Current forex crunch unpacked

TWO related developments portend a calamitous path for an economy that is already on a wing and a prayer: small-scale gold miners complained of erratic payments by the central bank for their gold deliveries and fuel retailers bemoaned lack of foreign currency for the worsening fuel shortages.
This is highly significant.

The Brett Chulu Column

The full context in which these indicative developments are located needs to be unpacked. The overarching milieu is Finance minister Mthuli Ncube’s recent letter to the International Monetary Fund (IMF), in which he revealed that Zimbabwe was on the verge of major economic implosion if financial assistance did not come the country’s way.

That letter was founded on Ncube’s realisation that Zimbabwe had dismally failed the Staff-Monitored Programme (SMP) litmus test, the only gateway to debt relief discussions with international financial institutions (IFIs) and the Paris Club (grouping of bilateral lenders), owed in excess of US$10 billion in terms of the principal, interest arrears and penalties. The IMF indicated in its
Article IV report published a week before Ncube’s letter. The report made it clear that Zimbabwe did not qualify for traditional debt relief mechanisms such as Highly Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI). A tailor-made debt relief initiative (sui generis) for Zimbabwe is the only way out.

Unfortunately, Zimbabwe’s poor performance in the SMP sends a signal that the country is not serious about prudent economic management and pays lip service to poverty reduction aspirations.

These two issues matter to the IMF and the World Bank, as they are pre-requisites for eligibility to debt relief. With these two international financial gatekeepers giving an adverse report on a country’s own promises, it closes the door on other reputable international lenders, affecting the private sector’s access to international credit lines and banking services. The sum of this prognosis is this: we are on our own. This thread connects to the forex crunch we are experiencing.

The government is in a dilemma; the sources of financial assistance available are commercial such as those we have been relying on from a pan-African bank specialising in trade financing.

The challenge with this financing option is that it is discouraged (diplomatic speak for condemned) by the IMF. The IMF made it clear that this class of financing arrangements will scuttle debt relief negotiations with the IFIs, and the Paris Club by extension.

The IMF came short of naming the bank, deciding to mention that the recently collaterisation of gold and platinum production for loans was concerning and would complicate any future debt relief negotiations.

Couched in soft diplomatic speak, the sub-text of the message is: stay away from this route if you need financial help from the international community. This is the poser the government is staring at: to disappoint the IFIs or not.

The tobacco sales have begun. The Tobacco Industry Marketing Board announced this week that sales of the golden leaf have raked in US$64,4 million from 28,2 million kilogrammes in 16 days.

It remains to be seen whether the sales total at the end of the marketing season will surpass last year’s. However, there are concerns over the payment mechanisms.

One of the key issues raised by the IMF is the resistance by the monetary authorities to remove exchange controls, leaving the market to allocate the forex.
The current policy of fixing the official ZW$-US$ exchange rate at 25:1 is a huge disincentive to tobacco farmers as the central bank will retain part of their forex earnings and credit their bank accounts with Zimbabwean dollars that are trailing the grey market by a staggering 200%. The farmers will also be required to sell their un-retained portion at the interbank rate.

This means farmers are selling their hard-earned forex at a third of its open market value. It is such forex distortions, occasioned by a non-market forex policy the IMF pointed out, were a major source of economic instability.

With the tobacco selling season failing to provide immediate forex relief, the central bank has to service its debt to the pan-African bank as per the structured finance terms deals.

This means the central bank’s top priority in terms of forex allocation is towards servicing these expensive loans. The term sheets of these loans are secretive, suggesting very high interest rates. Considering that these loans are the only source of significant financing available to the monetary authorities, defaulting is not an option.

This suggests that a significant chunk of forex coming from depressed platinum export proceeds, gold and tobacco could be going towards servicing these possibly usurious minerals-mortgaged loans. There are more possible threads.
It is a matter of public record that the IMF formally raised the issue of the gold incentive that was being financed by printing money on a monthly basis. The central bank promised to stop this incentive.

There are questions begging answers. The release of higher denominations coincided with a sharp weakening of the Zimdollar.
It has been shown mathematically that all the episodes of precipitous fall in the Zimdollar are directly correlated with printing of money. The central bank needs to convince the nation that the new notes are not new money that is possibly a new way of funding the condemned gold incentive scheme.
The impression that can be easily created is that the promised so-called drip-feeding of new notes is a sanitised way of substituting the monthly money-printing to finance the gold incentive, a scheme the IMF called out.

If the central bank cannot come clean, then our banks need to issue a public statement that indeed they are selling their electronic balances to get the new notes. If that is the case, the central bank needs an independent body to verify that the quantum of new notes released indeed balances with the electronic balances banks sold to the central bank for the notes.

The impression that the current moves by the central bank to curb arbitrages could be a way of deflecting blame for the calamitous fall of the Zimdollar away from the central bank’s money printing needs to be convincingly dispelled.

The distortions in the economy that have intensified seem to indicate a major monetary imbalance, flowing possibly from a money supply swelling and the fixed exchange rate, which exchange rate is kept conveniently low in order to buy forex earnings from exporters for a song. We now have the connected and privileged buying fuel at an equivalent of US22 cents per litre and selling it at several times the price but low enough to lowball licenced fuel forex retailers.
This is temporary and unsustainable. Some basic commodities, such as sugar, have gone underground and are sold in forex only, even in some shops. A new practice has emerged: some sellers are quoting ridiculously high prices in Zimdollar, far above the black market-indexed price, forcing the buyer to buy in forex.

The black market forex rate is the highest in the capital and is kept low in other towns, creating an arbitrage opportunity, leveraged upon in two ways.
First, forex is bought cheaply in smaller urban centres and sold at a profit in the capital.

Second, goods become significantly cheaper in the capital than in other areas — goods cheaply acquired are sold in areas outside the capital in forex for a tidy profit. These are not the cause, but a result of the monetary distortions at the national policy level.

If our monetary authorities continue to ignore or cleverly side-step IMF recommendations, the economy will implode soon.

Trying to mend leaking, rusty pipes with sticky-stuff and tyre-rubber strips has never been known to be a sustainable plumbing solution.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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