Government has been warned against clandestine price controls being effected through its stranglehold on foreign currency allocation.
Source: ‘Govt subsidies for private players not sustainable’ – The Standard January 27, 2019
BY MTHANDAZO NYONI
Economic analysts said there were companies that were being forced to sell products at below cost after getting foreign currency from government. The practice was not sustainable and would only widen the budget deficit, analysts said.
Recently, Delta Corporation —the country’s largest beverages manufacturer — announced a new pricing system pegged in United States dollars, in a strategic move to keep itself afloat in the face of foreign currency shortages.
But government, through the Reserve Bank of Zimbabwe (RBZ), moved swiftly forcing the company to reverse the decision after assuring it that it would provide the forex required to fund its import requirements.
Analysts who spoke to Standardbusiness said by guaranteeing private companies like Delta access to US dollars so that they could sell below cost of production, the central bank was effectively subsidising private companies.
This, they warned, was not sustainable and would see more private companies stampeding for the same favour.
After government had assured Delta of steady foreign currency allocation, Surface Wilmar and Olivine Industries suspended operations citing a worsening foreign currency crisis.
Olivine Industries is jointly owned by the Ministry of Finance and Economic Development and the Wilmar Group, which also owns Surface Wilmar.
The two could have anticipated that what happened to Delta would also happen to them, analysts said.
“Taxpayers’ money should be used to fund government activities involved in running the country, not running businesses. Unfortunately, socialist countries tend to have policies that claim government should run, or at least regulate all businesses,” economist John Robertson said.
In communist countries, Robertson said, governments claim the right to control all businesses. Communism failed and socialist countries tend to remain poor, he said.
Robertson said private banks should play a leading role in promoting business, but the banks needed the skills to determine which business people and which business ideas would work.
“But even when the bankers are satisfied that the business proposals are good, bankers still need security from business borrowers because they are lending money that belongs to depositors,” he said.
“The best form of security is property, backed by title deeds and by good laws that defend the property owners’ rights. Property owners are putting their properties at risk when they borrow against them, so they work very hard to pay off their loans.”
Robertson said the money available should be bought on a foreign currency market that is run by the banks.
“If there is not enough money available, the banks should be able to borrow from foreign banks, but only after satisfying everybody that enough analysis of the borrowers and their businesses has been done to show that they are sound and worthy of support,” he said.
“If big developments can be shown likely to pay themselves off by making everybody in the country more efficient, the government can borrow from other governments, or from the World Bank, but such loans must be repaid. Zimbabwe’s failure to repay loans has disqualified the country from access to new loans.”
Bulawayo-based economic commentator Reginald Shoko said “government cannot afford that arrangement (subsidising private companies), it’s not a priority to allocate the scarce foreign exchange to Delta.
“The company must start exporting to fund its foreign currency needs rather than expecting foreign currency from a strained government. Why are we funding for people pleasures ahead of medicines and requirements by farmers and miners who are source of foreign currency?”
Shoko said the government should immediately stop the practice of subsidising private companies as that impacted negatively on the economy. The practice tended to increase government’s budget deficit and to promote nepotism and corruption.
Industrialist Busisa Moyo who is also Oil Expressers’ Association of Zimbabwe chairperson, said the best way to allocate foreign currency was allowing the willing buyer and willing seller market model to distribute the resource.
“I see this as a short-term intervention while the economy finds balance. The best allocator of a scarce resource however, is allowing a ‘market model’ of willing buyer and willing seller to distribute the resource,” Moyo said.
“Foreign currency is best placed in an interbank-run market system or at least an auction system. Exporters have approached us to lodge their complaint that they are not receiving fair value for ‘their forex’ and industry is complicit in dispossessing them of their property by accepting these allocations.
They argue that this is unconstitutional,” he said.
Analysts said the RBZ should play its roles which include, among others, protecting the value of the country’s money by ensuring that there is never too much of it in circulation and by seeing to it that the banks manage it properly; looking after the country’s foreign currency reserves as well as printing and issuing the country’s money.
Robertson said when a government interferes with property rights and the banks cannot get the security needed to support lending, government might have to force the central bank to lend to businesses.
“In Zimbabwe, this is called Command Agriculture. This lending would never have been needed if title deeds to farmland had not been rendered obsolete by government policies. This move crippled the whole country and it is still in this crippled state today. Help is not coming from international sources because the country is seen to be suffering from a self-inflicted disability,” he said.
“We know that we could fix this by restoring the collateral value of our land, but government wants us to remain on our crutches and in our wheelchairs. Look how disabled we are! Surely we deserve aid? No, we don’t. We just need to be empowered by property rights,” Robertson said.
Robertson said government should restore title deeds to land so that security for billions of dollars worth of lending would become accessible from the banks.
“The banks could become as supportive as they should be and the Reserve Bank could concentrate on being a central bank, not a government department, the function of which is to make bad government policies work a little bit better,” he said.