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The slow downwards drift of the RTGS dollar against the US dollar on the interbank market has two causes: the most obvious is that there are more RTGS dollars chasing fewer US dollars but there has also been a switch by businesses from the parallel market to the interbank market.
The first has a number of mainly negative implications.
A downward movement in the exchange rate does introduce inflationary pressures, not immediate but there beneath the surface and building up pressure. It also has negative implications, considering the high level of inequality of incomes in Zimbabwe, in that too many essential goods have too high a percentage of imported raw materials.
The second cause is a lot more positive.
Many companies were resorting to the parallel market to source currency for essential imports and using even today’s rates on the interbank market are obviously sourcing their inputs at a lower cost and so are able to reduce prices. We can see some of this in shops and supermarkets.
But the main problem we now face is that the exchange rate for people importing critical essentials — such as medicines, baby food, the soya beans used to make most of our cooking oil and margarine, and the wheat to make our bread and flour — is the same as the exchange rate for those who want to import whiskey or luxury German motor cars.
And all this is being done in a peculiar environment of a burst of high inflation and a country with a low level of industrialisation.
We have just had a strong burst of inflation. As we explained last week this cannot be a long-term event because money supply is not rising, so high inflation must burn out. But, regrettably, inflation is the antithesis of Robin Hood, it moves money from the poor to the rich and so heightens the inequalities in Zimbabwe, though with the Government and many firms introducing cost-of-living adjustments in pay on a sliding scale will help there. The high demand for imported consumer goods by a small percentage of the population does put pressure on the exchange rate and does raise the percentage of import earnings that go on consumption rather than production.
Zimbabwe’s industrial base is a second problem. There is a lot of industry, and factories are still being built. But a very high percentage of the raw materials required for that industrial base have to be imported. We can contrast our position with that of South Africa. The rand has done some amazing gymnastics but with very modest effects on prices of goods and services. This is largely because almost everything South Africans buy is made in South Africa and often from South African raw materials.
The level of industrialisation in South Africa, and the breadth and depth of the industrial base, is about the sole positive inheritance from the apartheid era and is probably the major tool the South African government has to eradicate the thousands of negative inheritances.
During the growing international isolation of the apartheid regime, it fought back by widening and deepening an already fairly impressive industrial base and working out ways for its farmers and miners to supply the raw materials for that industrial base. Laws, rules, subsidies, Government contracts and political pressure were all applied to localise as much production as possible.
With the advent of democracy and the opening of South Africa to world markets that industrial base was so strong that it did not collapse. South Africans may have had more choice and may have increased the percentage of imported goods in their shopping trolleys, although not excessively, but at the same time the industrialists were able to export more.
We see that in Zimbabwe. Most internationally branded consumer goods on our shelves and streets are imported from South Africa.
Zimbabwe, admittedly, tried the same policy at a somewhat lower level in the UDI era and the first decade of independence but used a pure licence system that was far from transparent, encouraged low quality and inefficient businesses, and was far too open to crony capitalism and even when fair was looking at short-term results rather than a long-term industrial growth. So the wheels fell off. Then our reforms were derailed by bad Government accounting, printing money in effect, coupled with a regrettable increase in corruption and crony capitalism, which is a system where who you know is far more important that what you do. South Africa was far from perfect in its liberalisation, but took action sooner.
What we can now best call the US dollar era ended some of the worst of our problems but grew a distorted consumer-based economy out of the ruins of hyperinflation. Factories opened, production rose but few industrialists bothered about their supply chains since it was so easy to import just about every raw material they wanted. So the new industrial edifice did not rest on a solid basic foundation. People talk about the modern smart economies, but even those still need things like steel, oil seeds etc. and it would have been handier if more of these had been produced or grown in Zimbabwe. And a far too high percentage of that consumer-led growth was fed by the sloppy Government budgeting and money supply growth.
With the advent of the Second Republic we are starting to get a lot of things right. Crony capitalism and favouritism have gone, replaced by a determination to back anyone who invests and shows willingness to produce stuff, create jobs and pay modest taxes. Economic reforms that use market forces rather than a licensing regime are being accelerated. Government budgeting is now exceptionally tight.
But we still have our consumer-led economy demanding more imports than we can pay for from exports and still have too high a percentage of our export earnings going on consumption rather than production.
Monetary policy can help a bit. We have suggested before that the Reserve Bank of Zimbabwe can use monetary policy to cut back bank loans for consumption and increase lending for production. We have already heard complaints from some in the cooking oil industry that they need access to more RTGS dollars to buy their US dollars to import soya bean; actually they want cheaper US dollars but the root cause is that money supply is now starting to reflect the true economy and they cannot just dip into a lake of cash.
However, we now think there is a greater role for fiscal policy to help. Protectionism is not desirable; we do not want or need to recreate inefficient industries and we do not need a licence regime. But we can use fiscal policies, and Government purchasing policies, to reduce consumer imports. To an extent this is being done with import duties on consumer goods payable in foreign currency (raw materials are either duty free or low duty and the VAT charged comes from the sale of the final products).
The fiscal intervention in fuel was dramatic, with a big rise in duty coupled with a rebate for producers. But consumption is still too high.
Trade pacts and modern global practice make high customs duties difficult but there are other mechanisms; just one example would be a high excise duty on alcoholic drinks with a big instant rebate for local production. At least we would squander less forex on whiskey.
Fiscal intervention, in other words, needs to have the goal of cutting inessential imports, not protecting local industry, and so we need an extension of what has already been done in the last few months rather than a return to the bad old days. There is no magic wand, but a spread of modest fiscal and monetary interventions could do the job without creating new distortions.
Bongani Ndlovu