The oddities, complexities and symptoms of an incomplete market when we look at Zimbabwe’s foreign currency were highlighted in the Mid-Term Monetary Policy Statement from Reserve Bank of Zimbabwe Governor John Mangudya last week.
Despite delays between bids and allotments, which are a symptom of growth and which the Reserve Bank and the Ministry of Finance and Economic Development are addressing, the foreign currency auction system is working remarkably well, providing the overwhelming bulk of the currency needed by the productive sectors for their critical imports.
But anyone thinking the auctions provide the bulk of foreign currency used in business dealings was in for a rude shock a page or two later. The auctions provide about 30 percent of the foreign currency used in foreign currency dealings. The interbank market provides another 7 percent, provided that is by holders of foreign currency who sell this currency for local currency at the auction rate but through their bank.
The other 63 percent is from foreign currency bank accounts, either paid to someone else’s FCA or paid to a foreign supplier of goods and services. This, it must be remembered, are the proportions of the foreign currency spent through the banking system. They exclude the dealings on the black market, which apparently account for around 10 percent of our foreign currency spending, and they exclude the cash deposited into FCAs and allowed to just sit there as a little or big hoard never being spent.
Of particular interest, and perhaps concern, is that dramatic ratio of foreign currency to local currency spending from the FCAs. One tenth of the spending, the proportion that is sold on the interbank market, is in local currency and the other nine-tenths is directly from the FCAs.
A good chunk of that is obviously net exporters buying their machinery and raw materials and paying off foreign loans or paying foreign dividends. But a surprisingly large chunk must be Zimbabweans paying other Zimbabweans in foreign currency, which arouses suspicions that some of these business deals have prices discounted or otherwise reduced when payment is in a US dollar bank transfer.
While this is illegal, and can even give rise to civil penalties in line with SI127, the trick is catching the seller. There are no minimum mark-ups and if pricing varies according to deal who is to know.
In a more normal setting, one where there were no memories of past nightmares, one would expect a net exporter to do all their local spending in local currency. This goes beyond the modest amount they spend on staff costs and utilities and would include things like the payment for a factory extension and a decent percentage of locally-sourced supplies.
Part of the problem must be the nitty gritty of the banking system. Banks tend to buy foreign currency at below the auction rate and sell above it. The gap is where they make their money. But still that could hinder the FCA holder from converting to local currency before making local currency payments.
But part of the problem is the way so many still think in US dollars and regardless of any other factor want to continue doing business in US dollars; many probably do not even do the sums to see whether it makes more sense to use local currency or foreign currency.
The result is an interbank market that seems undersized and a direct foreign currency payment system that appears oversized. In an ideal world the interbank market would be growing to approach the size of the auction system.
The authorities are reluctant to mess around at the moment with the export retention percentages, but we all need to remember that these are not laid down in any law. They are set by administrative decree and can be changed instantly. And that is something that can be on a table when we all start talking turkey. They were last cut back by 10 percent to an average of 60 percent, in return for allowing net exporters to retain their retained export earnings as foreign currency for all eternity if they wished.
This is where a lot of that US$1,7 billion deposited within the banking system comes from. It appears a lot of net exporters do wish to retain their retained earnings for all eternity.
The authorities, led by the Reserve Bank but with backing from the Finance Ministry, are making practical efforts to do something about the allotment delay on the auctions.
For a start Afreximbank has decided that Zimbabwe is not some deadbeat country.
We obtained some emergency short-term credit from that bank, but we have been a model customer. So Dr Mangudya has been able to use that far better credit rating to convert some of this short-term financing into something more useful, extending repayment terms and the like. That in turn has allowed the Reserve Bank to be able to issue letters of credit of up to US$150 million. This basically is what Afreximbank was set up to do, make trade in, out and within Africa a great deal easier, oiling the wheels as it were.
Secondly, and Finance Permanent Secretary George Guvamatanga has been stressing this, the system needs adjustment to allow banks to use some of those US$1,7 billion in deposits in normal banking business. Banks apparently do lend a little to net exporters at times, but net importers are shut out of the system and just find their bank manager’s door shut, locked and barred, with a security guard possibly hovering to escort them into the street.
Mr Guvamatanga, who successfully ran the local subsidiary of a major conservative bank for some years, described the situation as an incomplete market, We can guess, considering the way Finance Minister Mthuli Ncube and Dr Mangudya have been transforming the central economic authorities, that any changes are likely to be careful, phased and conservative. That is well to the good but they need to be worked out and introduced soon.
The third plank of Dr Mangudya’s tactical process, is to “engage” the Finance Ministry to have more of the Government’s foreign currency earnings moved into the auction system. Presumably Dr Manguadya knows exactly what the Government earns and spends, since he is their banker, so let us hope the “engaging” works.
Most of the strain on the auction system is a stress coming from economic growth. Productive sectors need to expand, not just run on the spot, and that means more machines and more raw materials. Some of the raw materials are local, since the farmers are growing more, but imports are still rising.
Growth pains usually involve liquidity. And here, as the Monetary Policy Statement noted, there is a dichotomy. Zimbabwe was over-liquid in local currency, which the Reserve Bank has been fixing. On the foreign currency side it is not illiquid but much of the potential liquidity is tied up in those US$1,7 billion in bank deposits, which makes the industrial sectors for practical purposes suffer from tight liquidity.
To use an analogy, we are bit like Kariba Municipality when it runs short of water. There is a huge lake with plenty of water but the pump is somewhat on the small side.
On the money side, the pump is owned by the banks, and what is needed is some rapid crafting of policies to make it easier for the banks to have a bigger pump, but still to be able to do so safely and represent the interests of both their depositors and their borrowers. We are continuing to move towards normality, complete markets it you like, but need to sail the boat a bit faster.