Zimbabwe: RBZ Must Work On Auction Perceptions

The Reserve Bank of Zimbabwe has now run 43 foreign exchange auctions, and adding in the short Christmas break this means that they have been supplying the net importers in the productive and other critical sectors with their foreign currency requirements for just over 10 months.

So it is extremely difficult to understand why some importers are nervous that the system will be dropped. Admittedly, there have been delays within the banking system to supply the foreign currency bought at auction instantly.

Some delays are in-built, such as the need to check that the tendered invoices are in fact genuine and the prices quoted are the real prices for a real order, not some attempt involving an importer and supplier to externalise foreign currency.

Some delays are because of the seasonal flows of foreign currency into Zimbabwe, a surge as the tobacco crop is sold, for example, and the fact that many small-scale miners find it difficult to mine or pan gold in the rainy season. But this is not something new.

Zimbabwe has been living with this for around a century now with its two largest exports and banks have developed and can use a variety of instruments, such as letters of credit, to smooth out the surges and dips in major export receipts to match the fairly steady demand of importers.

The Reserve Bank of Zimbabwe has made it clear that it expects bankers to be modern bankers rather than cowrie-shell counters.

The fundamental stability of the auction system has been clearly explained over the last week by Reserve Bank Governor Dr John Mangudya and by leading economist and member of the Monetary Policy Committee Mr Persistence Gwanyanya, with Mr Gwanyanya doing the sums.

Basically the 40 percent of export earnings that have to be sold promptly on receipt to the Reserve Bank will come to around US$1,8 billion this year.

The auctions, at present average sales, will need US$1,4 billion. Obviously, as the economy continues to grow and we climb out of lockdown downturns, demand will rise, but there is some extra, and in any case the 40 percent is supplemented by 20 percent of what businesses have to sell promptly from what they sell in foreign currency in Zimbabwe and the Government’s own addition of 15 percent of its foreign currency earnings from duties and taxes charged in foreign currency.

In addition, as Mr Gwanyanya noted, some import demands will fall this year.

We have grown most of our own food and have made major inroads into cutting imports of those items, like soya beans, that still need supplementing by imports.

Against that was a rise in imports of raw materials for fertiliser, and regrettably a rise in imports of made-up fertiliser as our own fertiliser industry is still upgrading and expanding its production facilities. But that still produces a large foreign currency saving.

Some of those savings will have to go on imports of Covid-19 vaccines, a one-off, but we have the slack.

The Reserve Bank and the Monetary Policy Committee are aware of the potential liquidity needs in the banking sector, despite its combined holdings of US$1,2 billion, and to speed up the processes are now allowing banks to retain half the 40 percent they have to buy from importers so this can be immediately recycled to fill the successful bids of their customers.

There are still those who see the black market as important and believe that the two rates, which are both market-driven although the black market has huge margins between buy and sell rates because of its weird inefficiencies.

But, as Dr Mangudya pointed out, 95 percent of imports are now being bought through the official channels: the auctions, the small interbank market, and the foreign currency accounts, such as what the net exporters retain, and just five percent is black market. The rate generated by the auctions now dominates the economy.

Admittedly the black market tends to supply things like luxury consumer goods, so the rates are noticeable to people who buy these, and they would include chief executives of large companies, but its importance in the national economy is small and decreasing.

In fact it looks from those figures that a fair percentage of black market money is being used to externalise funds, rather than buy stuff.

But the figures also show why the monetary authorities are not really fussed about black market rates since that market is now a small side-show and has nothing really to do with the real economy.

The real economy functions in the banking sector, not in the tin-trunk sector, and so long as the real economy is market driven, and the auctions are that, with the Reserve Bank basically just ensuring that the minimum bid rate is realistic and then umpiring the market.

The separation of markets and the marginal nature of the black market means that rate convergence is not on anyone’s agenda.

This does not mean that the Reserve Bank has no managing role. It has uncovered cheating, and so has handed out a few red cards, and it acknowledges the delays and is now in the process of fixing that.

But since the delays are the old seasonal problem, now about to flip over the other way as monthly exports rise suddenly, the one remaining area is the market perceptions, and hence the efforts by the RBZ to expand its explanations in the past week.

This is important. The RBZ cannot sit as an inscrutable gnome any more and needs to explain and take people more into its confidence. A lot of progress has been made in this regard, but it is now better to over-explain rather than keep silent, and let rumours echoing in dark corridors fill any gaps.

As Zimbabwe continues to accelerate into the normal and real world from its 50 plus years of diversion into a managed economy, and at times badly managed economy, the rules of the normal world need to apply.

Government has learned, and while it might swamp people at times with information we all at least know how things are moving. Those post-Cabinet briefings, for example, not just give information, but allow questions when people might not understand fully just what is being said.

The advent of the Monetary Policy Committee has boosted information flows, but not everyone is as economically literate as the high-flyers in the Reserve Bank and the experts on the committee, and the lack of practical experience in a real market economy does hinder instant understanding.

So at times things like committee statements do need more explanations to correct misconceptions before they arise. Many commentators, including some journalists, can also grab the wrong end of the stick, so maximum information flows are required.

There will always be those who think the worse of anything; that is human nature. But when facts and figures are presented to back up generalisations and explanations, most people can start to understand and can make assessments on the things that affect them reasonably accurately.