On the surface, there is nothing wrong with Zimbabwe’s foreign currency auction system. The authorities from the Ministry of Finance and the Reserve Bank of Zimbabwe insist that the official rate is the most “reasonable and sober” rate. The unofficial rate, they have asserted on multiple occasions, is volatile and driven by unseen saboteurs who they keep threatening to rein in. The authorities are partly right of course, the Zimbabwean economy is being sabotaged. They are wrong about the identity of the saboteurs though, they are not nameless, all they need to do is look in the mirror.
While there is a case for us to have and use the Zimbabwean dollar, thanks to incompetence, arrogance and hubris we have failed to reap much of the touted rewards for having our own currency. Instead, our economy has been plagued by the millstone that has been the Zimbabwean dollar instead. To be clear before we even begin a lot of these problems will not be solved by dollarisation as some have called for. Dollarisation is not the solution to Zimbabwean problems. It’s not the panacea that some think it is. Instead, it is a millstone of another kind.
Anyway here are some of the ways in which the economy is being hurt by the foreign currency auction or rather the way in which the auction has been set up and is being run by the RBZ:
- Exports being sold below cost ruining exporting companies in the process
- Making imports cheaper and ruining local companies in the process
Backlogs are the perennial bane of the RBZ auction
While the RBZ likes to pretend that its rate is the most “fair” all indications show that it is not. No one is willing to part with their hard-earned foreign currency at the sub-economic rate the auction establishes. The Dutch auction system is meant to distribute foreign currency at the lowest possible rate and often the bank manipulates the process by banning entities from the auction and refusing to allow certain bids by claiming they don’t meet their priority list. The result is a rate that never reflects supply and demand in the market. Over 90 auctions the official rate has managed to be less than half what the black market is willing to pay and buy at.
With these facts on the table, it’s a small surprise that the black market has managed to thrive. Those turned away by the RBZ have not tucked their tails and begged the RBZ for readmittance but rather simply taken their funds to the black market. When the RBZ auction started it probably was the largest supplier of foreign currency in Zimbabwe. Now they barely supply one-third of the country’s auction needs and at this rate, their contribution share will continue to shrink as they lose more and more supply.
Robbing exporters of their foreign currency
So if people are not willing to part with their foreign currency at such sub-economic rates how has the RBZ been getting foreign currency? Regulatory robberies is the answer. They have contorted a series of rules that basically allows them to force exporters to give them foreign currency at ridiculous rates as low as $140 ZWL which is less than 50% of what the market is willing to pay for the same foreign currency. They like to pretend that theirs is the true rate and the rest are just evil speculators which is patently false.
At first glance such tinkering is harmless. It ought to serve and make sure that prices remain low and there are no erratic price hikes fuelled by spikes in the exchange rate. The truth though is that such tinkering actually just exacerbates the problem. It means that Zimbabwe’s exporters are making less from their exports. In fact, thanks to the contrived rates used more and more exporters including important Zimbabwe tobacco farmers are now selling at a loss or barely making a profit. The rigged foreign currency auction is working to ensure that fewer and fewer businesses are interested in exporting.
Artificially cheap imports
Instead, everyone is going where all the money is-importing. Because foreign currency can be bought at artificially cheap rates engineered by the RBZ we end up having a situation where imports by retailers are artificially cheap and that hurts the infant local industries. It becomes cheaper to import items like washing powder and cooking oil. More and more businesses see benefits in importing rather than making products locally. This fuels even more demand for foreign currency creating shortages and ruining exporters and local businesses in the process.
The well-meaning constrictor
The RBZ means well but their actions have had the opposite effect and wanton reckless money printing has not helped. Propping up “essential” manufacturers by making sure they get cheap foreign currency has not worked the way the bank thought instead it has made a small shortage problem worse. The more it continues to operate like this the more the gap between the rates will continue to grow and right now it is a frightening gulf that no regulation can close. Tellingly even businesses operated by the bigwigs themselves do not even bother with the official rate anymore.