Economic Stabilisation

This morning the Zimbabwe dollar went through the 1 000 to 1 barrier against the Rand - the most frequently traded currency. That puts the US dollar over 7 000 to 1 and the Pound to over 11 000 to one. This constitutes a massive devaluation of the local currency in the past two weeks and must signal the arrival of hyperinflation in a very real sense.

For those who live in economies that have free floating exchange rates fixed on a market driven basis, the situation here needs some explaining. In theory we are in a so-called 'controlled economy' where the State fixes all key prices. This includes the price of the local currency in hard currency terms, the prices of all basic staple foods and the price of fuel. The theory is that under such circumstances the State can 'protect' the interests of the poor from the ravages of the market. The reality is very different.

If we take foreign exchange as an example. The official rate at the Bank for US dollars is 250 to 1 and anyone going into the Bank to change foreign exchange will get that rate. Exporters who sell their goods in USD will get that rate on a third of their total earnings - the balance can be used by the exporters or traded. So-called free funds - those foreign exchange resources that are not the proceeds of economic activity inside Zimbabwe (such as funds from the Diaspora) can also be traded - but not in the Banks - only on the street.

So if the State buys fuel using the US$500 million a year they take from exporters at 250 to 1 exchange rates, they can buy fuel - at a cost of about 60 US cents a litre landed and sell it on local markets at Z$325 a litre and make a very nice profit. Their problems arise when they have to take into account all the demands on the official pool of foreign exchange created in this way. The State allocates these funds secretly so no breakdown of what they do with them is available - what we do know is that they do not have enough to buy food (US$350 million a year), fuel (US$600 million a year) and electricity (about US$60 million a year) and meet demands for patronage and self seeking payments for luxury cars and other Zanu PF perks.

So the supply of fuel at these low prices is limited to people who are connected to the State in some way and perhaps the security forces and the Police. The rest of us have to rely on the private sector. The private sector does not get any funding in terms of foreign exchange from the official system - they have to buy the so-called free funds on the open market for this purpose and that is where the parallel market for foreign exchange comes in - at 28 times the official price. So we who rely on the open market for supplies - 98 per cent of the people who live here, must pay Z$6 500 a litre for fuel or go without. If the State was to try and control the open market price, fuel would vanish overnight and the country would literally come to a halt.

But it does not stop there - the exporter who earns US$1 million from a sale will in fact only get Z$92 million on one third of his export earnings and then has to trade the balance to make any money at all. But everything he has to buy (unless he imports it direct) will be costed out at the open market rates for the dollar. This is because virtually everything that is imported commercially is being paid for with 'free funds'. So he has to try and trade returns on the balance of his export so as to earn more than the parallel market rate on the remaining foreign exchange he has from his export. We find that many products sold here are now more expensive than they were in regional terms. We used to be able to buy most things here at local prices well below their South African equivalent and certainly less than in our other neighbors markets. That is no longer true.

We could take a basic staple like maize meal as another example as to how the system functions - the State buys maize from our neighbors at about R1750 per tonne. This is only Z$62 500 a tonne at the official rate of exchange for the local currency. However if it is purchased at the parallel market rate then the cost rises to Z$1 750 000 or 28 times the 'official' cost. The selling price was Z$600 a tonne (yes - six hundred dollars a tonne). So the GMB was virtually giving away the product to local buyers.

However if you went into a store to buy maize meal - just milled maize in a bag, then you would have had to pay about Z$150 000 a tonne - a gross margin over raw materials costs of 250 times the sale price from the GMB. Who made the profit? Well I bought maize meal late last week from the local market - I had to go to a person in an office in Bulawayo who then sourced the product and sold it to me at a price (Z$350 000 a tonne). My driver collected it from a miller and was 'charged' at the official price (half) and we threw the so-called receipt away. I cannot buy maize direct from the GMB because my name or the name of my firm does not appear on any 'official' list. Only Zanu PF related individuals and firms can do that - I just pay the price at the other end and charge my customers accordingly. The price of the raw material from the GMB - Z$58 000 a tonne after a recent price increase.

The profits made on such a system are enormous - on the 1,2 million tonnes of maize sold annually in this market for human consumption, the profit would be at present prices Z$350 billion a year. That is a massive 500 per cent gross margin - at the very least. Some traders are demanding Z$550 000 a tonne for maize meal - this is the wholesale price set by the indigenous millers association, an organisation linked to Zanu PF.

These sorts of profits are only possible because the free market is not working. All these basic necessities are in short supply and this allows what economists call 'rent taking'. For the ordinary Zimbabwean on the street, it simply means high prices and problems of supply. What is amazing about the maize situation is that if the product was brought into free supply and the price deregulated, the actual free market price would not rise significantly - but the subsidy of many billions of dollars would no longer be required - freeing these resources for other purposes in the public sphere.

At his birthday bash on Saturday in Gweru, Mr. Mugabe said that they were working hard to turn the economy around. Just whom does he think he is fooling? The 8 000 school kids at the party? Certainly not the local money markets - they simply took the Rand from 700 to 1000 in 3 days! Today, cyclone Gumede, the second cyclone in a week has just arrived in Bulawayo - we had 100 mls of rain this morning. Another huge system is set to follow - it is currently hammering the Indian Ocean Islands and Madagascar. This is the cyclone season. On Saturday Mugabe may have sat in the eye of the storm - but the rest of us felt its wind and fury. His turn is coming.

Eddie Cross
Bulawayo 25th February 2007