On Tuesday, the main opposition MDC Alliance issued its State of the Economy Address, a response to government’s new economic blueprint, the National Development Strategy.
Here, we publish an extract of MDC-A’s policy position on RBZ’s currency reforms, by the party’s co-Vice President and former Finance Minister Tendai Biti.
Zimbabwe’s foreign exchange auction system is a rigged one.
Despite the fact that Zimbabwe’s economy is a small fractured economy not comparable to that of South Africa, India, China or the European Union. The exchange rate has remained flat with auction rates floating between ZWL$$79 AND ZWL$$82.
Yet the USD relationship with stronger currencies Rand, Pula, Rupee, Renminbi, Euro and the Pound have been more volatile for the same period, June to November 2020.
An auction system presupposes an open market both in respect of supply and demand. This is not the case in Zimbabwe. On the supply side, the Reserve Bank of Zimbabwe is the sole supplier of the foreign exchange supplied to the market, therefore it has the capacity to fix a price as it has in fact been doing. It is therefore not an auction system but a fixed exchange rate system.
Secondly, the bulk purchasers remain the same, consistently since the auction floor was introduced. The market has been dominated by not more than 20 companies who are traditional beneficiaries of Zimbabwe’s patronage system, this include companies in the fuel sector such as Sakunda and Trafigura, companies in the fertilizer industry such as FSG, companies in the food industries, in particular, the Innscor Group.
“There is no science at all in how the weighted average is arrived at”
Another characteristic of an auction is transparency and openness. There is transparency on both supply and demand and the public can determine a weighted average. (President Emmerson) Mnangagwa’s auction system is opaque. There is no science at all in how the weighted average is arrived at. The auction system is thus a fraud, a cheap illusion by an incompetent delusional regime.
In our view, the auction system needs to be scrapped, multiple currencies need to be restored, export surrender requirements need to be scrapped, productivity needs to be increased, structural reforms need to be carried out. Anything else is fiction.
A system where a captured Reserve Bank of Zimbabwe supplies foreign currency to its chosen cronies cannot be described as an auction. There is a real market for foreign exchange out there and it is not (RBZ governor) John Mangudya’s auction system. To date the weekly supply of foreign exchange to the auction system has been about US$18 million.
At this average, it means that foreign currency supply to December 2020 will be US$468 million.
In a 12-month cycle, the total supply by the auction will US$936 million. Yet the country’s imports exceed US$7 billion consisting mainly of fuel US$$2.5 billion, electricity US$1 billion, drugs US$1 billion, agricultural imports US$1 billion, food and others US$1 billion.
These imports are not being funded by Mangudya’s paltry auction amounts. There is, therefore, a huge informal foreign exchange market that consists of the following (i) diaspora remittances (ii) gray imports (iii) bilateral offshore transfers and trading (iv)the black market (Fourth Street Market and Osphateleni), It is a question of time before the rigged exchange rate itself cracks due to both supply side and demand side pressures.
“The rate will implode again and Zimbabwe will be back to square zero”
On the supply side, it is unsustainable to keep on borrowing from the Afreximbank to sustain the auction system. On the demand side, demand for foreign currency will increase to finance fuel, electricity, drugs, and other consumer needs.
The rate will implode again and Zimbabwe will be back to square zero. Restoring and returning Zimbabwe to prosperity therefore requires a permanent and lasting solution on the exchange rate.
In February 2019 through SI 33 of 2019, the government introduced the Zimbabwe dollars. The sudden introduction of the Zim dollar was irrational. As the MDC Alliance, we said it is not possible to issue a currency and expect that currency to survive without attending to the fundamentals.
We have been proved right.
In February 2019, the Zimbabwean dollar was introduced at the rate of ZWL$$2.5:USD1. Within a few months, the open market rate was ZWL$$100:USD1.
Impact on wages
The consequences on wages, savings and investments was dramatic. In real terms therefore, workers and pensioners found themselves in negative territory. It is cheaper for a worker to stay at home than to go to work. This is effectively what public sector workers have done, in particular doctors, nurses and teachers who have consistently withdrawn their labour in the last 6 months.
The government’s real wage bill which had increased from 42% to 85% of total revenue between 2010 and 2015 collapsed to less than 40% of total expenditure by 2019.
An average teacher earning US 500 per month has lost 85 percent of his real wage.
Consequently, the wage bill as a percentage of revenue has declined from 90% in 2017 to 37% in 2019.
Impact on Pensions
According to the Justice Smith Commission inquiry into the loss of value in the pensions and insurance sector from 2006 to 2009 presented in April 2017, pensioners lost US$5.5 billion due to hyperinflation and the government’s mismanagement of the economy during the meltdown years of 1999 to 2005.
Billions of dollars have now been lost in 2019 through currency and exchange manipulation done through the vehicle of SI33 OF 2019.
We propose therefore the repeal of SI33 of 2019, SI142 OF 2019 and the Finance Act number 2 of 2019. In short, we propose the redollarisation of the economy in the immediate short term. In the mid-term, Zimbabwe has no choice but to join the Rand Monetary Union.
Summary: Currency Reforms
- There must be an urgent return to the multi-currency regime
- We propose that SI142/19 with its cousins SI212/19 and SI 213/19 must be repealed as a matter of urgency to restore the regime of multiple currencies.
- As a transitional measure, we propose that the currency created by SI33/19 that is to say the local currency, must be allowed to float without any inhibition and controls against the US$
- We propose an end to export surrender requirements
- In the midterm, we propose that the government must attend to major structural reforms to achieve monetary and fiscal convergence with the Rand Monetary Union
- We propose to join the Rand Monetary Union
- In the long term, once Zimbabwe joins the Rand Monetary Union, the Reserve Bank act must be repealed, and the Reserve Bank of Zimbabwe abolished.