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Eddie Cross: “So few business leaders have the national interest in mind”

By Eddie Cross

Two years ago, the new Minister of Finance in Zimbabwe brought together a small group of local business persons in an informal advisory group. I was privileged to be included. Our meetings were irregular, largely driven by the Ministers need for a sounding board against which he could bounce ideas and problems. The great thing was that he listened, did not always agree, but we felt our views on a wide range of issues were being heard. Occasionally we had lunch together.

Mthuli Ncube and Eddie Cross
Finance Minister Mthuli Ncube and economist Eddie Cross

Because these deliberations were always on a strictly private basis and none of us talked about these encounters or their outcome, I will not talk about this process here, except to give tribute to two incidents which highlight my topic today – that of the role the private sector can play in Zimbabwe, if it is allowed to do so.

A year ago we were plagued by shortages and queues for basic necessities – fuel, cooking oil, maize meal and other items. In addition, our money markets were chaotic, the ‘market rates’ set by our shadowy world of informal sector traders, were going through the roof, 135 to 1 and rising. Business was talking about 200 to 1 by Christmas and all the consequences. Inflation peaked at over 800 per cent, driven mainly by the collapse of the local currency.

Our informal group was invited to attend a Cabinet Committee led by the then Minister of Foreign Affairs, General S B Moyo (now late) and comprising of a number of senior Ministers and Civil Servants. We arrived at the venue at 14.30 hrs, not knowing what to expect and were told to wait until we were called. When we finally went into the meeting we were told where to sit and then the Chairman asked us for our ideas on how to resolve the market problems we were experiencing.

We then simply stated that in our view, the problems with supplies could only be solved by handing over responsibility to the private sector. He was most surprised and asked us if we had the capacity in terms of both financial and physical capacity?

We responded in the affirmative and to bolster our position we had representatives of very large corporates in our team. S B Moyo was a very effective Minister and with his military background, used to decision making. He stated that he supported our point of view and thanked us for our contribution. We left the meeting.

I am not sure of what transpired afterwards, but in a series of decisions and actions, the supply of five critical basic commodities was transferred to the private sector and liberalised using market principles. Fuel, maize, soya beans, wheat and crude vegetable oil were involved. The market problems vanished.

Some months later, one of our group in a meeting with Mr. Moyo reminded him of that crucial meeting and the decisions made and said ‘Minister, I hope you understand just how much you helped the country by those decisions.’ We are going to miss him very much going forward.

The chaos in the money market remained. We did a mathematical analysis of the problem and concluded that the main driver of inflation was the depreciation in the exchange rate. We were not satisfied it was justified. We knew that the bubble created by artificial exchange rates in 2014/17 had to be burst and the local currency devalued, but we also felt that the extent of the depreciation we were experiencing, was no longer justified by the fundamentals.

We had stopped printing money, in fact there was a shortage of the local currency, we had a fiscal surplus and a cash budget process and a balance of payments surplus. We had authorised a return to the multi-currency system used when we dollarised in 2009 while retaining our own currency as the main means of exchange.

In early June 2020, the President called us in for a light supper at State House with the Minister of Finance who had suggested the meeting. The President went around the room asking each of us what we thought should be done to bring a halt to the chaos in money markets.

We gave our views and were thanked and went home. He sat on this issue for two weeks and then gave an instruction that the Reserve Bank should initiate a formal auction for foreign exchange at the Bank. The Governor advised on the technicalities and the auction was launched on the 23rd of June.

The rest, as they say in the classics, is history. In the first few auctions we were able to put US$15 million a week on the auction and with several hundred companies participating, the rate quickly settled down at about 82/83 to 1.

Over the next 6 months we were able to increase the weekly volume of hard currency to over US$35 million a week and with the currency stabilised, the inflation rate began to fall, declining from a high of over 800 per cent to 350 per cent by the year end and just over 4 per cent per month. The rate of exchange had devalued slightly to just under 84 to 1. The month on month inflation rate today is 2,19 per cent.

The private sector was taken by surprise, ‘was this sustainable’ they asked, we responded that in our view it was. It was being funded by our own cash flow from exports and other sources. It was exciting to see, week after week, hundreds of companies, small and large, buying hard currency on the market at rates they set themselves and funding the real heart of this economy with raw materials, machinery, spares and equipment. This process established a new sense of stability in all markets although the informal sector continued to report transactions at 100 or 110 to 1.

I am not concerned about this wide gap between the formal market rates and the informal rate for two main reasons:

Firstly, the majority of funds being used by the private sector to support imports of all kinds, are now taking place at the auction, or formal sector rate. Right now at the level of about US$5,4 billion a year or 96 per cent of all formal sector imports;

Secondly, those individuals and companies who are using the informal sector to secure hard currency and doing so either to protect value in the mistaken belief that the authorities are going to allow another bout of money driven inflation or they need money to fund smuggling in one way or another.

As far as I am concerned the much higher rates paid for currency being traded outside the formal system is essentially a tax on these activities. It gives a much higher return on remittances from abroad and this in turn is fed into the economy to buy food, pay for education and health services and to build homes.

All positive and contributing massively to the welfare of our people and to the economy at large. The good thing about the stability created by the auction is that it has also stabilised the informal market rates which have changed very little in the past 8 months – in fact they have strengthened when compared to the rates that were running when the auction was started.

Listening to the voice of the private sector. Taking key decisions to unlock its potential for growth and market driven stability. That is what it is all about. What concerns me is that so few business leaders have the national interest in mind when they seek the ear of our political leadership. So often it is their own narrow interests that prevail when they get an opportunity to talk to power. If we can get around that, this will be a very different place in a very short space of time.

Eddie Cross, Harare, 27th March 2021

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