The growth of the auction system to the record US$31,6 million that was bid for an allotment this week can be gauged by what the bidder paid for this currency.
In a few hours on a weekday afternoon more than $2,5 billion, around 5 percent of the total supply of Zimbabwean dollars, passed into the accounts of the Reserve Bank of Zimbabwe, a fairly large dent in the liquidity of the importing business sectors.
Since most of the auction money is spent on raw materials and on machinery and equipment, the effect of the weekly breaking of bidding records we have seen for most of this month will, cumulatively, have caused an even bigger dent in liquidity, since it takes a bit of time for the bidders to get delivery of their imports, or even if they are paying off credit supplies it takes time to process materials or sell what they have processed.
The four September auctions have seen US$88 million allotted, and a little over $7 billion removed from the bank accounts of importers.
Of course the Reserve Bank has been continuing to buy the portions of export earnings and local foreign currency payments that must be surrendered, so these Zimbabwe dollars are not being destroyed but rather transferred into the accounts of exporters, and presumably giving them adequate local currency liquidity to pay their immediate Zimbabwean bills without having to tap too heavily their retained earnings in nostro accounts.
But the general effect of a growing auction system is to remove the pressures of over-liquidity in the Zimbabwean financial system. Importers have seen a significant drop in what they have in ready cash, net exporters are using their ready cash in Zimbabwe dollars and are notoriously reluctant to tap their nostro accounts for local transactions, making that huge lake of more than US$1 billion remarkably sticky.
The net effect of all this movement is in practical terms a drop in the de facto money supply and sharp decrease in the sort of pressures we have seen from too much liquidity.
In straight forward terms this will reinforce the pressure for falling inflation rates, already seen since early August by a near flat curve for the exchange rate. With pressures for both cost-push and demand-pull inflation dropping the introduction of the auction system has had a double effect on not just taming inflation but even raising the possibility, still perhaps vague at the moment, of even negative monthly inflation, although if that happens the negative numbers will be trivial.
The fall in importers’ liquidity also means that there simply cannot be pressure on the exchange rates to rise, and explains to some extent the tiny weekly firming of the Zimbabwe dollar we have seen since the end of August. That firming in four consecutive auctions, a cumulative 2,28 percent, is thus driven by economic fundamentals, not by any attempt to manipulate the system. If you increase the supply of foreign currency and decrease the liquidity of the buyers, you do suddenly get a point of stability.
This explains some of the comments coming out of business houses, and even from exporters thinking about a deal, that there is little interest for nostro currency that costs more than the auction rates, although there is a still a premium on the black market for US dollar banknotes, but even that premium is now lower and very very steady.
The other major point in the auction this week was the narrowest band in bids we have seen. With a top bid of $86,70, the lowest we have seen since the rate went stable at the beginning of August, and a low bid of $78, the highest for a month, we have reached the position where bidders are now in a 10 percent band and are obviously taking a great deal more care to work out just what number they should write down on their application forms.
The growing confidence that things are working out has been backed by the Government in its negotiations with the civil service unions. The Government has made it very clear that while it will offer its workers the maximum it can afford, it will not go over the limit. In other words the Treasury is following the lead of the more responsible corporations; it will keep its percentage of income going on staff costs relatively constant, but will be looking at wage increases that can be backed by income, not by the desire of employees to keep their standard of living constant.
Obviously Government income is rising. The inflation we saw in the first six months of this year, and the reasonably genuine attempt of private employers to raise salaries in partial compensation, has pushed up tax revenue. The adjustment In income-tax bands while large in nominal terms did not take into account the full ravages of inflation.
This is one reason why the Government has to wait a couple of months after a flood of wage settlements in the national employment councils before it can sink a deal with civil servants. It needs the extra taxes, paid in arrears, from the private sector before it can spend more itself. Now that Zimra can give the Treasury a fairly reasonable estimate, or at least a good ballpark guess, of what will be coming in as a result of changes in taxpayer income, the Treasury can in turn give the Government negotiators a percentage to work with in the salary talks.
The inflation we saw in the first six months, and which in the end made the auction system politically possible since it would result in zero price rises, has reduced spending power across the line. For the first time in over a decade, and we must remember the low US dollar salaries that were being paid when dollarisation started and before finance ministers started printing fake dollars, Zimbabweans are being paid what the fundamentals give as the right numbers, not what people expect to support a standard of living that was built on imagination.
Even those who reckon they could inflation-proof their income by switching to US dollars have seen a drop, because they have fewer customers. AT the bottom of the ladder even Zupco has seen this with its last doubling in fares. Zupco kombis charge twice as much as large Zupco buses, although still below the fares charged by the illegals. But outside rush hours Zupco kombis almost always have empty seats. Most of the private sector had already discovered that tracking prices to the US dollar or to inflation saw volumes fall, and most suppliers are now having to examine their cost structures with the attention such an exercise deserves, rather than just assume they can keep prices stable in real terms.
In many ways, what we have seen in our economy since the beginning of August is a return to what we saw in 2008 when we dollarised, a completely new economic situation.
The main difference we now have to accept is that this time we cannot consume our way out of reality by pretending we are richer than we are. We have to accept that we are not rich, and that the only way to become rich is through producing more, not by consuming more.
This places a burden on the private sector, where the production must take place. By allowing market forces to fix the fundamentals, along with its own rigid discipline, the Government has accomplished the revolution that was needed. Zimbabwean industry is now largely protected by market forces, rather than by licensing or edict. In home markets manufacturers have driven out imports of consumer goods by lower costs.
But there are still large swathes of light industry where we have lost our ability to produce. Some of this loss is because we are now using market forces, rather than crony capitalism and Government protection against imports. Part of it is because we were pretending that our local currency was the US dollar, which through a spanner into the costing equations. And part of it was because some industries were inefficient, could not manage costs, and assumed that because they could make money in an economy controlled by edict they could overcharge for inferior products.
That attitude is still around. It beggars belief that the local product should cost more than the import, and yet we still see that in far too many products. But there is a growing group of business people who have bitten the bullet, recognised the new reality and are starting to operate in a real world. The remainder need to follow suit.