AN economic cyclone is ravaging the country — almost entirely man-made.
A trusted economic adviser to the powers that be admitted last week that the Zimbabwean economy does not follow normal economic laws. Such admissions embolden political elites to proffer any solution they deem fit if trusted economic fundis admit that they, too, do not fully understand the behaviour of our economy.
So all we are witnessing are economic experiments, hoping some of the experiments will succeed. We have just invented a new field of economics: experimental economics. Its central thesis is: what happens when we burn the house if we suspect there is a snake in the house? Its corollary is: can we fix an economy if we unleash a hurricane to destroy free markets and competition?
Fuel, auction question
The most glaring anomaly in the recently launched forex auction has been the absence of fuel bids for the first three auctions. The fourth and latest auction did have winning bids for fuel. The report of the winning bids for the fourth auction lumped electricity, gas and fuel in the same category, with a combined amount of US$528 200, translating to 3,3% of the total winning bids. This means the proportion of fuel bids to the total bids is below 2%.
Our annual fuel import bill is about 15% of the total import bill. If less than 2% of the bids are going to fuel, it beggars the question as to where the funding for the bulk of the forex for fuel imports is coming from. In fact, the weekly bids from the auction are less than the weekly fuel import needs. The fuel anomaly forces us to review what the public domain is on the operation of the forex auction and on the exchange rate.
We know fuel importers get the bulk of their pump retail sales in the local currency. It is evident that the major fuel dealers are not bidding for forex on the auction market. It is surprising since the guidelines published by the central bank at the inauguration of the auction market spelt out that fuel was in category one on the import priority list and thus would be expected to get priority in terms of bids for forex.
Why are fuel dealers not going to the auction market? There are two possible reasons. The first possibility could be that fuel dealers are using letters of credit to import fuel. If this is the case, the central bank is obliged to publicly explain this arrangement. More importantly, we need to know the exchange rate at which the letters of credit are priced. It is very important information. The central bank has been clear in that it wants a single-reference exchange rate and that reference rate is to be the auction rate.
The central bank needs to unequivocally assure us that the fuel dealers are getting forex at the auction rate. The second possibility could be that the major dealers are getting forex allocations at preferential rates, well below the lowest bid rates at the auction market.
What is more surprising is that a wide range of bid rates are being made and are accepted — what is stopping the big fuel dealers from making low bids unless if they are getting much lower rates outside the auction?
If below-market forex allocations for fuel are being made, then we are still having a fuel subsidy that is not recorded as a fiscal expenditure, a point the Bretton Woods institutions raised as a prime area for correction.
Probable below-market fuel forex allocations could be creating serious arbitrages that will sustain the parallel market. We bring into question the validity of the forex auction rate based on a mathematically arrived-at forex rate (weighted average) instead of an economically-derived market rate if the questionable mathematical price excludes a heavy weight in the form of the fuel sector. The auction is not satisfying all bids despite the absence of the fuel sector.
Stock exchange wager
Three weeks ago, we had anticipated that political elites would double down on their work of making economically questionable decisions. It did happen — the sword of Damocles was unsheathed by political apparatchiks and swivelled towards the head of the biggest financial player in the country, Old Mutual.
With characteristic braggadocio, the politicians threatened to expunge Old Mutual from the Zimbabwe Stock Exchange.
This is unheard off in free markets where party politicians usurp the role of exchange regulators and threaten to delist a company on a stock exchange. It is within the purview of the stock exchange regulator to professionally investigate any germane allegations of misconduct by a member of the stock exchange and pronounce a commensurate punishment if the misconduct is proved.
If Old Mutual is the culprit singled out, what was the point of shutting down the entire stock exchange? The unscientific argument that Old Mutual is fuelling the exchange rate through the Old Mutual Implied Rate is intellectual laziness. Any company that is listed in another country has an implied or inferred exchange rate. Seed Co and PPC have implied exchange rates. If implied exchange rates are the problem, the venom directed at Old Mutual should have been spewed at the other dually-listed companies in equal measure.
Treasury banned the selling of fungible shares (Old Mutual, PPC and Seed Co) in the vain hope that it would tame implied rates due to demand depression and thereby stabilise the exchange rate. It did not happen; the implied rates kept climbing. The non-logic now is to delist Old Mutual so that the implied rate is not calculated in the hope that without an implied rate from Old Mutual the black market forex rate will fall. We still have two rulers with which to measure the implied rate: the listed shares of PPC and Seed Co; they will still give implied rates.
Will the politician also take PPC and Seed Co to the guillotine? If they do not, it will turn out Old Mutual is being systematically persecuted for deeper reasons.
The central bank flexed its muscle and ordered that all mobile phone payments will have to be done through ZimSwitch by August 15, literally gifting a private entity business that has been painstakingly developed by other players over years, with EcoCash now being the main loser.
This has effectively created a payments pipeline monopoly. The timeline to adjust is extremely short. Cassava has been spending a fortune to upgrade EcoCash and its recent investment is literally going to waste. This is a case of domestic investment being subjected to arbitrary and potentially illegal treatment over alleged abuses.
Why not let legal due process take its course if a company has breached the law? The impression investors, both domestic and international, pick from such knee-jerk decisions is that the legal system is not strong enough to protect investments. It spooks investors.
The collapse of the exchange rate and raging inflation is driven by weak fundamentals and the almost complete breakdown of trust in the monetary system. Trust is not rebuilt by further betraying trust. You do not use a whirlwind to clean up — a whirlwind is indiscriminately destructive and in its wake is always trail of destruction and brokenness.
Brett Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — firstname.lastname@example.org.