Mugabenomics

The consequences of the price blitz and the subsequent attempt to hold down

escalating prices driven by high levels of inflation has simply been the

near complete disappearance of goods for sale in the formal sector.

Wholesalers and retailers are still standing with vast areas of empty

shelving and thousands of idle staff.

Industrial firms are similarly idle – output is tiny in relation to their

capacities or domestic demand. Export activities have continued – mainly in

desperation as firms tried to do something that would at least help with

overheads.

These new regulations (I have not seen the actual regulations themselves –

just press reports and these seem to be enough for the Police to act against

traders and businessmen) are another nail in the coffin of the remaining

private sector in Zimbabwe.

For those who live in a normal society with a functioning market economy I

must explain. The State here operates a very strict and rigid exchange rate

regime. Under this regime right now the official exchange rate for the US

dollar is 30 000 to 1. There are many different exchange rates managed by

the Reserve Bank (a different one for exporters, tobacco farmers, wheat

producers and so on) but the “official rate” is the one used for exercises

like this one. The open market rate for the dollar right now is about 1 200

000 to 1. That is 40 times the official rate.

The Reserve Bank buys about US$500 million from exporters and others at the

“official rate” and then uses this for essential imports and patronage. If a

Zanu PF person gets foreign exchange at the official rate from the bank then

they can import a luxury vehicle, for example, for a tiny fraction of its

real cost. So a Member of Parliament, who gets a small salary, can in fact

afford to import and drive a top of the range SUV or luxury car.

But US$500 million does not go very far when total import demand is in

excess of US$2,5 billion, especially if a significant proportion is used to

support the life styles of the rich and privileged (there is a once a week

flight to Dubai – just for shoppers). So the business community has to buy

its foreign exchange in the open market. This comes in many forms: –

So called “free funds” which are available for sale in Zimbabwe in return

for local currency in quite significant quantities – multiples of 1000 US

dollars at a time perhaps. These attract the highest rates of exchange as

the funds are not traceable and can be moved anywhere in the world. People

here who want to liquidate their assets and get out use this route and pay

the premium (about 50 per cent over the market rate) to do so. It is

estimated that something over US$500 million a year makes its way out of

Zimbabwe in this manner.

Then there are the funds in local Foreign Currency denominated accounts with

local Banks. These have many sources – foreign inflows from NGO’s, export

earnings, allocations from the Reserve Bank in return for export commodities

(gold and tobacco). These can be traded – the way this happens is that the

owner of the FCA arranges to import something for another company or

individual and then sells that product under a local invoice that reflects

the agreed price for the foreign exchange used. Often this system also

attracts a premium as exporters try to make up the shortfall in export

earnings arising out of the purchase of 40 per cent of all foreign earnings

by the Reserve Bank at the official rate. Because of the shortage of foreign

exchange this is accepted as a normal cost of doing business. It means that

often local manufacturers pay well above import parity prices for raw

materials etc.

And then there is the street. About US$100 million a month comes into the

system from remittances sent by the 4 million or so Zimbabweans living

outside the country. In addition there are many other smaller sources –

tourists and visitors, diplomats and any other person with cash foreign

exchange. This market is extremely efficient – prices change by the hour and

are set nation wide driven by the ubiquitous cell phone. It also pays the

lowest exchange rates that are available and are used to set a myriad of

prices – fuel is the best-known example and this tracks the price of fuel at

about US$85 cents per litre. The market is huge and the volumes traded daily

exceed the turnover of many Banks. Traders make a fortune on margins that

are higher than would normally apply in a formal system.

So any attempt to enforce the use of the “official exchange rate” on costing

where the open market, in whatever form, is the source of the foreign

exchange (over 95 per cent of all transactions) will simply mean that the

whole system will shut down except for those who wish to close down and

leave with their assets. This will greatly exacerbate the present chaos in

formal markets and further enhance the informal sector as the main source of

all basic needs at much higher costs. Yesterday for example I spoke to a

woman who had paid Z$2,8 million for 15 kilograms of maize meal that cost

(ex GMB) Z$60 000. Not a bad margin for the seller (a street trader) but a

disaster for the consumer.

So the so-called “war on prices” continues. In fact this rhetoric simply

disguises the real purpose which is to bankrupt the private sector, close it

down and take it over for a tiny fraction of its value and then resume

production and sales – but under tight political control. The other main

objective is the same one that underlay the Murambatsvina exercise – drive

as many of the urban population out of the country before the 2008

elections, as is possible. In this respect they are succeeding with nearly a

million Zimbabweans having fled the country since the start of the year.

This is nothing more or less than the ongoing Zanu PF/Joint Operations

Command election campaign. This takes time and I think you can now

understand why the talks with Zanu PF under the auspices of the SADC have

taken so long to come to finality. They were supposed to be concluded by the

end of June, then the end of October, they still meander on – the objective

is clear, to try and hold the elections before the MDC can recover or get

its message out to the people or get the Diaspora organised.

I cannot imagine that the South Africans are not full conversant with this

state of affairs and therefore must conclude they are in cahoots with Zanu

PF on this issue. It’s dangerous for them as they can ill afford to have

another two million Zimbabweans in their overcrowded slums wreaking havoc in

their society.

Eddie Cross

Bulawayo, 31st October 2007