John Mangudya is betting against the market. Again.
On Friday, a worked up John Mangudya faced the one question that’s become an irritant to him – why are you persisting with a forex auction system that’s clearly not working as planned?
This is a question Mangudya and his colleagues on President Emmerson Mnangagwa’s economic team have faced with increased frequency in recent months.
Allocations of forex from the weekly auctions are several weeks behind, creating a US$150 million backlog, undermining confidence in the system and opening an ever widening gap between the official exchange rate and the black market rate, which some say is the implied market rate.
During a review of Mangudya’s recent monetary policy statement, economists and representatives of the country’s industry and commerce, repeated these concerns.
In his prickly riposte, Mangudya called his interlocutors “armchair, white collar critics who were not at the coal-face.”
Mangudya is not alone in this obduracy. At Treasury, both Finance Minister Mthuli Ncube and permanent secretary George Guvamatanga believe there isn’t much that’s wrong with the forex auction system.
Like Mangudya, both stress that the black market is insignificant as it accounts for 10% of all forex trades in the economy and should, therefore, not dictate the exchange rate.
But this is a strawman. No serious pundit has called for an exchange rate that chases the black market rate, only one which reflects market dynamics.
Mangudya and his Treasury counterparts frequently trot out mathematical models of exchange rate determination to support their view that the auction rate IS the market rate. But they conveniently disregard significant unknowns about the highly informalised Zimbabwean economy and unquantified levels of gold smuggling.
The black market most likely accounts for more than 10% of the forex market, because the forex market is plausibly bigger than the official eye can fathom.
The mere fact that US$1.8 billion is being held in foreign currency accounts, with holders of such funds not willing to let that cash circulate in the economy, tells you what market players think about the auction system and its exchange rate.
Learned nothing, forgot nothing
Mangudya perceives himself to be a cautious central banker. But his willful inability to read and quickly act on trends has had disastrous consequences before.
It was under his ponderous watch that daily fuel consumption increased by as much as 650% in 2018, a huge red flag which Mangudya chose to ascribe to an expanding economy, when he wasn’t making half-hearted charges about “market indiscipline.”
Mangudya also took too long to close the arbitrage window which saw people flying to Europe for a fraction of the cost. Now the country has to deal with a US$150 million debt to airlines.
Like the Bourbons, Zimbabwe’s economic policymakers have learnt nothing and forgotten nothing of the recent past.
Denialism, policy cowardice and outright incompetence needlessly perpetuated a fuel crisis for four years. Fuel is Zimbabwe’s single largest forex cost and its pricing is perhaps the most sensitive to the exchange rate.
The country experienced protracted fuel shortages from 2016 until 2020, when some sense finally prevailed and the government allowed a market price for the commodity.
But for the longest time, even as fuel consumption increased to ridiculous levels, Mangudya refused to see the obvious.
Then, like now, Mangudya insisted that this was due to a variety of other reasons – an expanding economy, hoarders, unscrupulous traders – and not the most glaring one; artificial demand spurred by ridiculous pricing which made fuel cheaper than bottled water.
In September 2018, as daily fuel consumption surged from 3 million litres to 15 million litres, with the RBZ pumping in US$20 million per week for fuel which still remained short, Mangudya insisted there was no crisis.
“Delays and missteps”
In September 2018, Zimbabwe spent US$149 million importing fuel. In September 2020, the country’s fuel imports were about US$20 million, yet the international crude price was nearly 50% lower than it was in September 2018.
Evidently, even as the authorities denied the obvious, the 2018 fuel consumption surge was mostly driven by a grossly unrealistic exchange rate and amounted to a huge subsidy which the government was reluctant to end.
When the government eventually acted, it ordered a precipitous 150% fuel price increase in January 2019, which triggered protests that left a reported 12 people dead.
Expectations that this would jolt the authorities out of their tendency for deleterious delays on important policy moves did not materialise. They could be making small, cumulative responses to the market to fix problems. Instead, they delay the necessary for so long, only acting when the problems have become so big that they need big-bang solutions that upend markets and damage the country even further. A stitch in time saves nine.
An IMF staff monitored programme entered into in May 2019 veered off course, with the multilateral lender bemoaning “delays and missteps in FX and monetary reforms”, which it said had failed to restore confidence in the new currency.
Ironically, the forex auction system, which Mangudya and his Treasury counterparts laud for the significant slowdown in inflation from 837.53% in July 2020 to 56.37% in July 2021, could fuel yet another spell of high inflation.
The auction has indeed given many large companies better access to forex. But analysts have warned that should the official exchange rate maintain its artificial stability, while the black market premium widens, inflation could once again become resurgent.
This is because, for much of the economy, pricing is based on the parallel or “implied market rate”, which is higher than the official rate and keeps moving as the auction’s failings undermine confidence.
As it is, the central bank has had to revise its year-end inflation projection from under 10% to between 22% and 35%, although it cites rising oil prices and the attendant increase in imported food costs.
What needs to be done?
Mangudya has vowed to persevere with the forex auctions.
“When you’re in a race, you can only increase speed but don’t change direction,” he said on Friday. “The auction system is going to continue. We have no problem with refining it.”
A system that allocates more forex than is available and makes winning bidders wait for up to two months needs more than just “refining.”
The system is broken and needs much more than minor tweaks. Calls for a transition to an interbank forex market in which banks play a central role are not without merit.
The government should put its money where its mouth is and allow a truly liberalised forex market. If the current exchange rate is indeed market-driven, then the sky will not fall in.
Easing the central bank out of the forex trading equation will have a positive domino effect that would allow gold producers, for instance, to realise good value and reduce smuggling.
Once a market-driven exchange rate is established, all fuel pricing needs to be in local currency to relieve pressure on the US dollar, as a significant part of retail fuel purchases are funded through cash bought on the black market.
Zimbabwe’s fuel price is at least 40% above its regional peers, with as much as US$0.49 of the price per litre going to government taxes levies. This needs to be reduced.
The government needs to re-think its 20% surrender requirement on local forex transactions, which have forced many businesses into the informal space in order to avoid what is, in truth, yet another tax.
Removing this surrender requirement will reverse this informalisation trend.
Above all, the government needs to temper its newfound penchant for self-congratulation, listen to the market and learn from past mistakes.