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Of currency, arrests and defunct economists




IN unbelievable candour, President Emmerson Mnangagwa’s biographer, associate and economist, Eddie Cross, revealed in an interview with publisher Trevor Ncube his advice to newly-appointed minister of Finance Mthuli Ncube. 

“Call the street vendors and hear them out,” Cross recounts the incident. In his own words, “that’s the real economy”. Wagging his finger at Ncube for emphasis, he concludes “those guys are sharp”. 

Less than a month after those remarks, the government is after the foreign currency market traders, cracking down on and arresting them for their activities. Jailing them without bail.  

Former Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono had a similar exercise targeting street traders. He, too, claimed the good work the auction system had accomplished was being undermined by illegal street forex traders. As a result, at least 23 000 people were nabbed and charged. 

The newspapers, during the blitz, carried thunderous headlines labelling the traders as “cash hoarders” or “illicit forex barons”, using a flurry of superlatives against them.

Instead of them accepting responsibility then for the printing and profligacy, no one in power wanted accountability. 

In the world of Neverland, Peter Pan always finds an excuse not to grow up.   

In fact, at the time Gono was quoted by The Herald as saying: “I must reiterate that I am going to print and print and sign the money until sanctions are removed and there is balance-of-payments support. It’s a commitment I am ready to be fired for because we need money for infrastructural development”. 

That was on 1 October. Never mind the year.   

Is there an iota of truth, as the state-controlled The Herald claims, that market traders are the cause of the parallel market rate spiralling out of control?  

The Sunday Mail, another state-controlled paper, on 3 October this year, rehashed an old opinion piece under the headline: “We declare war against greed”. 

Does the evidence support this?  

To gather perspective, a detour is necessary. On the eve of the military coup in November 2017, Zimbabwe experienced a foreign currency exchange rate spike for a premium of 20% to 90% in six months. That is premium paid in local currency for every United States dollar. All indications were that the rate would surpass 100% premium by end of November.  

Perhaps the late former president Robert Mugabe at the material time could have accused the street traders of manipulating the rate to cause his ouster?  

Data tells a different story. Bond notes were introduced on 4 May 2016. For a good 12 months, the parallel market rate premium was less than 10%. Then it spiked in the four months prior to the coup. The RBZ money supply figures attest to exactly what happened.  

When bond notes were introduced, money supply was $5 billion. It grow by 20% to $6 billion in 13 months (at the time the exchange rated was 1:1).

In the four months prior to the coup, it grew by 33% from $6 billion to $8 billion.  

It is obvious the introduction of bond notes precipitated money printing. The money printing — of which RBZ holds the monopoly — caused the rate to spike.  

Did market traders print or manipulate the markets with the extra ZW$2 billion in four months? 

Mugabe was never given to market fundamentals. His derision of the concept of supply and demand was made evident when he sniggered that a country never gets broke. When the country required that the scare foreign currency resources, Mugabe was buying aeroplanes in Malaysia and his kids rolled in Rolls-Royce luxury sedans. His wife bought a palace in Sandton.  

Yet at the time propaganda outlets screamed Zimbabwe had signed a Russian platinum deal and all was well.  

The man was clearly high off power. Could Mangudya as the RBZ governor have refused to buy the aeroplanes? The truth is the decision was made at State House, not at RBZ.  

The printing press caused the rate to spike in Nov 2017. Post coup, the rate came down from the premium of 90% to 30%. 

Why did the then newly sworn in President Emmerson Mnangagwa invite such optimism and confidence? The confidence, apart from self-promotion, was also backed by a halt in money creation. 

In the first four months of Mnangagwa’s presidency, monthly money supply moved from 10% to 0%. Literally a major halt!  

This was a remarkable achievement. Five months after the coup, money supply grew 0% from December 2017 to April 2008. It remained at $8 billion.

At the same time, foreign direct investment and new debt (in the private sector) on the promise of anything but Mugabe started flowing in. Real dollars flowed into the country and stabilised the rate.  

However, the new dispensation was hasty and lost control towards the elections. The election period saw money supply increase by $3.3 billion, beating Mugabe’s own record. Unprecedented, even with the low bar Mugabe had set. 

By October the rate had moved to US$1: ZW$6 from 1.3 before calming down to US$1: ZW$3.  

What caused this?  

The foreign exchange market rate came down because of the new Afreximbank loans that injected dollars into the market. Supply and demand. Market traders only respond to these market developments. Afreximbank loans helped to ameliorate import demand pressure by paying directly for the importation of fuel in the country.  The loans kept on increasing until they reached their limit at US$1.4 billion.  

The rate continues to move because government lacks discipline. The condonation bill of US$10.6 billion is all the proof. The RBZ is sitting on external loans of over US$5 billion. A piercing hole in its books that requires debt servicing. 

Zimbabwe’s anchor has been diaspora remittances and aid. Not production. That is why Zimbabwe’s largest GDP sector is wholesale and retail distribution. The sector contributes 19% to GDP, while agriculture and mining contribute 9% and 7% respectively. Both combined are less that of the wholesale and retail sector.   

Remittances and aid prop up consumption, not production.  

The auction system did not propel production. Instead it subsidised imports and consumption. It took away money from exporters and gave it to importers for consumptive goods. Exporters scared of the government and its brutal ways have chosen to keep currency in foreign currency accounts than trade it at the auction or parallel market. They now face viability problems as they get 80c for every dollar of export.  

The US$2 billion of remittances has avoided the foreign auction like a plague. If the auction was the correct price, then the people would freely trade on it. What of those who earn in US dollars? Why do they not pay their bills using the auction rate?  

Ideology matters 

It is often said men, like lions, behave on instinct. The instinct in men is ideology. It rules over us consciously or unconsciously. 

Maynard Keynes went further to argue “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” 

The second republic is still ruled by Mugabenomics. In their conversations they still ask themselves: What would Mugabe have done?  

The idea of an auction with a priority list is straight out of Mugabe’s playbook. It was never done to facilitate the market. But rather to know with the intention of controlling the major importers in the country. Mugabe thought this was vital security and political information.  

The fixing of the auction rate is exactly what Mugabe would do. Mugabe did not believe in markets. He demoted and derided as stupid anyone who argued that markets can regulate pricing. He preferred economists and intellectuals who pandered to his instinct that prices must be determined by the government, since the government is the biggest economic unit in the country. 

Former Finance minister Patrick Chinamasa was called stupid for suggesting that the government could not afford civil servants bonuses. Samuel Undenge became a whole minister because he wrote paid-for adverts on central planning and its virtues.  

Mugabe had his favourite business people that “solved” his problems. It is them he gave parastatals such as the Grain Marketing Board and Noczim bills, and then diamond mining concessions and tenders. 

Mugabe would personally thank them using their totem on his private lines. He invited them for tea and biscuits.  He called them patriots. Never mind they were making hand-over-fist money by monopolising the sectors.  

Nothing has changed today. Command Agriculture was not misnamed. It is straight out of Stalin’s handbook.  

By arresting market traders, the second republic has shown itself to be anti-markets. 
Anti-price discovery. It has continued on Mugabe’s path of not believing a country can go broke. It has its “patriotic” businessmen to whom payments are done without recourse to the consequences.  

Governments the world over hold the monopoly to print money. The exchange rate is a price. It values how much foreigners want your local currency. Foreigners demand a country’s local currency for higher-yielding interest rate than home country. 

To buy local goods for consumption. When they invest in the local country and seek a return on their money.  

The value of the local currency is determined by how much foreigners demand it. For example, in the United Kingdom lots of bureaux de change openly advertised and sold the Zimbabwe dollar. That was because Zimbabwe was a top tourist destination for many English visitors who demanded the local currency. 

Similarly, the stock market was quoted in the Zimdollar. And investors wanted the return and so demanded local currency.  

Therefore, if there is an oversupply of Zimdollars, foreigners are not keen on it.  
The over-supply of Zimbabwe dollars means that foreigners and locals prefer a currency that retains value. That is why the market is trading mostly in US dollars. Because there is an over-supply of Zimbabwe dollars.  

If there is an over-supply of tomatoes, the price comes down. You do not arrest street vendors for selling tomatoes cheaply. 

*About the writer: Tinashe Murapata is founder and CEO of Leon Africa.

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