eBusiness Weekly
The list published by the Reserve Bank of Zimbabwe of the top hundred bidders on the foreign currency auctions has few surprises, but is well worth analysing to see who are the biggest importers in each sector, where are the major gaps in our own production of raw materials, and just what we all spend our money on.
As expected, food processing companies dominate the top level of allotments, with Cangrow Trading, a cooking oil manufacturer, taking the top slot with US$12 million, but others in food processing, and especially cooking oil, being well represented although the dairy companies seem to be only marginally behind.
So our first inference is that not only do Zimbabweans use a lot of cooking oil, but that we have to import the bulk of the raw materials, basically soyabean or crude soya oil, to meet the demand. So the second inference is that if Zimbabwean farmers could grow more soyabean then a lot of pressure would come off our export earnings.
The food processing companies would still be net importers, needing the recyclable hexane for their extraction processes, packaging materials, spare parts for machinery and even replacement machines at times, but the demand would be a lot less. And Zimbabwe would be richer if we paid our own farmers, rather than foreigners, to grow the stuff.
The other area where we need to help our farmers meet our demand is dairy products, with three big producers in the top 20. It is accepted fact that our dairy production has fallen while demand has grown, and that dairy farming requires capital investment and high levels of skill.
Some have put the blame on land reform, and the break-up of large dairy herds, but there are many parts of the world where small holders produce the bulk of the milk through co-operative and other ventures, and it looks as though the sort of efforts that were so successful in converting tobacco from an estate crop produced by a couple of thousand estate owners to a crop produced by tens of thousands of small-scale growers need to be applied. Cows can flourish in Zimbabwe, so it appears the problem is in organisation and investment, not in trying to produce something the land will not support.
The fertiliser companies are near the top as well. That is expected and import substitution is difficult. And, in fact, as farming gets better and more productive, producing the raw materials, we are likely to see the fertiliser companies rise even higher on the lists.
One point that some may miss, is that some large enterprises do not use central buying, preferring subsidiaries or the units where they are the largest shareholder, to operate independently and source their own currency. The Innscor empire, probably the largest food processor in Zimbabwe when all the bits are added together, appears to need around 3 percent of all allotted currency, although the group members are listed separately.
The allotment list gives market analysts some idea of how big some of the private companies are. Listed companies have to publish their figures, but private companies just have to tell the taxman. Now, in some sectors, we have an indication of who dominates which market.
Initial comments on the publication of the list have been favourable, with many welcoming the transparency. But some have asked: “Does everyone deserve the allotments?” These people have missed the point of the currency auctions. After 55 years of bureaucrats choosing who wins and who loses, we now have a currency market.
Once what you want to buy is on one of the two priority lists, and that is really the only input a bureaucrat has, anyone with the money, the documentation and a willingness to follow certain simple rules can bid. It simply no longer matters who they are friends with, or who owns them, or any other subjective criterion.
If they follow the rules, which are designed to make sure that things generally that Zimbabwe needs are bought and that no one is fiddling the process, you can buy. Even the percentages of the currency allotted to each sector and type of business are now market-related, rather than at the whim of a bureaucrat.
This is what a normal economy, where markets decide market shares and decide which business grows and which declines, rather than that system introduced at UDI and continued to last year which guaranteed the survival of deadwood and limited growth of the innovators and the efficient.
But, apparently although the system is designed for the honest, not everyone is in that group. Reserve Bank governor Dr John Mangudya announced that already 12 entities have been barred from the auctions, and another 62 are on the watch list of the Financial Intelligence Unit.
He carefully did not say if any of his top 100 were involved, but as this group takes 45 percent of allocations with those getting less than 0,2 percent of allocation, and there must be hundreds, probably well over 1 000, getting the other 55 percent, it is likely that the cheaters are lower down the scale.
The other factor the governor wanted to address was a tendency by some bidders to borrow money to buy foreign currency and what he saw as an over-willingness by some banks to lend, even authorising instant overdrafts.
At first sight this appears to be unneeded interference into the business world. But then, on careful thought, some of the dangers become more obvious and the question must be asked as to why some people borrow in the first place.
There is some legitimate borrowing, for example many businesses might float loans for new machinery. But this is not done on overdrafts and short-term borrowing; it is normally done at significantly lower interest rates in the money investment sector with tailored loans that are paid back at the same rate depreciation erodes the value of the underlying asset.
Those seeking overdrafts to fund working capital for raw materials, spares and the like are ready to push up their costs, since banks want interest, and distort prices. And finally we have potential speculative behaviour, someone wanting to amass huge stocks of material and reckoning inflation, which they help generate, to be greater than the interest bills. The auctions were supposed to kill speculators, but obviously some do not want to die.
And all this borrowing for consumables adds to money supply growth, and fuels inflation. So it is, after all, a legitimate concern of the governor.
His solution is modest. Banks are now forbidden to lend more than half the value of a bid, and we need to remember that all bids have to be made through banks. The gentleness of that measure gives an indication of just how serious the problem was with some bidders, who were obviously among the paper pushers rather than the producers, and were likely to be those who make money from wheeling and dealing rather than making things.
Present interest rates are not conducive to running businesses on borrowed money, and while the odd emergency can pop up, especially with the Covid-19 lockdowns and the like, working capital should be in stocks and cash, not in IOUs.
The cheating, and the potential cheating and speculation, are supposed to be blocked by the banks that were designated the gatekeepers of the auctions. The documents required with a bid are pretty simple and it is difficult to understand why banks forward bids that are dubious in the first place.
Those few dozen rejected each week because import and export documents are not finalised, a bidder has not taken into account their own nostro balances, or someone is not bidding for goods and services on the priority lists, should not be there in the first place if banks did their job.
And if a bank has a customer who runs accounts with five banks, keeping their nostro money in one and their auction dealings with another for example, they should be aware of this quite quickly. The RBZ and its Financial Intelligence Unit have the advantage of being able to see all bank accounts and other dealings of a bank’s customer with the authorities, but banks should take more care to know which of their customers are decent businesses who just need help and advice and which are more dubious and take more steps.
Meanwhile the Reserve Bank has to do more gatekeeping than a central bank should be expected to do, which presumably is why Dr Mangudya was so testy about sloppy banking and why he wonders about just what the banks he regulates are actually doing, and why.
