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

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