Thursday, September 25, 2008

Subject: Old Mutual Implied Rates and Hard Boiled Egg Index - Monday September 22

Subject: Old Mutual Implied Rates and Hard Boiled Egg Index - Monday September 22

Many thanks for not reacting against the Hard Boiled Egg Index. I am hoping that sanity might returned to the foreign exchange market soon and such ideas can be abandoned, but you will see from the table below that the Inter-Bank rate has been becoming a shrinking fraction of the more market-driven exchange rates.

I am working with updates of the figures below, which uses the OMIR to arrive ata cash value of about Zim $800 or an RTGS rate of Zim $45 000 to US $1

Currency OM implied rate Market rate*
US$ $39 945 2%-113%
£ $73 171 2%-113%
R $4 762 1%-3%
*Market rate range shown as a percentage of the OMIR

Hard Boiled Egg Index
Cost per egg Total for 7 eggs* ‘Fair value rate’ †
$200 $1 400 $1 400
*As per African median of 7 eggs per US$1 †Mid rate on HBEI

The Hard Boiled Egg Index is believed to demonstrate "fair value" when pricing goods at the cash rate and generally reflects continent wide purchasing power parity.
It is hoped that a website dedicated to the HBEI should be launched within the next month. Meanwhile, I will carry on updating the following table in the hopes that it will be helpful.
Kindest regards,

Friday, September 19, 2008

John Robertson's articles

I will be posting articles to this blog as I receive them. There may sometimes be attachments which you can request from me.

I hope you enjoy seeing what is happening on the Zimbabwe economic scene.

Forex rates compared

"Exchange rates appear to have been unsettled slightly by the conjectures that the Agreement we have all been waiting for might result in big inflows of foreign exchange. Hopes that such inflows would overcome the forex scarcity for a while seem to be fading as fast as the terms of the agreement are sinking in, but the Old Mutual share price did carry the OMIR down. I suspect that the hesitation will be brief.
There is a table that compares all the available rates since the beginning of August so that you can see how the Reserve Bank's managed inter-bank rate compares with those at work in the various "markets" but the distortions that apply to each of them are still forcing them to follow different tracks. The closest ties can be seen to be between the OMIR, the RTGS and the Parallel rates actually paid by importers. The cash rate would no doubt be higher if the Zim dollars to pay for the real money were not so scarce, and the HBEI might be lower if more eggs were on offer in the market and if chickes were not having to be fed on imported food! But it is a more modest number and certainly better than the inter-bank rate, which seems not to apply to anything..."

Kindest regards,

if you want a copy of the table please e-mail me at

Wednesday, September 17, 2008

A preliminary comment on the Agreement Between Zanu-PF and the two MDC divisions on resolving the challenges facing Zimbabwe

16 September 2008
John Robertson sent out the following concerning the agreement between ZANU-PF and the MDC. In my opinion the agreement was the only way out - no matter how flimsy it appears!

"As a first impression, the extremely cumbersome nature of the procedures to be adopted to bring about change seems likely to make the process very long and difficult. Although the promise of important improvements is evident in the wording, nothing in the document recognises the urgency of the measures needed to address the problems that are right now devastating the lives of millions of Zimbabweans.

Hopes that inflows of funding might be made possible by the power-sharing formula seem unlikely to be fulfilled beyond a few token gestures, simply because not much of the power is being shared.

The new government framework will ascribe executive authority to the President, the Prime Minister and the Cabinet. The President will chair the Cabinet and the Prime Minister will chair the Council of Ministers. This Council will consist of all the Cabinet Ministers, but as a body it will not have executive authority.

The Cabinet, under the President’s chairmanship, will exercise the important powers. These include the allocation of financial resources, the choice of policies and the preparation of legislation.

The Council of Ministers will assess the implementation of Cabinet decisions, assist with co-ordination, handle committee briefings and make, or consider, progress reports.

Accordingly, if donor countries, aid organisations, private investors, international banks or any of the Bretton Woods institutions were looking for evidence of a major shift away from the policy choices that have caused the most rapid peace-time economic decline recorded in modern history, they will not find it in this Agreement.

To bring that assessment into better focus, the document’s references to the land reform programme show that the Zanu (PF) interpretation of events completely dominates the agreement and the party has no intention of making any meaningful changes to the policies.

Far from identifying one of Zimbabwe’s most urgent needs, to get farming expertise back onto the land and to restore production volumes and values as quickly as possible, the Agreement reaffirms the reasoning behind the wilful destruction of Zimbabwe’s largest industrial sector, its largest source of foreign earnings, its most important employer and its food security.

Since the adoption of the land redistribution policies, most of the land has remained fallow, most of the food needed has had to be imported, most of the industrial activities depending on farmers for inputs or depending on farmers as customers have been in steady decline and most of government’s tax revenues have fallen to a fraction of their former levels. Yet the policies have been fiercely defended in the Agreement document, which we were all hoping would present the clear thinking needed to restore confidence and economic recovery.

Instead, the potential investors, lenders and aid donors will see that the Agreement, through its omissions, effectively articulates a refusal to address the origins of Zimbabwe’s economic decline and a denial that the ruling party’s policy choices were fundamentally flawed.

By injecting phrases such as colonial conquest and historical injustices, the authors of the Agreement have done nothing to reassure potential investors that their property rights will be respected. Claims in the document that the land acquisitions and redistribution policies are irreversible and that the responsibility for compensation to all those targeted for dispossession lay with the former colonial power will also cause dismay. Too many people know full well that a high percentage of the businesses destroyed were established on land bought after 1980, when Zimbabwe became independent, and that descendants of the original 1890 colonisers owned hardly any of the longer-established enterprises that were also destroyed.

Perhaps more to the point, the Agreement could have recognised that almost no Zimbabweans have felt any real benefit since the adoption of the land reform policies. The reasons are almost too many to list, but because of them, investment has virtually stopped, taking with it job creation in nearly every sector. As a result, training and career development prospects have disappeared for most people unless they were prepared to emigrate.

Food production has declined to a fraction of the country’s needs, but the money to pay for food imports has been beyond most people’s reach. Taxes have increased, but the quality of government services, specially in health and education, have fallen to disgraceful levels, while electricity, water, transport and communications services have also deteriorated.

Financial services have become erratic and inflation has so thoroughly destroyed savings that damage has been sustained in every economic sector, causing the loss of many livelihoods and forcing hardships onto millions of people. And everyone who has dared to criticise the clearly unpopular political leadership, whether as individuals or news media representatives, has placed themselves at risk of physical molestation or worse.

If these issues had been included in the Preamble in place of the tedious and largely dishonest expressions shown, their recognition by the parties to the Agreement might have helped rebuild some of the confidence needed to restore the hoped-for flows of aid, investment and support funding. What the providers of such sums will see when they study the Agreement is a tangle of bureaucratic trivia that can be certain to slow progress to a snail’s pace and to keep the incumbent authorities firmly in the seats of power.

In the early stages, we will – hopefully – see an end to political intimidation and the restoration of the destroyed opposition news media. We might even see the licensing of a few independent radio and TV stations.

The least amount of change will come from the removal of sanctions. This is simply because, until a few weeks ago when paper to print money was affected, all of the sanctions were against targeted individuals. In no way can we expect Zimbabwe’s economic situation to be improved by the restoration of senior Zimbabwean government officials’ rights to shop at Harrods. "

May I comment that people are affected by the sanctions - being an embargoed country anyone with external funds has dificulty in using them!

Saturday, September 13, 2008

This was sent our by John on 12 September and is his comment on the new Forex Shop System.

Forex shops are Ok if you have forex but officially no Zimbabwean is allowed to hold forex!

"Despite the efforts of Zimbabwe’s patient, obliging and amenable population, which, through endless opportunities to practise, has become good at finding the positive sides to difficult situations, very little that is worthy of praise has been found in the latest changes announced by the Reserve Bank.
Its claim that its innovations will “increase internal capacity utilization, as well as shore up the availability of basic goods and services” seems to have been made on the assumption that, because consumers will be eager to pay in foreign currency for competitively priced imported goods, traders will be able to supply them.
In reading through the policy document, the section entitled SOURCE OF FUNDS might have seemed to hold the key, but no such luck; no new sources are identified. In the document, the listed sources are:
(a) Residents earning salaries in foreign currency;
(b) Residents receiving foreign currency from the diaspora (free funds);
(c) Embassy, NGOs and International Organisations staff earning foreign exchange;
(d) Corporate FCA holdings, (with prior Exchange Control approval);
(e) Foreign visitors/tourists;
(f) Cross boarder traders; and
(g) Direct new investment, switch of existing investments, as well as any other funds available to individual investors other than proceeds of crime of money laundering.
It is this very list that has proved hopelessly inadequate in recent years and it is the resulting foreign currency scarcity that has forced up the price that buyers have to pay for it. But it is having to pay for it with Zimbabwean money, the value of which has been progressively destroyed by the gross ineptitude of those wielding authority over the central bank, that has done the most to generate the high prices.
The claimed reasons for the decisions to take these steps and to create the Foliwars, Felocs and Felopads* that are supposed to make all imports affordable, are to formalise foreign exchange transactions so that all businesses engaged in such activities have to pay for licenses, the terms of which will impose upon them controls that will result in the acceptable prices.
However, government’s inability to keep supplying Zimbabwean currency in the rapidly rising quantities needed to pay the rapidly rising prices is part of the underlying problem they are trying to address. The decision to legalise the sales in foreign currency is supposed to permit increases in turnover, profits taxes and VAT that will be better brought to account.
By making the goods more affordable, government hopes to stimulate demand and draw larger and more dependable revenues from the licensed traders. It also hopes that all the unrecorded and untaxed dealings by unlicensed traders will stop because of the threat of prosecution, and so dealers licensed by government will capture all the business.
What is missing from this picture is recognition of traders’ requirements. They need access to foreign exchange, but as demand for that is very much greater than supply, its price is very high and rising. They need a reasonable rate of return, but government is demanding that they accept a maximum mark-up of 30% and that 15% of the total selling price should be surrendered to the Reserve Bank at the going inter-bank exchange rate. As this rate is currently less than 1% of the parallel market rate, the amount surrendered is better seen as a very heavy additional tax, which will effectively reduce the profit margin to little more than 10%.
Traders will face a major hurdle to even get started. Government wants them to pay their licence fees in foreign exchange at a rate that will certainly badly affect their ability to stock up with imported goods. As the licenses are for wholesalers and retailers, not manufacturers or exporters, they would seldom have balances in foreign currency accounts and would therefore have to first buy their licence fees on the parallel market.
Some curious thinking has been applied to the setting of the fees. For traders of Zimbabwe origin, they are at US$20 000 per floor, irrespective of the area of the floor and for foreign businesses the fee is US$50 000 per floor. Many retailers are likely to find this burden unacceptable. An equally curious distribution of licences per urban centre is shown in the proposed list. Harare, Mutare and Bulawayo are thought to be the same size as each other and the same size as Victoria Falls, as each will have the same number of licensed traders.
On all the initial reactions to the proposals, it would appear that the arrangements might be of some interest to shoppers who can find the foreign exchange to spend, provided that the procedures are not too complicated. But at first sight, that doesn’t look encouraging; buyers with funds in corporate FCAs must seek approval and the banks might need pro-forma invoices from the shops if the shoppers are drawing down from personal FCAs.
However, the supply-side of the equation might be the more serious issue as the onerous requirements imposed on the traders will neither encourage the needed commitment, nor assist the traders to offer well-stocked shops. Government’s hopes of improvements arising from these changes, therefore, would seem to be very unlikely to materialise.
Governor Gono was careful to point out that the economy was not being permitted to “dollarise”. If he were to permit full dollarisation, perhaps the government, the traders and the consumers would all enjoy a more significant improvement, but government’s pre-occupation with control seems once again to be the reason why the idea will not work.
The only significant improvement in the whole document is the reduction from 45% to 25% in the amount that has to be surrendered to the Reserve Bank at the inter-bank rate by exporters. That will perhaps take the edge off the need to get an exceptionally good rate of exchange for those who have to convert foreign earnings into Zimbabwe dollars to meet local costs. But such is the scarcity of foreign exchange, the movements on the parallel market seem set to continue.
An additional claimed improvement is a 150% bonus to be paid to gold miners, to improve upon the payouts they get at the inter-bank exchange rate. As the bonus will also be at the inter-bank rate, and as mentioned, that rate is less than 1% of the parallel market rate, the gesture is more likely to be seen as an insult than as their salvation. They and the producers of tobacco, cotton and other commodities are badly affected by the rigidity of the inter-bank rate and the whole country is being adversely affected by their inability to plan for expansion or even to meet the advance payments needed to sustain current output.
Dr Gono’s assertions that, “we have watched and observed with heavy hearts the suffering of fellow Zimbabweans as they waited and continue to wait in long queues at the borders seeking to bring in basic commodities” and that, “We have also seen desperate mothers and youths spending cold nights in foreign lands in pursuit of basic commodities”, and further that “our hearts are bleeding at the daily sights of workers being laid off their jobs due to industrial capacity under-utilisation” have a very hollow ring. Too many of us have been able to gauge the extent of expenditures on luxury vehicles and other State-sponsored gifts to politicians, judges and senior military and civil servants to believe there is a shred of sincerity in such claims.
We have yet to see the details in the power-sharing deal between Zanu PF and the MDC, so it is too early to suggest that these measures might become redundant if Zimbabwe begins to enjoy a higher quality of economic management. But our hopes have to lie with the realisation of that long-awaited prospect.
* The names for the Foreign Exchange Licensed Warehouses and Retail Shops, Foreign Exchange Licensed Oil Companies and Foreign Exchange Licensed Outlets for Petrol And Diesel, "

John Robertson
September 12 2008