The Sunday Mail
Clemence Machadu
Howdy folks! Liquidity challenges are one of the macroeconomic issues bedevilling the sustainable growth of the economy.
The shortages of foreign exchange have been affecting the smooth importation of critical goods and services, and a host of other challenges.
Folks, the greenback continues to be erratic in the country through various leakages such as rising trade deficit, smuggling; as well as holding of the hard currency for speculative purposes and for fear of the unknown.
It is also happening at a time when monetary authorities are injecting more bond notes whose convertibility to the US dollar has proven to be troublesome.
Since bond notes cannot be used for imports and since money in the bank is not easy to use for payments, given how there is a huge backlog for foreign settlements, the shortages of physical greenback has been intensifying.
This has led to the proliferation of a thriving black market where things are now happening.
The elusive US dollar is now being rationed on that black market at usurious premiums and some desperate importers of critical finished goods and raw materials have been left with no option but to get the greenback on the parallel market.
It’s do or die for local companies; otherwise they go bust if they don’t get adequate forex timeously to manage their operations.
But the increasing premiums they pay on the black market are being passed on to the consumers, which is why prices are rising.
People now prefer to save their money at home in US dollars, whether they want to use it later or now.
Keeping it in the bank while the premiums of getting it out are rising means that they will lose value for their money.
So the participation of members of the public in purchasing US dollars and holding them as a reliable store of value is also contributing to the high demand for the greenback that is also causing more shortages and rising premiums.
A sustainable solution lies in managing the rising imports and increasing surveillance on our borders to avert smuggling of goods.
The country is still importing products that we have in abundance. For instance, maize worth $101 million was imported between January and July, yet there is plenty of maize locally.
So there should be enhanced scrutiny on what is being imported in order to manage greenback leakages.
Just looking at the year-on-year trade deficit for the past couple of months, you will realise that for the month of June it rose 4,9 percent to $230,2 million, further rising 18,23 percent in July to $217,9 million — mainly on account of rising imports.
There is also need to deal with externalisation of the greenback.
Zimbabwe is being used by some people as a hunting ground where US dollars are rounded up and then smuggled to other countries where there are better economic fundamentals for doing business.
While short-term measures like increasing surveillance on cash smuggling can be implemented, a sustainable solution lies in making sure that we have friendly policies that encourage more investment to trickle in as well as more foreign loans and other lines of credit flowing into the country, apart from just growing exports.
Again, the fixing of bond notes to the dollar seems to be promoting more greenback shortages as it has resulted in the emergence of rent seeking elements who are taking advantage of the US dollar shortages.
If we can walk down the memory lane, we can get a glimpse of how an almost similar scenario of a fixed exchange rate and price freezes fuelled shortages of goods in the formal market.
Folks, in December 2007, for instance, when the official exchange rate was US$1:Z$30 000; the parallel market rate was US$1:Z$1,5 million.
While the market forces were changing equilibriums, the unrealistic official exchange rate remained unchanged for a number of months and by April 2008, when it was still fixed at Z$30 000, the black market rate had sharply risen to US$1:Z$100 million.
The impact of this huge disparity was that it created huge opportunities for arbitrage by rent seeking elements.
For instance, taking the April 2008 rate; one could exchange their US$1 to get Z$100 million on the parallel market and then go to the bank to apply for US dollars; and one could get as much as US$3 300.
Of course, banks did not have foreign exchange to meet such kind of demands.
But what is clear here is that the situation created excessive and needless demand for foreign exchange as just about everyone had Zim dollars to buy the greenback with a view to preserving unearned value through it.
The situation was also worsened by the fact that the then National Incomes and Pricing Commission was enforcing price freezes whereby producers and retailers were required to charge ridiculous prices for their products, which were not even reflecting the costs of production and rapidly changing circumstances.
Producers responded by either stopping production or moving their products to the black market.
Fast forward to the status quo, the continued shortages of the greenback are apparently reopening 2008 wounds slowly.
While the money in the bank, mobile wallets, bond notes cash and greenback cash are said to carry the same value, we are seeing different rates being charged, which has created thousands of “jobs” for rent seekers.
It is also resulting in people’s real income levels rising, albeit without earning it or producing anything, which increases the demand for goods and services in a way that is not sustain- able.
For instance, if someone changes their US$100 on the black market, they can get as much as $150 transferred into their mobile money wallet.
They can then go and shop goods worth US$140 in supermarkets and pay with mobile money.
How is this different from “burning” which was practised during the “Casino Economy” era?
What is worrying now is that these premiums have of late been rising.
If you want to get the greenback by cashing out from your mobile wallet, the premium can be as high as 50 percent.
What this means is that there might come a time when some shops will actually reject electronic money, as its value is worth much less than paper money, if the situation is not reined in.
On the other hand, some shops are also increasing their prices to cover up for the “losses” of accepting electronic money.
So it’s very important for this arbitrage to be averted.
The monetary authorities need to think outside the box, it cannot be business as usual.
Doing nothing about it is akin to the central bank bequeathing all its powers to the black market. Already it has lost some. We need to bring integrity to people’s money.
No one should benefit from doing nothing. The value of people’s savings should be preserved.
Even the International Monetary Fund has recently highlighted that the charging of high premiums for people to access cash from their accounts is not conducive to maintaining trust and confidence in the financial system.
The IMF argued that the premium to access US cash or external dollar accounts will feed in prices, initially for imported goods, and later more generally in the form of inflation.
It further highlighted that there is a broader cost in terms of the soundness of the balance sheets of the financial sector and potentially fiscal cost that any recapitalisation needs may create.
In light of the above, we expect more action from Government in order to deal with the monetary and liquidity developments in the country before it gets worse.
Later folks!
