Local currency ‘hot potato’ pressure

The commercial banks, through their setting of the exchange rates by adjusting their ask and bid rates, are in the process of another devaluation of the Zimbabwe dollar with the mid interbank rate now moving towards the psychological $10 000:US$1 following an 8 percent slide over the past week.

The weighted average of the ask rate, what banks make customers pay for foreign currency, went above $9 900 this week, meaning some banks were already selling a US dollar for more than $10 000 and the rest are likely to follow fairly soon.

Once the barrier is broken it is broken and the new rate then becomes the new normal.

The ready availability of Zimbabwe dollars, despite the efforts of the Reserve Bank of Zimbabwe and more importantly the Ministry of Finance, Economic Development and Investment Promotion, appears to have arisen over the festive season, and the annual bonuses paid by the Government for its own employees and the better employers in the private sector would certainly have added to the pile.

While bonuses were paid in both currencies, there is that factor that can best be described as the ‘hot potato’, in that no one wants to keep Zimbabwe dollars hanging around in their bank accounts.

So those in receipt of bonuses, just like those paid salaries in whole or part in Zimbabwe dollars, spend the Zimbabwe dollars as soon as possible after they get them.

This is when groceries are bought in bulk, when Zesa tokens are quickly ordered, and even when rates and other charges that can be paid in local currency are paid as soon as possible.

The US dollar components of any salary or bonus payment are then hoarded and payments for things like fresh food are trickled out over the month.

The same applies to businesses. They too start spending their local currency takings first whenever they can, paying what bills and invoices can be paid in local currency as soon as possible and so the flood of local cash after paydays quickly sees a good flow of local currency payments along the value chain in the formal non-petroleum sectors.

That in turn puts pressure on the banking system and its foreign currency trading, as the demand for foreign currency to pay the import invoices increases with businesses keen to put in their orders as soon as possible.

While they do have to present invoices to their banks, and while the imports have to be on the lists, most businesses have these handy and would prefer to build up stocks of goods rather than wait for just-in-time ordering.

That of course means the commercial banks need to buy more foreign currency, and with the auctions at present not reopening means that they have to buy from customers with surplus foreign currency, the net exporters who are ready for a good deal that allows them to pay their own bills in local currency where this is a possibility, although they will keep their foreign currency in their foreign currency accounts to preserve liquidity.

So from consumers filling their larders with their extra Zimbabwe dollars all the way up the line to major suppliers filling their stock rooms with either local products or with early-ordered imports paid for via their banks in local currency, the “hot potato” phenomenon is active.

The black market does not help. This market is quite different from the official market. It is largely fed directly and indirectly with the remittances from the diaspora, a large combined sum although in total still a lot smaller than the official inflows from the formal sector exporters.

But the pool of diaspora money does not go straight to the black market. A great deal is spent directly, on rents, on fuel, and at till points, since the official rate plus the retail 10 percent legal premium largely matches the black market rate without the complications of dealing with people who you do not know.

There is also some input into the black market from that peculiar pure US dollar sector, largely what is described as the informal sector although the present efforts to get these businesses registered with local authorities and Zimra will be blurring the boundary with the formal sector.

But those businesses will be open to sales of some of their US dollar receipts to buy local currency to pay off the taxes that more are having to pay, plus their older payments of rates and Zesa tokens and the like.

But the pressure on the black market from buyers of foreign currency, even if these buyers are just trying to raise US dollars to buy fuel and vehicle spares and other products where the option of local currency payments does not really exist in practical terms, has been pushing up the rate.

Added to that is the greater pressure from those wanting to preserve value, by stockpiling their spare cash in foreign currency, plus the pressure from businesses who want more instant access to foreign currency than banks can provide, or who want to buy the sort of consumer luxuries that banks might be less willing to finance.

The link between the official rates set by the banks, and the black market rates, are not explicit, despite the proposals of the Confederation of Zimbabwe Industries to make the black market premium a fixed percentage.

But the banks may well feel they need to compete, and certainly their exporter customers will feel that they need to be able to get a rate reasonably close to the black market rate before they sell. So the black market does influence the official banker market quite strongly.

The Finance Ministry does buy 30 percent of all export inflows, and the switch from this buying being done by the Reserve Bank to the Ministry means that no new Zimbabwe dollars are created.

In addition the Ministry, via Zimra, gets a fair slice of tax revenue in foreign currency through the customs duties paid by importers and the VAT on foreign currency sales.

The Ministry was selling some of that cash to the banks via its wholesale auctions. But the Ministry must also have demands for its own foreign currency.

For a start the Government has now regularised those US$300 a month payments to civil servants and other State employees, converting them from allowances to part of the salary.

This means that the Treasury has to find around US$120 million plus a month to makes sure it has the cash.

The growing agricultural production means that, indirectly, the Ministry has to find the foreign currency component of the crop buying, or at least a chunk of it. Some, we all earnestly hope comes from the sales of grains and other crops in foreign currency to the industrial producers.

But the actual accounts in terms of what is sold and what currencies are not readily available, and the Government, quite correctly, has been keen to build up carry-over stocks of most surpluses to cope with fluctuating production.

The El Nino this season, with the late start to the rains and still the possibility of dry spells, is not as bad as feared, but production is still likely to be down so some of the stocks will have to be run down.

The stocks may well be valued in US dollars, with any local currency purchases to the market at prevailing exchange rates on the date of sale, but that still means the GMB needs to have a pool of foreign currency to pay the farmers their foreign currency component, and those payments are counted as free funds, so the farmers can do pretty much what they like with the cash.

Outgoing Reserve Bank Governor Dr John Mangudya has already put his finger on the essential point, that more foreign currency needs to be released into the official market to meet demand for foreign currency.

The problem has always been that the market has not in the past been that responsive to these injections, able to absorb them and still keep pressure on exchange rates, probably because of the “hot potato” phenomenon.

Commercial banks are forbidden to stock up on foreign currency beyond their day-to-day sales, but they face pressure from clients who are prepared to do the equivalent of stocking up through advance buying.

There appears to be need to push the sales of the gold tokens, the ZiG, a lot harder, especially with the present rise in gold prices, and persuade the private sector to store more value and preserve value in gold rather than US dollars and general stocks of goods, which is what most do prefer.-ebusinessweekly