Exporters will soon be unable to export
By Eric Bloch
ZIMBABWE’S foreign currency crisis is becoming ever greater. Forex availability is steadily declining, with a resultant collapse of those remaining sectors of the economy as have not already been dest
The increasingly great demand for forex is triggering massive competition within the foreign currency markets for whatsoever may be available, and that competition is driving exchange rates upwards rapidly. Last week saw rates in the parallel market soar to levels almost twice those that prevailed only a few months ago. Key purchasers of foreign exchange were major parastatals, believed to have included the National Oil Company of Zimbabwe (Noczim), the Zimbabwe Electricity Supply Authority (Zesa), the Grain Marketing Board (GMB) and Air Zimbabwe.
Zesa has been at great pains to deny that it has been one of the contributors to the upsurge in exchange rates, as a consequence of its rapacious encroachments into the “parallel” market. In prominent advertisements it has denied that it has been sourcing foreign exchange in the black market. But avoidance of the black market does not mean that Zesa has not sought forex in the parallel market, and in fact the authority has to all intents and purposes acknowledged that it does patronise that market.
In its press advertisements of denial, Zesa stated that it “… only sources foreign currency from the Reserve Bank of Zimbabwe and other authorised dealers like commercial banks ..”. Where the forex is supplied by the Reserve Bank, the transaction is within the “official” market. However, the only forex accessible to commercial banks and like institutions is the 50% of export proceeds as are not subject to mandatory surrender to the Reserve Bank.
That 50% is intended for the exclusive use of the exporter in accord with a Reserve Bank prescribed priority listing, and is subject to Reserve Bank authorisation, and therefore any forex provided to Zesa by the banks must be that which is “diverted” by the exporter (with the assistance of the bank) into the parallel market.
It must be assumed that other parastatals also do not access the black market but, in order to supplement the insignificant funds accorded them by the Reserve Bank, necessarily emulate Zesa in seeking their critically required forex needs from the parallel market. That market is regrettably a diminishing one.
Government has destroyed many of the generators of foreign exchange. Agriculture was a key producer of forex, producing over 200 million kg of tobacco, considerable quantities of cotton, sugar, citrus, beef and much else. Government brought agriculture to its knees.
That a land reform programme was (and is) needed is incontestable, but despite well-intentioned and constructive advice available to government, it adopted an obdurate stance which resulted in the slaughter of the golden goose, and hence it no longer lays golden eggs. In like manner government destroyed Zimbabwe’s relationships with the international community to such an extent that foreign direct investment dried up, balance of payments support was withdrawn, and almost all aid other than as required on extreme humanitarian grounds ceased.
But these disastrous actions of government did not suffice to destroy totally the foreign exchange resource to Zimbabwe. Whilst not enough forex could be earned by the mining, tourism and manufacturing sectors to provide fully for Zimbabwe’s needs, they were all major contributors to the forex pool. So, for a very long period of time government set out to destroy them – not necessarily with intent, but that was the effect of its economic policies and its disregard for the concerns expressed by the operators in those sectors.
First and foremost, government fuelled rampant inflation with its fiscal indiscipline, its tacit condonation of corruption, its constraints on productivity through its destruction of business confidence, its active promotion of a divide between employers and employees, and its incompetence in management of parastatals upon which the economic sectors necessarily had to rely for essential operational inputs. These devastating impacts upon those who could produce much-needed foreign exchange were then reinforced by government’s prolonged, rigid opposition to devaluation of Zimbabwe’s currency, for government was unwilling to recognise a correlation between inflation, costs of production of export commodities, and therefore of currency exchange rates.
The result was that exports became less and less viable, for necessary price increases to address the rising costs rendered the exports uncompetitive and, therefore, ever less foreign currency was forthcoming. Tourism was also severely affected, partially due to government reticence to devalue (until it belatedly did so with the creation of an “export support rate” or “exchange rate adjustment” in February last. That very temporarily rendered some exports possible once more, but only for a very short space of time, as the benefits were soon eclipsed by hyperinflation).
But tourism suffered even more from the adverse image that government’s actions gave Zimbabwe. Perceptions (not unfounded!) of an absence of law and order, and of a lack of tourism requisites, curtailed interest in Zimbabwe as a destination. As all these negative factors intensified, so the extent of foreign exchange inflows decreased. As they became less, so the value of that available grew, thereby increasing costs for all sectors of the economy, causing the inflation spiral to rise higher and higher. A never-ending cycle of cost escalations, resultant higher inflation, consequential lessening in exports and, therefore, of foreign exchange receipts, and therefore also of further costs of foreign exchange, set in. Government being completely unable to acknowledge culpability recurrently sought others to blame.
The leading culprit, according to the state, was the exporter. Accusations flew fast and furious that exporters were resorting to transfer pricing, whereby they were minimising the amounts of foreign exchange that had to be repatriated to Zimbabwe, and were accumulating vast amounts outside Zimbabwe. Inevitably some will have done so, for transfer pricing is a characteristic of any overly-regulated economy, and particularly one wherein exchange controls exist, and wherein the political, economic and judicial environment becomes more and more oppressive. But although some exporters have been guilty of some transfer pricing, it is inconceivable that this could be of any magnitude, for with escalating production costs few will have been, or are, able to do so and continue in operation.
Allegations of transfer pricing are not the only attacks upon exporters. As the extent of foreign exchange available shrunk the Reserve Bank increased the amounts of export proceeds that had to be sold to it, from 40% to 50% of those proceeds. That foreign exchange was to be applied primarily to the requirements of Noczim and Zesa. However, the shrinking forex inflows resulted in the amounts available to those parastatals falling sharply. That forced them into reducing supplies of fuel and energy to the populace, and to enter the parallel market to obtain such forex as available.
Fuel distributors cannot buy fuel at prices of $800 per litre and more, in order to supply fuel outlets at prices a little more than half of cost. The insufficiency of forex also motivated Zesa to demand of exporters that they pay for their energy needs in forex. Some have agreed to do so, despite the severe prejudice to their operations, but many cannot afford to do so. When they resisted the Zesa demands, a government official had the arrogant impertinence of saying that “exporting companies were trying to have their cake and eating it too”. What a brazen effrontery! The exporter has already been obliged to surrender half of his gross foreign exchange earnings for the benefits of Noczim and Zesa, and is then expected to yield even more. How can a requirement to pay twice constitute it having its cake and eating it?
And how does that insolent government official expect the exporter to pay for imported raw materials, spares for plant and machinery, franchise fees and royalties, commissions payable to foreign marketing agents, and the like, if progressively the foreign exchange which he has earned cannot be used for his business needs? Soon the exporter will no longer be able to export, due to lack of inputs, whereafter not only will the exporter be unable to pay electricity charges, but he will also be without any export proceeds to be subjected to the 50% obligatory surrender to the Reserve Bank. Then Zesa will be even worse off, as will be all Zimbabwe.