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The Forex Market: A layman's guide to how it works, and why it does what it does

Like any other commodity - sugar, soap, mealie meal - the price of forex will go up and down, driven by the forces of supply and demand, provided there are no restrictions placed on that market. People who want US Dollars or Rand will pay what they have to pay to get it; if the currency is scarce, the price will go up, if it is plentiful, the price will go down or at least stabilize. This is a simplified way of explaining why the rates for forex move up and down.

Just as price controls on sugar, say, drive the sale of sugar underground or to the informal sector, so price controls on forex have driven it to the streets - the parallel market and the black market. The regime, in the guise of the Reserve Bank of Zimbabwe (RBZ), has put price controls on forex, saying that 1 US Dollar will only cost Z$9 200, or whatever. People can't buy enough forex through the official channels to satisfy their needs, so they resort to buying from those who will sell, at whatever price they demand. This is how the parallel and black markets have occurred.

The distinction between the parallel and the black markets is drawn along several related lines: how much is being sold, who is buying and who is selling, and where the transaction is taking place. So the parallel market usually deals in large sums - many millions of dollars; it is often between businessmen and companies and, in the past, had bankers as its middlemen; and it takes place in offices and sometimes homes. Black market transactions happen on the streets, in the flea markets, and in back-rooms; sometimes for small sums of money like 20 US Dollars; and the deals often take place between individuals.

In an effort to curb the trade in forex, the RBZ cracked down at the beginning of 2004, threatening bankers, businessmen and others. Many fled in order to preserve their freedom. This crackdown was totally inequitable as probably 90% (a very conservative estimate) or more of all businesses and businessmen were trading on the parallel market out of necessity; this was the only way to keep their businesses going and their staff employed.

Subsequent to this, the auction system was introduced. In theory, this was to function as any auction: those bringing money into the country would sell it to the RBZ (they got the bad end of the stick, as the proceeds they would get were always going to be controlled!) and those wanting to buy would bid for it, and the highest bidder would win.

In practice, not so! The political manipulation and scheming became evident as the months went on, when the rate stuck at Z$5 200 for months. Those with forex to sell soon saw what was happening and, after their initial compliance - which was probably determined by fear of the consequences - they soon decided to channel their money where they could get better returns, namely the parallel market. Another point to note is that there was never enough money being sold at the auctions, so people resorted to other outlets where they could buy the forex they needed.

Look at it from an exporter's point of view: he needs to manufacture goods and has to buy many of his raw materials from outside the country, so he needs forex to pay his suppliers. If he applies to the auction and is lucky enough to get some, that's great! If he doesn't get any, or doesn't get enough, he has to go to the parallel market and pay, say Z$15 000 for every US Dollar he buys. So he manufactures his goods and then sells them overseas. When he gets paid, he brings his money in through the official channels - the banks. Acting on behalf of government, they allow him to keep a portion of his proceeds in forex (so long as he uses it within a stipulated timeframe), but the rest he must sell to the RBZ for their rate, say Z$9 200. It doesn't take a rocket scientist, as they say, to work out that he is losing money!

It is also worth noting that someone must have been benefiting from this auction system. Suspicion falls squarely on the shoulders of the "chefs" - they got their money cheaply from the auction, and either sold it on at a huge profit on the parallel market (which they are otherwise castigating as "unpatriotic" !), or they used it to purchase large quantities of luxury goods like big-screen televisions which they could sell on at an enormous profit to themselves.

What about Homelink? This was another scheme of the regime to get its hands on the forex it so desperately needs to keep the country running (and to line a few pockets, it would seem). Many Zimbabweans receive small amounts of money from their relatives working outside the country. They bring it in through Homelink (so expensively advertised at taxpayers' expense), and get the auction rate, or the closely linked diaspora rate - a fraction of its real value. But at least this enables the regime to buy fuel, pay for the electricity it buys from Mozambique and South Africa, pay its embassy staff overseas and, if there is any left over, service some of its debt. On the other hand if these recipients bring their money in and change it at the flea markets, or the so-called World Bank (the white-robed women!), the regime sees none of it, but they get more Zimbabwe Dollars and are able to buy more mealie-meal and other food with the proceeds.

This is why the RBZ's efforts to stamp out the parallel market just haven't worked. People want to get what they are due; they want to make their money go that bit further, to pay school fees, to feed their families…..

And now, enter the recent Operation Clean-Up or Operation Restore Order! Who and what is this devious regime targeting ? Answer - the small traders and the flea markets. Suddenly there are fewer places to buy and sell this valuable commodity, and the forex rate (for the US Dollar) on the parallel market drops from around Z$25 000 right down to somewhere between Z$ 10,000 and Z$ 20,000 - at least for a short period.

What of the future? Time will tell, but the fact is that the regime must have forex for all its own import requirements, so we can expect the crackdown to continue. Long-term, the solution lies with freeing up the market and removing all forms of price controls (on bread, mealie meal, and fuel as well as forex). When this happens the rate will quickly find its equilibrium and, as the economy stabilizes, so the rate will also stabilize. But there is clearly no political will to open up the markets, and the old Marxist way of thinking continues to direct our rulers, despite all the evidence which points to the ineffectiveness of these methods.

What is really needed of course is new leadership - leaders who have a genuine desire to serve the people, to rectify the economic mismanagement of the past, and to embrace wholeheartedly the free-market economy - subject to minimal controls to protect the weakest and most vulnerable. Let us hope and pray that change will come before the economy has been damaged beyond repair.