Auction Rates Ratchet Up Pressure On Black Market

The very small movement, well under one percent, in the auction exchange rate for the fourth week running is as important as the fact that this movement was a slight strengthening of the Zimbabwe dollar, both stressing that the process of price discovery within an open market has reached a plateau.

The last four weekly movements have seen the local currency slip less than half a percent, then just over half a percent, then move up just under a tenth of a percent, and then move up again just under three quarters of a percent, and all three movements done without any manipulation by the Reserve Bank of Zimbabwe or Government.

Because those using the market have to prove they are buying US dollars to pay specific foreign bills before they are even allowed to have their bid considered, and that they are emptying their own nostro account before they bid for more, means that the bidders cannot manipulate the market either.

What we have seen over the past month is the general agreement by the owners of importing businesses, their financial advisors and their bankers that the Zimbabwe dollar has a real value and that during the first eight weeks of the auction, as bidders moved from thumb sucking to very precise calculations, this value was found, at least for the purposes of buying goods and services that were necessary or highly desirable in running our economy.

But there are still some psychological steps that need to be taken.

For a start there is still an expectation in many circles that the auction rate and the black market rate, or parallel rate, should converge.

This expectation appears to arise from a misunderstanding over what the two rates are actually measuring and fails to take into account that the users of the two markets are now splitting into very separate camps.

The auction market handles almost 90 percent of our imports. This makes it the overwhelmingly dominant market and the bidders are the producers, manufacturers and suppliers of everything we must have and the bulk of the things we find useful.

The market is a run off percentage of our export earnings, with a small addition now from the free funds sources.

The Reserve Bank expects more of the export earnings will find their way into the economy through off-auction dealing within the banking system, but using auction prices.

With speculation, currency hedging and the like excluded the auction market is what fuels our commercial trade, including a little bit of financial services such as funding of dividends and disinvestment, although these are a small percentage of the trading.

The auctions, in other words, have become the normal business market and producers, processors and others involved in building the bulk of the economy have kissed goodbye to the black market without zero regrets.

The black or parallel market is a quite different animal.

It is fuelled by Diaspora remittances and funds a variety of economic activities.

We can all hope that pure consumption tops the list; while this is not evil it does not really add much value to our economy, but causes little damage and thanks to the forex import duties on consumption goods does allow a flow from the free-funds to the formal economy.

Even the consumption funded by the black market is not dominant in that sector.

Go into a supermarket or a building supply company or even a bottle store, now they are reopening, and you will find most of the stuff has the label “Made in Zimbabwe”, or is at least a necessary or very useful item that has been sourced by the seller or by a wholesaler from the auctions.

What is not sourced from the auctions are some of the pure luxuries, plus a few odds and ends that never made it on a priority list, but which are important to someone’s well being or even earning capacity and, regrettably a few consumer goods that should be made in Zimbabwe, but are not, or are made here, but at a price well above the imported price or at a quality well below the imported quality.

Sorting out the exchange rates and making the raw materials and inputs for production readily available, should open new doors for Zimbabwean industrialists to fill gaps, but inefficiency and greed need to be tackled in some areas.

In some sectors, and pharmaceuticals have already been identified, there might be need of Government pressure to see what can be made or packed locally.

We used to have a growing and flourishing pharmaceutical industry, even if in many cases this meant the active medical drug was imported in large drums and processed into bottles and made into tablets and capsules locally.

Our response to Covid-19 shows we can make far more than we imagined, and can even when we need imports add a lot of value, and so jobs, locally.

But the black market also fuels too other economic activities. Speculators are never going to be wiped out, although the authorities can dry up their funds a bit and can, by having a proper production market, reduce the arbitrage gaps.

To some extent, the black market is already self-correcting.

The huge margin, 20 percent, between what the old granny gets for the US$10 note her grandson sent her and what the speculator pays the dealer at the top of the accumulation chain means, with the near stability in that market now as well, that profits may never come or may take many months to appear.

The person who wants to move their liquid cash out of Zimbabwe has also to resort to that market, as do drug dealers and others who need smugglers.

The changes have made all of this more expensive, but have not eliminated the process.

But the point is that the major legitimate importers are not involved in the economic activity fuelled by the black market, and the black-market buyers are not involved in the major economy activity.

The auction and black markets are now split almost totally, are funded from quite different sources and have hardly any links, except where Zimra can get a handle on matters.

To expect convergence is unreasonable, although reducing demand in the black-market will probably stop the premiums rising.

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