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Editorial Comment: Small-bid forex auctions fill vital gap

06 Aug, 2020 - 00:08 0 Views
Editorial Comment: Small-bid forex auctions fill vital gap

The Herald

The expansion of the foreign exchange auction system to small and medium businesses eliminates what was seen as a major flaw, that only big bidders could buy foreign currency directly on official markets, and should continue the pressure for greater price stability and lowering of costs.

The main gainers are going to be the smaller industrialists and importers of essential goods and services, considering that 80 percent of allocations will go for category 1 imports on the priority list and just 20 percent of category 2, so importers of luxury consumer goods can continue to whistle in the dark, but that is no great loss.

Zimbabwean industry has undergone significant expansion over the past few decades, as can be seen by the expansion of existing industrial areas and the opening of new industrial areas. But there has also been a sea-change in the industrial sector.

At independence industry was dominated by large corporations and companies, very often needing several hectares for their factories. But over the last four decades we have seen an incredible growth in the smaller, and often family-owned, businesses crowding our industrial sites and seeking premises in newer areas being opened up.

In some cases older factories have been subdivided, but very often we have seen purpose-built industrial complexes with multiple tenants or co-owners as canny property investors see the opportunities and step in.

This has dramatically increased the diversity of our industrial sector as smart young men and women take their chances and turn their dreams into reality.

This does not mean we can do without the big companies. And in fact we need more of them, especially in the primary industry level. The loss or near collapse of corporations like Zisco and David Whitehead has created gaps that need to be filled.

But having thousands of smaller industries filling a huge range of niche markets has put in a richness and a stability that was missing, and if one or two collapse then it is not a tragedy; someone better can fill that gap fairly easily.

This sort of business model is common in much of the European Union, and explains a lot of the industrial strength of Germany, France and Italy.

But these thousands often need imported raw materials, often need access to specialised equipment and spares, and in this modern world more and more need specialised software. They have been using the black market, or have been forced to use large middlemen to supply their needs, and at times have had to pay dearly for both.

In extremities they even used runners going to South Africa with a charged foreign currency card, again at significant extra expense.

The new small-bidder auction system allows those with reasonably regular import bills of US$2 500 to US$20 000 to become direct importers. It also puts the large middlemen on their mettle. A smaller business might well find it convenient to lock into a major importer who can gain bulk discounts and credit, who can amalgamate a lot of smaller orders into a single haulage rig with its trailers and who has the in-house expertise to arrange the logistics and the customs clearing.

But those firms are going to have to offer value for money, and not rely on a monopoly or near monopoly when they come to pricing. The days of allocations decided by committee, and in the last two months by the need for large orders on the auctions, are over.

So either way the small and medium businesses win, whether they import directly or simply because they can force the larger concerns to become exceptionally price-conscious.

It might even re-open a line of business that has seen a decline in the last two decades, the logistics companies that can amalgamate loads and handle the paperwork, outfits that were squeezed by the large direct importers doing everything in house.

There are now also opportunities for smaller businesses in a particular area with similar import needs to co-operate. One model is, oddly enough, the Grain Millers Association of Zimbabwe which groups the large companies, the medium companies and some quite small outfits when it comes to amalgamating supplies. It does not work totally without conflict, and in fact the smaller companies have complained of what they see as arrogance by the two largest, but no one has jumped ship yet simply because it is so useful.

In some areas consumer should benefit fairly quickly. To take just one example, prescription drugs. Many pharmacies are still using an exchange rate of 110:1 with some on 120:1 and at least one large pharmacy on 130:1.

Yet prescription drugs are an essential import. But the pharmacies have been trapped into the black-market and dominated by one or two large importers with agency rights. They can now dip into the new auction market and break the old system, or at least force it to reform and become regionally competitive.

There are many other examples where weird exchange rates persist, not because suppliers are deliberately flouting the law, but because of the near impossibility of doing business without tapping free funds or other sources of foreign currency.

Thanks to the diversity, and potential competition, in the small and medium enterprise sectors, having their own direct access to foreign currency will not only allow them to price on their own costs, rather than on other people’s prices, but also allow a proper free market that rewards the intelligent and efficient rather than those with good contacts abusing a system.

It will obviously take time for the new small-bidder auction to reach its full potential, and here banks bear a special responsibility and have a special duty. Many of their customers are going to need help to ensure compliance with the auction requirements and auction rules.

Banks can upgrade their relationships with customers and now both bank managers and customers should want to see that process. And if banks will not help, then others can step in; processing the paperwork for a couple of dozen bids for a small fee will add up to a good revenue stream for someone.

The last side-effect of the small-bidder auction will be another blow to the black market, as a whole layer of foreign currency buyers leap into the legal markets.

And as black market premiums fall further, and they have already been hit by the big-bid auctions, more and more currency trading will take place where it belongs, in the banking sector.

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