THE fundamental fundamentals of the Zimbabwean economy are in place: the government of the Second Republic is living within its means for the first time since independence with borrowing limited to 1.5% of gross national product and even then only for expenditure income-generating investments.
The balance of payments is positive, so we earn more currency than we spend. In his address last week to Polad, the grouping of leaders of most political parties, the Minister of Finance and Economic Development, Prof. Mthuli Ncube listed the achievements.
Among these, monetary policy reforms have so far seen US$3.2 trillion worth of currencies auctioned in the two years since this system was put in place just before mid-2020. in turn seen the manufacturing sector, which gets the overwhelming majority of auction currency, produces the bulk of what we all need to buy, pushing our factory capacity utilization to almost 57% last year , according to the latest statistics.
This in turn sharply reduced imports, allowing faster growth with less pressure on currencies, reducing costs and creating jobs. Of that $3.2 billion, 64%, or just over $2 billion, went to raw materials, equipment and machinery, direct inputs to industry. But a good portion of the services, chemicals, consumables, packaging and energy components of the rest would have ended up being spent by industry or for industry. And all of this is on top of what is earned and spent from retained export profits.
So what’s the problem? There are many. The first was described by Professor Ncube, the “price discovery” mechanism. How do you assess the exchange, the exchange rate?
Bids made by buyers were meant to do this, but the Reserve Bank of Zimbabwe, as industrial demand for hard currency increased, continued to allocate more currency than was immediately available in this pool, generated from of the refunded part of 40% of export earnings, for these essential imports.
This created a backlog, the second problem. The calculation that the exporters would sell part of their 60% retained earnings at the hammer price, since there was a market exchange rate, was wrong; they simply accumulated them.
This hoarding was part of the problem described by the Governor of the Reserve Bank of Zimbabwe, John Mangudya, to Polad, the extreme nervousness over the local currency and the desperate desire of so many people, not just exporters, to hold as many foreign currencies as possible. This, as he noted, stems from the sad history of inflation in Zimbabwe, despite the fact that the fundamentals are now so different.
This hoarding and desire for hard currency in turn fuels the black market and that fuels inflation, so we get a set of self-fulfilling prophecies. This is just as we deal with legitimate and semi-legitimate business decisions, mind you.
Solutions are put in place. Price discovery is now the willing buyer’s market, the interbank exchange rate. This was established at the beginning of April and, although it was a modest market, it produced a purely market-based rate.
In mid-May, the Reserve Bank, as part of a major auction reform, rejected all bids well below this rate and aligned the auction and interbank rates. And Professor Ncube clarified to Polad that the interbank rate, which is set by the banking industry without any massage, is the real rate and the right price discovery mechanism and he wants to see the use of this market expanded.
At the same time, the mid-May reforms saw a program to clear the auction allocation backlog quickly and then keep it cleared by selling only what was in the pool. Thus, the two major problems built around the fundamentals have been resolved. All we need to do is keep them sorted.
The heart of the rest of the problems is the black market and the creation of liquidity by the private sector to feed it. Liquidity was used by buyers in this market, generating ever-increasing demand and, as a main side effect, causing most of the inflation.
Here, a number of measures were announced in the mid-May reforms, which are now being implemented.
The cheating of certain companies, with the connivance of the banks, either deliberately or because they did not care, has been known for some time.
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Last year, Dr Mangudya had to change the rules so that a maximum of half an offer could be borrowed. The other complication was that some were buying at auction and pricing using the black market rate, which required continuous monitoring.
But also last year, it became clear that the private sector and banks were now feeding the money supply, rather than strict government, and the monetary policy committee had to start measuring the broad money supply.
It then became clear that things were much worse than expected, as Dr Mangudya said in a statement late last week when the first results of detailed investigations launched last month came in.
The top 15 culprits were borrowing billions, even though they usually didn’t need them, and using them to stockpile materials, and using them to trade on the black market and even fund other people to buy currency foreign.
These companies were then not only arbitrating between the official market and the black market, but they were also arbitrating over time, buying stocks and making the products at one price, then reselling at the inflated price down the line. , creating huge profits that erased the debt with a large sum of money remaining.
And if they could buy currency at least at auction and sell it all at black market rates, those profits would be even greater.
This means that these companies have a vested interest in maintaining high inflation rates and high premiums between the black market and official markets. They take advantage of poverty. The worst had loans totaling $6.5 billion from 12 banks. Although Dr. Mangudya did not name any names, the list of suspects is short. Of the 54 companies listed on the Zimbabwe Stock Exchange, 17 have a market capitalization below this figure and only 10 are capitalized at 10 times this figure.
Dr. Mangudya also mentioned that some of the 15 had complex structures with multiple subsidiaries each borrowing and with a holding company that produced little but also borrowed heavily. So if the champion is one of those and part of the ZSE, the list of suspects is indeed very short.
His solution was to make sure the banks do their job properly and know their customers, even though a company or group using 12 banks is probably a worrying revelation for the banking industry.
The second thing banks need to do is ensure that loans are used for normal productive activities, and not for playing arbitrage and black markets.
This means that banks must be responsible and careful. In any case, the RBZ’s financial intelligence unit will be watching everyone in these 15 and their banks, as well as others who may get caught as investigations continue. Authorities must now be ruthless in taming and eliminating this behavior. Creating misery and then feeding on it is reprehensible behavior.
Edward Heath, a pro-business British Conservative Prime Minister, once used the phrase “the unacceptable face of capitalism”. That’s a good description of what we face from these companies and their banks.