Andrew
Eddie Cross
Out of the blue, the Reserve Bank of Zimbabwe (RBZ) announced in June this year that they were starting a weekly auction of hard currency.
The first auction was held in June and since then we have seen 10 such auctions take place and already we can see a number of direct implications:
The demand for hard currency revealed by the auction is much more limited than expected;
The bids have settled down to a level about 85:1;
It has had a direct impact on the informal market for hard currency where rates have stabilised at about 95:1; and
Inflation has retreated and retail prices are moderating.
Since the auction is only handling about 15 percent of all the hard currency available in the economy, the authorities must be delighted with these early outcomes.
But questions still remain regarding sustainability and the eventual impact on our economy as a whole.
While the official statistics show that we are at last operating within sound macroeconomic boundaries, with a fiscal and a balance of payments surplus, we still have to contend with an informal sector that is over two-thirds of domestic economic activity and has a direct impact on the formal sector in all spheres.
An example was the impact of EcoCash on the informal sector exchange rate and the shock discovery in February that they were handling billions of dollars from large depositors and in the process expanding money supply.
Also, we really do not know what is going on at our border posts and must accept that much of our trade is in form of goods smuggled into the country.
How this is funded remains outside the scrutiny of authorities and may be considerable.
We know the movements are substantial and that the supply of hard currency and the demand for the stuff is probably significantly greater than we see in official statistics. This makes exchange rate management a difficult task indeed.
But the main conclusion we can draw from the initial experience with the system is that the demand for hard currency here, for all purposes, is in more or less equilibrium. We are meeting our needs for imports at 85 or 95 to 1 to the US dollar.
This is exactly what the auction was intended to do, which was to discover at what rate the local market would clear and, therefore, reveal a price for US dollars that was more or less market-related. It took a lot of courage to allow that to happen, because everyone was saying quite the opposite: “Let the auction set the price and it will run away from us because demand exceeds supply.”
The talk was of rates up to 200 to 1.
With these expectations on the street and the existing lack of confidence in the local currency, this was driving up prices as retailers projected the cost of stock replacement.
Some retailers were already using 150 to 1 to set prices. Those are the realities that have emerged over the past ten weeks.
Sustainability
Now let us address the issue of sustainability. Inevitably this is tied to confidence.
If people do not have confidence in the local currency — call it whatever you want — then you will not want to hold it as a store of value.
You will go out and spend it when you get it or you will convert it into another currency that you think will hold value.
This immediately distorts demand and supply in that it drives up demand for the USD against the relative inelastic supply of the stuff.
If you can pay for your imports and get them into the country without paying border taxes, you will pay a premium for the currency required.
If you want to get money out of the country, the local currency is of little use to you and again you will pay a premium for hard currency or any other asset that is fungible — like the Old Mutual shares.
The introduction and protection given to local hard currency bank accounts has helped, but only to the extent that people think this means of holding the currency is secure and accessible.
There is more confidence both in the currency and the banks, but it is extremely fragile and any moves that disturb this equilibrium could immediately impact on the stability created by the auction.
The steady growth in hard currency balances to US$1,1 billion in July 2020 reflects this situation and the decision to bring back multi-currency policies to return otherwise dead currency to the market has helped.
Clearly we will not be able to claim that the auction is meeting our requirements for currency at a market rate until we are able to bring all requirements to the auction.
Fuel is still funded elsewhere by the RBZ and local free funds, and we still are not servicing our capital account needs properly — interest and dividends and debt settlement.
When we do, we will have to put more currency on the market and it is the availability of such resources that will determine the rates and sustainability, and it is this that market watchers are concerned about.
There is no doubt in my mind that we are on the right path to achieve this.
In the past year, exports have increased by 17 percent and imports have declined by 6 percent.
If we keep this up, we will get there, and the weaker local currency is helping in this process.
Low-hanging fruit
However, we must take steps to get our gold industry on the right track into the future. Gold is by far and away our most important single commodity and it is a low-hanging fruit.
If we were able to pay the full market price for gold to producers and to stop manipulating the market, it would boost investment and output and reduce smuggling into South Africa.
The impact on our balance of payments would be immediate and substantial.
The other major component of our balance of payments is the Diaspora and remittances to their families here.
The great majority of these inflows avoid formal channels and are difficult to capture.
But if we gave more attention to their needs and concerns, this could be remedied.
Basically therefore, I give the auction system the thumbs up as a game-changer and the most significant contribution to stability and growth in the past two years.
Let us stick to the game plan, it’s working and we need to give it more time and support.
Eddie Cross is a member of the Monetary Policy Committee. He wrote this article for The Sunday Mail.
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