essential goods, can access the auctions and probably start getting more currency through the banking system at official rates, the actual difference between the buyers on the two markets mean that there will probably remain a premium on the black market.
The stable black market rate and the huge gap between buy and sell rates have made short-term speculation in that market almost impossible, and even medium term speculation very dicey. But those who want to smuggle capital out of the country, or who want to import luxuries, cannot use official channels, and there are still the problems of even ordinary people having to dip into that market to buy fuel or pay some medical bills, especially in the wilder edges of the private sector.
In fact, the insistence of large swathes of the private medical sector in continuing use of the peak black market rates reached just before the auctions is something that needs to be addressed, possibly by clamping down on dual pricing relaxations with a start being made on enforcement of existing laws on the rate to be used.
Even in formal business sectors, where adherence to the new laws that dual pricing must use the auction rate is more common, and growing more common outside the luxury retail trade, has seen this negated a bit by a tendency to raise US dollar prices so the local dollar prices still follow the black market rate once it is realised that hardly anyone actually pays in US dollars if they can avoid this, especially if they hold US dollar cash that they can sell on the black market and then buy goods in local currency.
The black market premium can be expected to drift down, and already we are seeing that a recipient of diaspora remittances who wants local cash rather than electronic transfer can get, at least in theory, a better deal at a bank than on the pavement. But even when more exporters realise that they need to sell on auction, or more probably through their banks, rather than hoard currency the likely retention on limits of capital exports will retain the premiums on free funds.
One potential solution, of following the South African apartheid authorities in introducing a double market for the commercial and financial rands, is a possibility, although the democratic government of South Africa had to dump that for a number of reasons, including the fact that the human rights violations needed to enforce the system were no longer possible.
But there was that informal deal with Chinese business interests a couple of years ago that allowed companies already operating in Zimbabwe to buy Chinese currency from incoming investors to export their after-tax profits and dividends. That, in effect, created a financial exchange rate for trade between Zimbabwe dollars and Chinese renminbi. But part of the reason this was possible was that checking could be done both ends, something almost impossible in other cases, especially in currencies where there are vast offshore reserves no longer under control by any effective authority.
A better policy of dealing with the black market can already be seen, by pulling an ever-greater percentage of normal commercial transactions out of this market and continuing the process of pulling the Reserve Bank of Zimbabwe out of all quasi-fiscal activity and currency allocations.
Admittedly the Reserve Bank in direct allocations for fuel and food is using the auction rate, with all subsidies that remain now in the fiscal system not the monetary system, but as the auction system grows and stabilises to ever-narrower gaps between top and bottom bids, the next jump needs to be taken to place all transaction in the official system, either via auctions or through the banks at auction rates.