Yesterday the local State press announced that the government had agreed to new regulations that made it an offence to use market exchange rates in the determination of either costs of production or final retail prices on goods that had been imported. We immediately received reports of arrests in the City and assume that these relate to the new regulations. Already, under the so-called 'price control' regulations, we have had 28 000 businesspersons arrested and jailed.

The consequences of the price blitz and the subsequent attempt to hold down escalating prices driven by high levels of inflation has simply been the near complete disappearance of goods for sale in the formal sector. Wholesalers and retailers are still standing with vast areas of empty shelving and thousands of idle staff. Industrial firms are similarly idle - output is tiny in relation to their capacities or domestic demand. Export activities have continued - mainly in desperation as firms tried to do something that would at least help with overheads.

These new regulations (I have not seen the actual regulations themselves - just press reports and these seem to be enough for the Police to act against traders and businessmen) are another nail in the coffin of the remaining private sector in Zimbabwe.

For those who live in a normal society with a functioning market economy I must explain. The State here operates a very strict and rigid exchange rate regime. Under this regime right now the official exchange rate for the US dollar is 30 000 to 1. There are many different exchange rates managed by the Reserve Bank (a different one for exporters, tobacco farmers, wheat producers and so on) but the 'official rate' is the one used for exercises like this one. The open market rate for the dollar right now is about 1 200 000 to 1. That is 40 times the official rate.

The Reserve Bank buys about US$500 million from exporters and others at the 'official rate' and then uses this for essential imports and patronage. If a Zanu PF person gets foreign exchange at the official rate from the bank then they can import a luxury vehicle, for example, for a tiny fraction of its real cost. So a Member of Parliament, who gets a small salary, can in fact afford to import and drive a top of the range SUV or luxury car.

But US$500 million does not go very far when total import demand is in excess of US$2,5 billion, especially if a significant proportion is used to support the life styles of the rich and privileged (there is a once a week flight to Dubai - just for shoppers). So the business community has to buy its foreign exchange in the open market. This comes in many forms: -

So called 'free funds' which are available for sale in Zimbabwe in return for local currency in quite significant quantities - multiples of 1000 US dollars at a time perhaps. These attract the highest rates of exchange as the funds are not traceable and can be moved anywhere in the world.
People here who want to liquidate their assets and get out use this route and pay the premium (about 50 per cent over the market rate) to do so. It is estimated that something over US$500 million a year makes its way out of Zimbabwe in this manner.

Then there are the funds in local Foreign Currency denominated accounts with local Banks. These have many sources - foreign inflows from NGO's, export earnings, allocations from the Reserve Bank in return for export commodities (gold and tobacco). These can be traded - the way this happens is that the owner of the FCA arranges to import something for another company or individual and then sells that product under a local invoice that reflects the agreed price for the foreign exchange used. Often this system also attracts a premium as exporters try to make up the shortfall in export earnings arising out of the purchase of 40 per cent of all foreign earnings by the Reserve Bank at the official rate. Because of the shortage of foreign exchange this is accepted as a normal cost of doing business. It means that often local manufacturers pay well above import parity prices for raw materials etc.

And then there is the street. About US$100 million a month comes into the system from remittances sent by the 4 million or so Zimbabweans living outside the country. In addition there are many other smaller sources - tourists and visitors, diplomats and any other person with cash foreign exchange. This market is extremely efficient - prices change by the hour and are set nation wide driven by the ubiquitous cell phone. It also pays the lowest exchange rates that are available and are used to set a myriad of prices - fuel is the best-known example and this tracks the price of fuel at about US$85 cents per litre. The market is huge and the volumes traded daily exceed the turnover of many Banks. Traders make a fortune on margins that are higher than would normally apply in a formal system.

So any attempt to enforce the use of the 'official exchange rate' on costing where the open market, in whatever form, is the source of the foreign exchange (over 95 per cent of all transactions) will simply mean that the whole system will shut down except for those who wish to close down and leave with their assets. This will greatly exacerbate the present chaos in formal markets and further enhance the informal sector as the main source of all basic needs at much higher costs. Yesterday for example I spoke to a woman who had paid Z$2,8 million for 15 kilograms of maize meal that cost (ex GMB) Z$60 000. Not a bad margin for the seller (a street trader) but a disaster for the consumer.

So the so-called 'war on prices' continues. In fact this rhetoric simply disguises the real purpose which is to bankrupt the private sector, close it down and take it over for a tiny fraction of its value and then resume production and sales - but under tight political control. The other main objective is the same one that underlay the Murambatsvina exercise - drive as many of the urban population out of the country before the 2008 elections, as is possible. In this respect they are succeeding with nearly a million Zimbabweans having fled the country since the start of the year.

This is nothing more or less than the ongoing Zanu PF/Joint Operations Command election campaign. This takes time and I think you can now understand why the talks with Zanu PF under the auspices of the SADC have taken so long to come to finality. They were supposed to be concluded by the end of June, then the end of October, they still meander on - the objective is clear, to try and hold the elections before the MDC can recover or get its message out to the people or get the Diaspora organised.

I cannot imagine that the South Africans are not full conversant with this state of affairs and therefore must conclude they are in cahoots with Zanu PF on this issue. It's dangerous for them as they can ill afford to have another two million Zimbabweans in their overcrowded slums wreaking havoc in their society.

Eddie Cross
Bulawayo, 31st October 2007