Zimbabwe: The road back to defacto dollarization
The RBZ &the regime continues to search for enemies “sabotaging” their command rate.
Over the past year or so they have finger-pointed:
- Old Mutual …. “its the ZSE listing”
- Ecocash …. “they are printing money”
- Bureau de Changes … “they are indisciplined”
- Individual dealers ….” let’s arrest them and ban them from using telecom platforms”
- Large Companies ….” they have excess liquidity that they use in the parallel market, let’s sell Corporate Bills to them”
- Many others
They are finding enemies everywhere. The command rate has failed, because it is not liberal enough. No one is supplying forex freely to that market.
They have two things:
- The Printer
- The Guns
So they have power.
They can arrest, prosecute, ban, etc but their power is limited. They cannot force businesses to supply goods and services and a specific price. It thus comes as surprise to them that even when they have the printer and the guns, they still don’t have absolute power.
Their notion of holding absolute power is delusional. It’s the people that hold the ultimate power. The persecution of individual dealers is going to displace so many dealers from the market. A few dealers facing an avalanche of orders is recipe for disaster.
The rate is headed towards 300 by year-end, and inflation will go beyond 20% month-on-month if they continue persecuting individual dealers. There are some ignoramuses that say “book economics” has failed in Zim. In contrast, “book economics” has prevailed.
Every violation of laws of supply and demand has been answered with shortages and parallel markets. For each and every stupid policy enacted, the market has reacted perfectly as predicted by books of economics.
How is the market going to react to the prosecution of participants in the parallel market, especially the market makers? Answer: The rate goes up. When it does, ignoramuses ignorantly say book economics has failed when the opposite is true.
An example might help. Let’s say for illustrative purposes, Harare has 1,000 market makers in the USD/ZWL trade. RBZ cracks down on them, banning 50 per week, which is 200 per month. After 3 months, the RBZ has displaced 600 dealers from the market. Only 400 are left.
These 400 dealers have to suck up all the demand left behind by the other 600. They get more pricing power, to drive prices up…so as to widen their spreads. The wider spread is also reflective of the increased risk associated with the trade. The risk includes jail time.
Increased risk = wider spreads.
Wider spreads will drive those on the other side of the trade mad. If you have USD and want ZWL, a dealer will buy from you at 200, but if you want to buy USD using ZWL, the dealer will ask you to transfer 270. You walk away.
The market becomes thinner, spreads widen further, and the rate goes up again. A very vicious cycle is sustained. Those with dollars will end up not wanting to ever trade them into ZW, preferring to trade in and hold USD instead because the spread is too wide and too expensive to pay.
Dealers will shy away from holding a large ZWL inventory…if they are blocked, they lose all of the ZWL. That USD preference means they will hold 95% of their inventories in USD. The parallel market dies, as the RBZ persecutes dealers.
But the parallel market doesn’t die alone, it drags the ZWL along with it. Both of them to the dustbin. The economy becomes dollarized all over again.
DOLLARIZATION = taking power away from RBZ.
It is a real-life economic battle. They are fighting against their own people. They have the printer and the guns. But the people hold the power.