daniel chigunwe
THE rapid and far-reaching price rises over the last few weeks have been largely generated, as has been the case in the past during bursts of rapid inflation, by a dramatic rise in the value of the United States dollar on the black market and the general obsession that the black market rate is the “real rate” although that market handles well under 10 percent of all foreign currency dealings.
Something needed to be done and the authorities have reacted so far with several major actions plus some smaller adjustments.
On the major side, the Reserve Bank of Zimbabwe last week removed a lot of Zimbabwean dollars from circulation, more than $14 billion, when it launched the gold tokens, a sort of virtual gold, but backed by bars of physical metal in a bank vault.
The Ministry of Finance and Economic Development announced that those selling goods and services in Zimbabwe to Zimbabweans could keep all the foreign currency those local customers paid, rather than the 85 percent they had been able to retain before while selling 15 percent to their bank.
At the same time, the Ministry announced that some basic goods, and the first list announced the next day comprised 10 items, could be imported duty free, and even free of the import VAT.
Those items will be placed on Open General Import Licence as part of the general Government programme, in effect allowing the importer to just drive the goods over the border. VAT would become due when they were sold inside Zimbabwe.
The falling minimum interest rates for borrowers are likely to be hiked again. They were pushed dramatically to 200 percent in the middle of last year, but the Monetary Policy Committee of the Reserve Bank has been letting them drift down very gently, but it now appears highly likely in the co-ordinated blitz by the authorities that these go right up again, making it very expensive to borrow to speculate in the black market.
At the same time the Reserve Bank and the Government are co-operating on a “fine tuning”, as it is described, in the auction system, to make it a more precise mechanism that in effect punishes those who overbid for their foreign currency, since a bidder pays what they offer, by assuming that the Zimbabwe dollar has very little value.
The Ministry has also made it clear that it will be rigidly adhering to the policy of paying Government bills in local currency, and the Government is easily the largest buyer of goods and services in Zimbabwe, so dollarisation is not even on the agenda.
When we look at the likely effects of this range of actions, we need to first remember that the black market is not just a market that sells US dollars to people who want foreign currency.
It is also a marker where people with foreign currency buy Zimbabwe dollars. This double set of buying is what in fact creates a market, whether the legal interbank and auction markets or the illegal and criminal black market.
So if a lot of Zimbabwe dollars are removed from circulation, you get fewer Zimbabwe dollars chasing at least an unvarying supply of US dollars; in fact you probably have more US dollars available for sale in the black market as the black market premium rises, as some people with US dollars going shopping first stop by a dealer and change their money, rather than just handing over the US dollars at the till.
The net result is first stabilisation and then a fall in the price of the US dollar.
The $14 billion extracted from circulation in four days last week for gold tokens is more than half the more than $25 billion extracted for gold coins since these went on sale almost eight months ago.
So the extraction rate has been fast. But it was easily sustainable. The Reserve Bank has allocated 140kg of the gold in its vaults to back fully all the tokens it sold, but that is less than a two-day output from our miners, large and small, even when we assume they take weekends off.
Higher interest rates will stop the banking system pushing more local currency into the market through loans.
Here we need to remember that since the Government switched to something very close to balanced budgets some time ago, with borrowing limited to a minority of the income producing capital budgets, money supply growth in local currency has come from the private sector and the bankers.
The two Ministry moves also have a positive effect. Allowing those paid in domestic transactions to keep all their foreign currency, and remember that wholesalers and retailers are allowed a premium of 10 percent on the interbank mid-rate, allows the net importers in this sector to fund far more of their imports, without having to go to auction.
While the move to allow 10 items, so far, to enter the country under a general import licence and without paying any duty or VAT as they cross the border, was announced as a way of dealing with potential shortages, which would have to be engineered by speculators.
But it will also hammer a group of local manufacturers who grossly misread the present situation or who even wish to profiteer from it.
A bit of stock out or more commonly near stock out comes from the reaction of those paid in Zimbabwe dollars. They rush to the shops on pay day and buy everything except the perishables they need over the next month on pay day, rather than do weekly shopping.
A far bigger chunk comes from those who are trying to create corners in some goods, buying up stocks in supermarkets and licenced shops and moving these in the uncertain world of the tuckshops that demand foreign currency only.
Some retailers suspect some manufacturers are also giving these tuckshops preferential treatment, and in any case report that some manufacturers are criminally demanding payment from retailers in foreign currency.
Some manufacturers are also increasing prices in US dollar terms, and we are talking about 15 percent plus increases, which seems absurd and is simply profiteering.
We also have some locally manufactured goods sold in local currency, but with the price increases in the last couple of weeks far greater than the rise in the black market exchange rate, let alone what they actually pay at auctions or banks.
Retailers, who generally charge what they are told is the stock replacement cost plus their margin, have suggested that this group is now pricing on what they expect the black market rate to be in a month or in three months or six months.
So what the Finance Ministry has done is place the importers of the listed goods in exactly the same position of a local manufacturer, who pays no duty and with the tax clock for VAT only starting to tick as the goods are sold.
The last time this happened, at dollarisation, local manufacturers were hammered hard, saying they could not compete, even when importers paid duty.
This time there are some who appear to want back-door, or even front-door, dollarisation while keeping tight import controls so they can charge significantly more than competitors outside the country.
They are now being signalled that this is not an option. It is not all manufacturers who play these games. There is a block whose prices are rising, but within limits imposed by the actual market, not a pretend market. These will cope with import competition, but those who think it clever to overcharge will not, and should not.
The full range of the programmes of the authorities must now be made to work. Market forces and solutions are being used, not decrees from a Minister. These market forces see a decline in the amount of local currency available for the black market, and impose limits via open imports on just what the worst local manufacturers can charge. They will work.
Online Reporter