Tight liquidity likely to remain

Monthly inflation has returned to the lowish single digits last seen between September 2020 and July last year, with 3,47 percent last month and 3,2 percent this month, after the dreadful spike in the second quarter and the worrying but modest rises in the second half of last year and the first quarter this year.

Not that 3,2 percent is that wonderful in absolute terms. Annualised it comes to around 46 percent, and very few countries see that.

Most worry badly when annual inflation hits double digits. But we are below 50 percent in annualised inflation, and even the average month-on-month for the last two months, at 3,35 percent, annualises to a little under 49 percent.

The October figure is now the lowest since the 2,6 percent of July last year, and is tie fourth lowest since the auction system was introduced at the end of June 2020.

In some respects we are now back to the first half of last year after the steady decline in monthly inflation following the auctions, and when there was hope that annual inflation, or at least annualised inflation based on a run of low monthly figures, could fall towards single digits this year.

The reasonably steady progress in falling month-on-month inflation ended in August last year, when it crept up to 4,2 percent and then continued inching up hovering between 5,3 percent and 6,3 percent for six months between October last year and March this year with that warning shot of 7 percent in February.

Then came the deluge: 15,5 percent in April, 21 percent in May, 30,7 percent in June, the peak, then 25,6 percent in July and 12,4 percent in August as that sudden mountain emerged in the monthly statistics.

We are on the other side of that mountain, after the market-led interventions of the monetary and fiscal authorities in drying up the supply of local currency feeding the black market.

With the strong fiscal discipline of the Government since the last few months of 2018, the inflationary pressure seen for almost 40 years from Government borrowing, often uncontrolled Government borrowing, ended. But the private sector then took over the role of creating money supply, and that created both the 2020 spike and this year’s spike.

The 2020 spike could be put down to the need for price discovery of the value of the local currency, and that value was a lot lower than almost everyone expected, and the need for a lot better allocation of foreign currency than bureaucratic fiat at the Reserve Bank of Zimbabwe and the increasing turn to the black market.

It was assumed that the auction system would solve both problems, price discovery and allocation. It largely, though not perfectly, did for around a year. However, there was still a holdover from the older days of some management.

This was seen in allotting largely what the importers of essential goods and services needed, rather than having a pure auction of what was actually on sale.

There was a serious effort to ameliorate this open-ended allotting by drawing a line for the minimum acceptable bids, never announced but made very clear, so the bargain hunting was partially limited, but almost every bid above that line and which met the priority lists was allocated.

In some ways this reflected the problem of a disjointed foreign currency market. While Zimbabwe has enjoyed for some time higher inflows of foreign currency than outflows, and even long runs of positive balances on pure trade, the division of those inflows into retained currency by exporters, surrendered currency by exporters, and the free funds flow, generally what the diaspora was pumping in, meant that the auctions were in some ways kept short.

While all exporters had to use their own money before they hit the auctions, and that accounted for a fair proportion of the imports, it had been expected that as price discovery found the value, the net exporters would take up the invitation to sell some of their net retained currency on the auction.

That hope never materialised. Instead the net exporters built up huge deposits in their nostro accounts.

The reserves created by a positive balance of trade, and more unfortunately, were privately held.

Transferring the bulk of petroleum imports to the free funds removed some of the pressure, and provided a way of productively using some of the inflow of diaspora cash, but the open-ended allocation of currency on the auction without more of the net inflow available was the problem, with those growing delays between allotment and actual collection of what was bought.

So even legitimate businesses either accessed the black market, or used a net exporter setting up an import subsidiary using black market rates, driving up the black market premium. Then the wide boys and girls stepped in, borrowing at what amounted to negative interest rates at least for black market currency, turning into real negative borrowing rates as inflation shot up.

Another set of wide boys and girls then decided to take the Government for a ride with overpricing, sometimes excused as using the expectation of a forward exchange rate but often just profiteering. They appear to have been a minority.

One interesting result from the Government attack on that crew is that not only was the creation of private local money supply diminished but the Government was able to increase the percentage of tax revenue spent on staff costs from around 37 percent to 44 percent without cutting back on capital programmes. Money that was going to profiteering contractors was now going to civil servants, without any budgetary manipulations.

The other attacks on the inflationary spiral attacked this mountain of local currency created in the private sector, first shoving up borrowing interest rates above inflation, making them real again, and then mopping up $10 billion of that pool with, of all things, gold coins. It worked and local currency liquidity is right down.

This, along with the monthly inflation collapse, is now already creating some pressure on the Monetary Policy Committee when it comes to setting interest rates, and will continue to create growing pressure. Most businesses find borrowing impossible, or very expensive, even when they need some overdraft facility for just part of a month to even out their cash flows.

However relief is unlikely very soon. Minister of Finance and Economic Development Mthuli Ncube has already said he wants to see several months of consolidation and continued falling monthly inflation before he even thinks of recommending a rate fall, and while he does not set interest rates he has influence.

The monetary policy committee also appears itself to be worried about loosening the screws too soon, and even after four months of falling monthly inflation, although the first two months of that fall still saw double digit monthly inflation, wants to keep the lending taps dripping rather than flowing.

There is also the need to make sure that those who borrowed to play the black market realise that this was a bad move and that they must lose money with a stable rate and those immense interest bills their bankers are demanding.

A fair number of speculators must be selling out to repay their banks, and that crimps the black market as well, with lower demand and higher supply for foreign currency.

So while there is some possibility of some decrease in rates, the rates could well remain positive on the annual inflation rate, which will remain high even if the new lower monthly rates continue until September next year when that mountain of high monthly rates is finally out of the calculations. So no one should hold their breath.

There is still that attitude in much of the economy that holding foreign currency is the sensible path. The huge reduction in auction bids is partly driven by the fact that more businesses are collecting their own.

This arises from the fact that the interbank rate, especially once the 10 percent retailers premium and the bank charges on messing around with black market dealers are calculated in, gives as good as the black market, so we are seeing more customers just paying in foreign currency rather than going via a dealer. But partly it is due to the fact that more raw materials are available locally, so cutting demand.

We can see this dollarisation pressure in that latest decision by Simbisa, the major fast food company, wanting to revalue its shares in foreign currency and move to the Victoria Falls Exchange, even though most of its business is still in Zimbabwe and its capital is largely owned by Zimbabwe residents.

One could understand a split in the company, one coping with the investment into the rest of Africa and one staying local, but the actual move appears to be an attempt to convert a large sum in local currency, its capitalisation, into foreign currency without using any market, and that factor will need to be considered by the authorities very soon.

It could mop up more free funds as present shareholders sell shares, or it could provide a great deal of pressure on exchange rates as people buy in.

These are the sort of new challenges that those who want to stabilise exchange rates and slash inflation further need to think through and watch out for, and decide whether the move is another attempt at backdoor dollarisation. There will be others.-ebusinessweekly