HomeAnalysisUnsustainable subsidies distort market

Unsustainable subsidies distort market

In recent weeks, I have been fascinated by the workings of the alternative market — some choose to call it the black market and others prefer the term parallel market.

Editor’s Memo,Brezhnev Malaba

For a segment of the economy that plays a very significant role in determining the fortunes of the nation, I find it astonishing that there is barely any reliable information out there on the underground economy.

Curiosity is one of the best assets of a journalist, so I delved into what the International Monetary Fund describes as “the shadow economy”, a vast swathe which partly explains why Zimbabwe now has the world’s second-largest informal economy as a percentage of its total economy.

In a study of 158 countries, the IMF found that Bolivia is the most informalised at 62,3% with Zimbabwe coming second at 60,6%. A huge proportion of the informal sector comprises small and medium enterprises, cottage industries, family-owned companies, and all manner of sole proprietorships.

But by far the least understood component of the informal economy is the parallel market. In Zimbabwe, most people assume that the black market refers solely to money-changers who operate in the streets.
That’s a narrow perspective. The shadow market has tentacles in virtually every segment of the economy.

The formal and informal markets are intertwined in an intricate web that takes quite some effort to fully comprehend. For instance, every economist knows that a lot of the money traded on the parallel forex market is coming straight from the vaults of formal companies and financial institutions.

A lot of the runners on the forex parallel market will openly tell you exactly where they get their cash allocations — or “floats” as they call them. Almost the entire financial sector, including institutions that should know better, is implicated.

Unlike some in government who view the underground market as the devil’s lair, most level-headed people see it as a manifestation of deep-seated distortions in the economy.

By continuing to stubbornly insist that the rate of the bond note to the US dollar is 1:1, the authorities are creating fertile ground for distortions in the economy. We all know for a fact that there are companies and individuals that get allocated forex at that ridiculous rate. The money fuels parallel market activities.

One obvious source of distortions is a plethora of subsidies extended to countless sectors by the state. When importers of fuel, wheat or medicines are accorded the privilege of accessing scarce US dollars from the central bank at a ridiculously unrealistic rate of 1:1 with Real-Time Gross Settlement balances or bond notes, should we be surprised when some of that money finds its way into the parallel market?

The distortions in the fuel market are astonishing. Zimbabwe now offers some of the cheapest fuel in the world, at US$0,35 per litre for petrol and 32 cents for diesel. These shockingly low prices are uneconomic. I can assure you, this is not manna from heaven — the taxpayer picks up the tab, one way or another.

Prominent economist Brains Muchemwa says the system of subsidies is unworkable.

“Subsidising cooking oil, fuel, bread, pharmacies, packaging (beer, water, etc) is a battle one cannot win. Queues for these will surely get worse. Scarce FX (forex) resources are being wasted for no benefit. When shall we learn as a country? We did it before and it never worked,” Muchemwa tweeted on Wednesday this week.

He further argues that, if the government continues with these wasteful subsidies, it becomes futile for Finance minister Mthuli Ncube to criss-cross the world in search of a bailout package which will enrich a few individuals at the expense of the majority.

Here is the issue: the government must stop financing private consumption through subsidies that promote rent-seeking behaviour and inefficiency.

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