The success of the auction system for allocating foreign exchange and setting exchange rates, along with the addition of the small-bidder auctions last week, hides potential elements of instability that might well need to be addressed.
The first, having the big bidders and the small bidders on different days, was addressed last week after the Reserve Bank of Zimbabwe lucked out on the first auction with a weighted average almost identical to the big bidder auction two days earlier.
While the big-bidder weighted average is the official rate, regardless of what happens on the small-bidder auction, it would have been a nuisance to have different averages a couple of days apart. Some would have read into the small-bidder auction a signal that was never intended to be part of the process. By having them on the same day, even if they produce different average rates, the only inference that can be drawn is that smaller bidders are willing to pay more, or pay less, than larger bidders. The two auctions remain separate, but can no longer give signals to each other.
The second level of instability is the fact that close on three quarters of the money supply is in the form of foreign currency held in nostro accounts. So far cash-rich major exporters have not been all that keen on entering the auction, preferring to hold these huge cash reserves of well over US$1 billion in foreign currency, and the Reserve Bank has been hesitant in enforcing its own rules that unused or unsold retained export earnings in nostro accounts should be surrendered after 30 days at the ruling exchange rate.
Net exporters have always, since the start of the retention schemes, argued that the 30-day rule is impractical and would harm them. In the latest set of arguments the mining industry has noted that 30 days is not enough time to give orders and process payments for the approved imports needed by miners.
They are probably correct in this stage of our economic reforms. The checks that are required take time and, in any case, trying to predict your foreign currency use for months in advance, and the sort of prices your suppliers might be charging and world markets might by paying, is tricky. Obviously every exporter would like at least something In hand in case of a fall in prices for their production and a rise in prices for their inputs and especially for sudden breakdowns that need expensive spares.
This is why, after all, most sensible companies try to have cash reserves in the first place and if your inputs are imported then you want those reserves in foreign currency.
In a normal economy with very stable exchange rates and easy access to foreign currency, at least for imports that most people agree should have some priority, there would be little problem if exporters retained nothing and bought their foreign currency through their bank as they needed it. This is how business is done in countries with totally convertible currencies and how it is done in most countries with local currencies that are not acceptable for international payment but where foreign currency can be bought and sold without much trouble.
Even here there is hedging against fluctuating exchange rates and those large US dollar nostro holdings of our major exporters can be regarded as a major hedging operation. One can sympathise with exporters, considering the monetary and financial history of Zimbabwe, but hedging with three quarters of the total money supply is an extreme position.
Government fiscal policies have an effect. The rigid adherences to budgets and the creation of budget surpluses have slowed the creation of Zimbabwe dollars down to normal levels. Printing of more Zimbabwe dollars, either Gono-style with a printing press or the electronic printing in the multi-currency era when we were, in effect, printing fake US dollars, has been eschewed.
But this is built on trust in a particular President and a particular finance minister. All other finance ministers since independence, after promising to be good, run real or virtual printing presses and were allowed, or even encouraged, to do so by then then President. The odd attempt of a finance minister, think the late Bernard Chidzero, to rein in spending to what we could afford was countermanded.
Even when we had a deal with the International Monetary Fund this was frittered away on unnecessary consumer imports, rather than used to reform the economy since the switch from the closed economy to an open economy was considered politically damaging, although most of Eastern Europe and, in the great classic case China, were able to gasp that nettle and explain to their people just what was happening and then start showing results quite quickly.
Zimbabwe missed that opportunity although, like most centrally planned economies, we had been through the rapid expansion period, in our case in the UDI years and the first decade of independence, and were then in the stagnant phase with the wheels coming off. If we had bitten the bullet in the 1990s and done ESAP properly, our economy would be about twice the size now.
Land reform would have brought down vast quantities of political flack, but implementing the sort of deal that the Second Republic managed to hammer out in just over a year with the former landholders, would have seen far more countries unwilling to impose sanctions and significantly reduced leverage by Britain and the USA in regional and international forums.
But we have been fixing things in the last two years, and that should have been building up more trust, at least to the levels where we should now be at least discussing implementation details of economic reforms, rather than sitting in enclosed camps debating policy while we hope “everything will be all right on the day”.
And the main details we now need to work out is how can we mobilise those export earnings sitting doing absolutely nothing in nostro accounts, except providing ever-more expensive insurance for the holders. The price discovery process is basically complete. AT some stage we are going to see the exchange rate fall. It might be this week; it might be next week; it might be next month. The first fall will not be serious, but if we have been creating a bubble that could lead to nervous selling that in turn could lead to more selling.
Here industry is going to have to take a lead. Industrialists saw very clearly the serious problems of the dollarization of the economy, driving up their costs compared to regional and international competitors. Their dream must be a stable local currency but with easy access to foreign currency for their inputs. That would give them control over costs, and thus ownership of the local markets with a competitive edge in export markets, but without the serious constraint of limited imported inputs.
The recent estimate that as Africa moves, albeit in its hesitant and jerky progress, towards a continental free-trade area, Zimbabwe will be one of top two winners means that this is even more important for our industrialists. We once had one of the most industrialised economies in Africa. WE have fallen behind a lot, but we still have one of broadest industrial bases and a very large pool of educated, skilled and now, 40 years after the opening our education system to all, experienced workers and managers.
The dream of the industrialists, and the vision of the Government, appear to be very nearly identical. So there should be far more interaction of how to achieve this shared outlook without sudden dislocations and jumps, The interests of primary producers in agriculture and mining have to be taken into account at a serious level, but present policies appear to be doing that rather well. Farmers, their private sector backers, and the mining have been given security and support, so they can be taken aboard.
The commercial and retail sectors have been less fussed about local currencies and frequently sigh for the dollarisation days, but they too can be persuaded once they can see that having a lot more people with more money will benefit them in the medium term and make them rich in the longer term. We do not have to be a nation of shopkeepers: we can be a nation of producers.
So we need debate, quick debate, at the national level between producers and political policy makers on how long the temporary dual pricing regime, introduced just three months ago, should last and how it can be adjusted and eventually eliminated. Emergency measures should not the norm, but as they are changed into more normal policies that change needs to be managed.
It is possible. The Covid-19 pandemic bringing everyone closer, the RBZ willingness to bring private sector representatives into its policy setting and implementation process and the desire of the fiscal authorities, with the farmer deal being the last example given, to fix the underlying inherited mess open new opportunities that need to be seized.