EDITORIAL COMMENT: Currency value, price rises defy logic and reason

One of the weirdest and most difficult to explain phenomena in Zimbabwe is the continuing fall in the value of the Zimbabwe dollar against the US dollar in both the official markets and in the black market.

For some time now, foreign currency inflows have exceeded foreign currency outflows, at least legal outflows which do not capture attempts to stash large sums of liquid cash in foreign countries.

This has been the case for a couple of years. This gives Zimbabwe what is known as a positive current account.

At the same time, the gap between exports, which are rising as our miners surge ahead, and by the end of this year are likely to be producing around 4,4 times the output of five years ago, with much of that value going on exports.

At the same time, many imports are falling thanks to our farmers with Government backing. Zimbabwe now in its third year of self-sufficiency in summer grain and in the second year of self-sufficiency in winter grain.

Even in the main two food areas where we do import, oil seed and dairy, the farmers have been raising production rapidly and closing the gaps.

And now the Government is implementing policies so fisheries will produce a national surplus. So we are moving closer to the stage where just about the only food import will be rice, and that is not a major food item.

With the rising tobacco, horticulture and cotton exports the entire agro-industrial sector is now a significant net exporter.

This means that although the balance of trade, that is the foreign currency account minus the diaspora remittances, is still negative it is only just negative, and the rising mineral exports will soon close that gap.

Normally economic theory would predict that in these circumstances the Zimbabwe dollar would be increasing in value, or even with the slight distortion caused by partial reliance on diaspora remittances to maintain a positive current account, would at least exhibit a stable exchange rate.

So President Mnangagwa, in his latest weekend column, is not the only one who is curious as to just what is happening in the foreign currency markets and why.

With sharply falling demand for agricultural raw materials and food, an ever higher percentage of the allotments under the foreign currency auctions should be going on capital equipment and spares, as industry and agriculture upgrade their machinery and mechanisation. Miners earn their own currency and so do not use the auctions.

Yet the President has noted that there appear to be some who buy currency on the auctions, handing in invoices as they must to justify their bid, and yet then fail to buy the machinery or raw materials they wanted the foreign currency for, or at least having this machinery and raw materials delivered.

The system usually means the invoices have to be paid, but collusion between a Zimbabwean importer and a foreign supplier could see fake invoices, cancelled orders and money diverted.

At the same time the Government, for almost five years now since the start of the Second Republic, has exercised a hair-shirted adherence to fiscal discipline, paying all current expenditure, the running costs of the Government, and much of the capital budget out of the money it has already collected in taxes.

A small portion of the capital budget comes from borrowing, but then the rigid policy is only for spending where there is a guaranteed source of income to pay off the debt.

So we get a modest loan for the Mbudzi flyover complex, tied to the tollgate income, or perhaps a dam for urban water supplies tied to the sales of the water that will be impounded.

Even the International Monetary Fund has praised this sort of highly conservative budgeting.

This means the private sector, rather than the Government, is creating most of the local currency money supply.

The main problem appears to be an almost insatiable desire among a fairly large block of businesses to hold foreign currency and to get this by fair means, the legal routes, or foul, the criminal routes.

So as the President noted, along with some cheating on the auction money, there are also those who divert factory output to the informal sector, where they are paid in foreign currency, or playing the fool with their swipe machines to make people pay with US dollar banknotes and other malpractices.

We also have retailers complaining about manufacturers who, even when they are forced to obey the law and sell in the currency of the retailers choice, who raise the US dollar price of goods as they arbitrage between official and black market rates.

And no one really knows where all this inflowing foreign currency is going. Net exporters might keep large foreign currency balances in their nostro accounts, money just sitting there and not being used to make more money as would be normal but that is still legal.

But the stuff that is being fiddled seems to be kept outside the banking system, as robbers now know, and some must be going to pad bank accounts in Europe or North America or tax havens in the Caribbean.

There are, of course, many honest and legal businesses.

Some were, with a lot of distaste, dipping into the black market to preserve value rather than play speculative games, and these are clearly those who leapt at the opportunity first to buy legal gold coins and now the more convenient gold tokens, backed by bars of gold at the Reserve Bank of Zimbabwe.

Since the total gold in the coins and the tokens is well under 500kg, and the Reserve Bank through Fidelity buys more than 2,5 tonnes a month, it is easy to see that the seven months sales of coins and tokens comes to less than a week’s output from the mines, so there is no question that the Reserve Bank could cope with a lot more sales.

If you want a number, 1 tonne of gold, a 12-day supply, would whip $1 trillion out of accumulated bank accounts and there is not that much money around.

A major investigation is now in progress led by the Ministry of Industry and Commerce and the report will go directly to Cabinet and, we hope, will also be published.

It is unlikely that there is a single reason for the recent spate of price rises and the recent movements on the black market: some will be deliberate profiteering, some will be other skulduggery, some will just be people going with the flow and some will be people scared of making losses and listening too much to gossip at a bar.

But presumably the Ministry will be able to centre on the prime causes and we hope, be able to name names.

At the same time there needs to be some serious economic analysis and research over why with foreign currency national surpluses and almost equality between exports and imports we should be even close to this mess in the first place.

It defies every economic textbook and only makes sense if we assume a lot of serious dishonesty, including a criminal desire to strip Zimbabwe of capital, and some deliberate manipulations by those who for so long have been making their money totally unproductively who will be out of business if rationality prevails.