The consequences were dramatic – retail stores were fully stocked and the liquid fuel sector moved from complete failure to meet demand to free supply at world market prices.
At last sanity. It lasted for five years and then in 2013 we reverted to a single Party government. Almost immediately the wheels came off – in the next 5 years we saw a gradual but accelerating economic crisis developing. The fiscal deficit spun out of control reaching 40 per cent of all State expenditure in 2018. Domestic debt exploded and balances of an electronic form of money now called the RTGS dollar reached a staggering $23 billion by June 2018.
The newly elected Government said it would not be business as usual – major economic and political reform was on the way. Mthuli Ncube came in from the other planet he had been living on for the previous 19 years and when he walked into his Office as Minister of Finance, the roof fell in on him. His immediate conclusion – we needed a transitional stabilisation plan and radical reform if we were not to crash as we had in 2008.
In a series of reforms, he delinked the local currencies in use from the US dollar, opened up the market and eliminated the fiscal deficit. The next logical step was monetary reform and he assumed that as the Reserve Bank fell under his portfolio, this would not represent any challenges – how wrong he was!! In the period from 2000 to 2008 the Governor of the Bank had virtually run the Government – printing money recklessly so that in the end our currency was worthless. The Governor was arguably the most powerful figure in the country after President Mugabe.
When Mr Mugabe took over the reins of power again in 2013, the Governor immediately began to take back much of the power the Bank had held before 2009. Exchange control was reinstated and the Bank began to sweep export earnings into their own accounts and printing money to replace it – fine so long as we had full convertibility. But it did not last, it could not last.
For a Government that was living beyond its means on a huge scale, the Reserve Bank was a godsend – the bank bought real USD at 1 to 1 with electronic currency printed for this purpose and could thereby subsidise all key inputs – fuel, electrical energy, basic foods. The exporters paid the price and for a long time simply took the losses.
The new Minister of Finance knew this could not last and demanded that action be taken. The Governor refused and the crisis deepened. Exporters began to threaten they had no choice but to close down. Eventually the President personally stepped in a forced a compromise – Finance would get an interbank market operating on a willing seller/buyer basis but the Bank would continue to be allowed to sweep hard currency into its own accounts and allocate this at the interbank rate of the day to users.
The agreement was that the Banks would come in at 2,5 to 1 and allow the rate to adjust depending on supply and demand – it was a mistake; the opening rate was too low. The open market rate surged – first to 3, then 3,5, then 4 and now it stands at 7 going to 8. Market operators avoided the interbank market – banks simply saw money changing hands between players at the open market rates. Virtually nothing went through the formal market.
We already had a fuel problem – as soon as the real exchange rate started moving, the controlled prices in the fuel market became totally unrealistic. You could buy fuel in Zimbabwe and export it and make a fortune. Arbitrage reigned across the industry. Today the real value of fuel in our pumps is about 50 US cents a litre – regional fuel prices are US$1,10 to US$1,30. As a consequence we queue.
But there is much more wrong in our fuel industry than just the exchange rate system. During the GNU the Minister of Energy followed a few simple principles – open access to the Beira Pipeline for all importers of fuel, just pay the pipeline and storage charges and take your fuel out in Mutare or Harare and sell it on the market – but show your prices on the forecourt. For 4 years the system worked flawlessly.
Once the new Government took over in 2013, all that changed, the new Minister abandoned the open access principle, the new operators imposed a high tariff on the pipeline – forcing regional States to stop using the system. Zimbabweans had no choice in the matter, they just paid. The new monopolists and cartels then started taking a high margin at the wholesale level and sharing these premiums with political players and persons of influence and power. The result; a form of “State Capture” with the new fuel oligarchs controlling the flow of millions of dollars and thereby dictating what was going on in the country.
The result is that we have spent probably US$2 billion in secret premiums on the purchase of fuel on the world market. Much of it banked externally. So while our neighbours had fuel at world market rates, we paid a premium. Fine while fuel prices on world market were at historically low prices from 2014 onwards. But the result is that we spend over US$100 million a month on bulk fuel supplies when the actual cost today should be about US$70 million.
Under the present system operated by the Reserve Bank, the Bank collects up to US$3 billion from the exporters each year and from this, they are expected to meet the cost of essential imports – fuel, fertilizer, electrical energy, drugs and so on. It is just not enough to feed this totally corrupt and inefficient system. If foreign exchange was supplied by the interbank market, anyone could import and if the monopoly on the pipeline was dismantled – anyone could use the system and the cost of transport would be reduced.
But to get there we have to dismantle the Reserve Bank system – feed all foreign exchange from all quarters through the interbank market. Get NOIC operating properly and dismantle all the cosy and costly things that are currently increasing the cost of fuel landed in Harare.
We are currently operating both a fiscal surplus and a surplus in hard currency and in my view total forex earnings from all sources probably exceed US$9 billion – exports of US$6 billion and Diaspora remittances of US$3 billion. We can easily cover our energy needs – both fuel and electrical, if the market is allowed to operate properly. In addition, I am certain we would have to buy surplus foreign exchange off the market to maintain an exchange rate of 4 to 1. If the market stabilised at this level, inflation would drop dramatically and we could restore the people’s spending power.
I know that, at last, the President appreciates that the present hiatus simply cannot continue. People are unable to live, price discovery is a nightmare, the corrupt and the criminals in our midst are making a fortune. The new team at the Ministry of Energy are a great step forward – but they cannot do it alone. The monetary crisis must be sorted out and market forces allowed to determine prices and supply, and for me, it cannot happen quickly enough.Post published in: Featured