IMF vote of confidence in Zimbabwe reforms

THE results of the latest examination of the Zimbabwean economy by the International Monetary Fund is giving the country a good grade, that in the considered opinion of the IMF we are largely doing things right.

Of course, as we do not owe the IMF any money and with the United States determined to block any support from the IMF, there is no immediate direct gain. But the indirect benefits are immense, both internationally and locally.

Many global banks and international investors like to read IMF reports before they even open business discussions, let alone firm these up. So when digging into the IMF websites produces reports that state Zimbabwe has been reforming, that the reforms are largely the right ones, and that the results are flowing in, this is a very important recommendation.

A second set of advantages is that the IMF is basically confirming what the Zimbabwean Government has already announced it is doing. Again this should be expected, but there are always those who distrust politicians and those who, in our polarised society, like to think the worst of Government.

Having an independent body like the IMF looking closely at what we are doing confirms that the Government has been very open in its dealings with the people of the country and has not been obscuring what is going on or even trying to gild the lily. A major component of the Second Republic, one that is not often stated, was that the Government needs to be upfront with the people, telling us exactly what is going on. There are no Potemkin villages, the original being a fake façade for the Empress Catherine the Great of Russia one visit to the southern Russian territories.

So when the IMF confirms that the Zimbabwe Government is controlling its budget effectively and the Reserve Bank confirms that it is managing the money supply effectively this is important. Similar Government promises have been made in the past, and found to be fantasies, so people are suspicious and having the IMF confirm that the figures are accurate is a plus.

It should be noted that the IMF consultations were not just with the Government and Reserve Bank. A lot of other people were talked to, including a lot of people in the business world and what is termed civil society.

In fact that openness by the Zimbabwean authorities, the attitude that we have nothing to hide so look where you want and talk to who you want to talk to, is another hidden plus.

So the net result must be an increase in business confidence, again both internally and among those outside, and that can only be of benefit. The IMF has not always been loved, and there has been a lot of criticism. But the biggest critics are generally those who show minimal fiscal discipline. In fact Zimbabwe’s dealings with the IMF and the way it is portrayed have varied greatly since independence, with the most difficult relationship being when Zimbabwe’s budget was so out of control.

One interesting point that the IMF made was what was termed the greater “flexibility” in the exchange rate, which must be referring to how the auctions were being managed over the past few weeks and the rules in place.

Since the last week of September there has been a 20,5 percent devaluation of the Zimbabwe dollar, with the rising bids being market driven but following some fairly strong signalling by the Reserve Bank.

In fact a fair slice of the market appears to be seeing the signals as stronger than what they actually are.

This week we saw the top bids on both the main and SME auctions returning to $120 after falling last week. Considering that the bottom bidder on the SME auction bought a US dollar for $98 and the bottom bidder on the main auction bought one for $99 it seems that some bidders are assuming value is falling faster than it is.

To pay $21 more for each US dollar bought than the minimum bidder, and almost $15 more than the weighted average, suggests that some bidders have a large pool of local cash, that they do not regard this as important, and that they are not in a competitive market or rely on imports for only a very small fraction of their requirements and so are not too worried about what they pay.

The danger is if they hold a monopoly or near monopoly and so have little incentive to control costs. But they still need to bear in mind that money supply is being controlled and increases kept significantly below inflation rates. And they also need to remember that when the holdings in nostro accounts are tabulated for calculating the money supply the Reserve Bank uses its own auction rate.

This means that money supply can grow, but the number of Zimbabwe dollars available can decrease. Obviously that is not happening, but a large chunk of the growth in money supply is driven by the exchange rate, not by having extra Zimbabwe dollars or US dollars in circulation.

Even a tiny change in the exchange rate will have a large effect on money supply when you consider that we are moving fast towards US$2 billion in private and business nostro accounts.

A 5 percent drop in Zimbabwe dollar value, as we saw this week, can translate into an extra $10 billion in the money supply, without a single extra Zimbabwe dollar or US dollar added to the piles.

Of possibly greater importance in the “greater flexibility” in exchange rates is the move by the Reserve Bank to be far more thorough in investigating and checking every bid. The fact that a third of bids were rejected for the main auction, but only 21 percent for the SME auction, suggests that there has been some hanky-panky among some major bidders, a continuous cry from the Reserve Bank.

No new grounds for rejection have been announced on the weekly table, so the reasons are still the same: either exports or imports have not yet been properly accounted for or bidders still have some of their own foreign currency that they have not used before asking for more. Presumably everyone is only using invoice support for orders for items on the two priority lists, although that could be another reason to dump a bid.

In the ordinary course of events one would expect the SME auction to have the larger rejection rate, since smaller companies are more likely to make mistakes or have inadequate access to decent financial advice. The fact that one third of the bigger bidders got it wrong suggests that there are more people than we thought who are trying to get round the system.

On the other hand the fact that two thirds of major bidders had their bids accepted and allotted is a hopeful sign that the majority of businesses use the system as it is intended and are not trying to cheat or ease their way round corners. Presumably now that dodgier bids are far more likely to be rejected should be another strong signal that the Reserve Bank is serious about its rules and regulations.

Obviously flexibility in setting rates is quite different from enforcement of rational rules.