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BSR: Labour & Capital converge against the surrogate currency


The residual message emanating from the junior doctors’ strike is plain but somehow, the government is missing it completely, which is tragic. It is, in a nutshell, that the market is formally rejecting bad money that was foisted upon it three years ago.

At the core of the doctors’ strike and demands from other sectors is a desire for a safe store of value and expression of loss of confidence in the surrogate currency to serve that purpose. This fundamental economic dimension of the labour dispute between the government and junior doctors is getting lost in the multiplicity of detail over legality, professional oaths and morality.

Condemning junior doctors for demanding wages in USD is insincere, ahistorical and overlooks the weight of the problem. It is the government which, in the first place, paid workers in USD but when it ran out of USD, instead of admitting to a problem and finding a long-term solution, the government created a surrogate currency which it falsely and misleadingly touted as equal to the USD.

Now though, chickens are coming home to roost. The government was warned back in 2016, that the surrogate currency would ultimately fail because there was no way it could be regarded as equal to the USD. Unbeknown to most, however, the government was already neck-deep in troubled waters through the RTGS balances it had been generating without restraint. The convergence of RTGS balances and Bond Notes became a sure cocktail of disaster.

In the big picture, the USD wage demands by doctors must be seen for what they are: a formal rejection of the surrogate currency by a key part of the economic system - Labour. Labour has lost confidence in the surrogate currency and this is just a start. Blaming doctors shows the government is missing the wood for the trees. It is missing the big picture.

The fact of the matter is that more such demands will come from other parts of the labour component of the economic system.

Delta's giant step

In fact, it is not just labour which is rejecting the surrogate currency in favour of the USD. Just today, Delta Corporation, probably Zimbabwe's largest consumer-goods manufacturer and one of the blue-chip companies on the Zimbabwe Stock Exchange, has just announced that all its products will be sold in foreign currency.

Delta Corporation's move represnts a giant step for Homo Economicus, the economic human. The corporate giant has done what every rational economic actor wants to do. In many ways, although fields could n't be more different, Delta's move vindicates the junior doctors' claims.

Delta has cited foreign currency shortages which are affecting imports of raw materials. In short, Delta’s move demonstrates that capital, like labour, is also seeking refuge in a secure currency, in this case, the USD.

Lately, other companies including the biggest fast-food chain, Chicken Inn, had already started pricing their goods in both USD and surrogate currency. Some private schools have also demanded fees in both USD and surrogate currency. Delta’s step is, however, far more radical. It has gone a step further, by exclusively pricing its goods in USD. It has rejected the surrogate currency. Delta has effectively dollarized the beverages sub-economy in the country.

Beneath the frou-frou of arguments which Delta offers for this bold step is the simple reality that one of the biggest companies in the country has totally lost confidence in the surrogate currency and has rejected it.

The reason is simple: The market is now fully conscious of the fallacy of the 1:1 fixed exchange rate. The government thinks retention of 1:1 rate somehow keeps the value of savings. Junior doctors do not believe it. Neither does Delta Corporation. Or teachers. Or indeed most workers who have seen the value of their earnings plummet in recent months.

So the worker knows the value of his labour has now diminished greatly compared to, say five years ago. The company knows this too. They went along with the pretence of equality between the USD and surrogate currency for a while but it has become clear it’s untenable. Like any rational actor, the worker or the company wants a secure store of the value of his labour or in the case of the company, its investment.

Regrettably, the government has chosen the ostrich approach of burying the head under the sand. Consequently, it is under-prepared for the consequences.

The question, of course, is how the consumer market will respond to Delta's move. Do punters have the foreign currency to consume its products? Beer is popular. Soft drinks are also popular. Both were sorely missed during the festive season as supply was limited. Delta could have made a move before the festive season but that might have generated accusations of profiteering and even protests. The adjustment has come during the hardest month of the year. It remains to be seen if it can maintain the USD price regime. It has gambled on the undying appetite of beer-lovers.

Delta may also be playing a hard-bargaining game with the government. It's statement suggests that it used to get a share of the forex allocation but this has since changed, forcing it to now source its own forex from the market. Government may get concerned by the threat of scarcity or expense of alcoholic beverages and soft drinks, both popular among citizens. This may force the government to intervene and allocate forex to Delta, leading to the re-intorduction of prices in surrogate currency.

But, in the meantime, more companies could follow where the giant has taken a lead.

Essentiality not generation of forex

An argument that has been thrown around with reckless abandon is that those who do not generate foreign currency must not expect to be paid wages in foreign currency. On the face of it, there’s some superficial logic in this argument. But it’s fatally simplistic. It is built on the assumption that the ability to generate foreign currency is the sine qua non to earning or getting an allocation of foreign currency. This does not accord with reality.

In our situation, it falls flat when confronted with the reality that there are many in the market who do not generate foreign currency but do get it at cheap rates from the government. They do not get this foreign currency because they generate it, no, but for other reasons.

Consider for example of importers of fuel and wheat. They do not generate any foreign currency. Instead, they consume it. Where do they get it from? They get it from the government. Why? Because their products are products are considered basic and essential. The proper rationale is not that they generate foreign currency. It is their essentiality. That perhaps is the key ingredient, although, shockingly, the government has never outlined the criteria for foreign currency allocation.

Now, also consider also the situation of gold and tobacco producers as exporters. They generate foreign currency through exports. Using the logic that those who don’t export must not expect foreign currency, it should follow that those who export should expect to retain their foreign currency earnings.

In fact, the central bank should not retain part of these foreign currency earnings because it exports nothing. Yet it is well-known that part of tobacco farmers’ and gold producers’ foreign currency earnings are kept by the government. Not only that, but this foreign currency is allocated to importers who do not generate foreign currency.

It might be argued in response that these non-forex generating importers are an exception to the general rule. If that were so, wouldn’t it be more solid and persuasive if the government backed up the claim by disclosing the full list of beneficiaries of the foreign currency allocation scheme? Such transparency would enable the nation to verify whether the beneficiaries of foreign currency are deserving on grounds of essentiality.

Conclusion

In a nutshell, as already pointed out, the government is running the risk of missing the wood for the trees. In other words, by focusing only on the junior doctors’ demands and condemning their wages demands, it is missing the big picture of what is happening on the economic landscape. The surrogate currency has long been in distress. But now the market – both labour and capital - are firmly rejecting it.

The junior doctors’ demands and Delta Corporation’s move on prices represent a fundamental step by both capital and labour in rejecting the surrogate currency, which the government still ridiculously maintains is equal to the USD.

The market is in total disagreement. Delta has dollarized. The junior doctors want to dollarize. Many more are rejecting the surrogate currency. More companies will follow and more workers will take the doctors' route. There is, it seems, as an inexorable march towards re-dollarisation and the demise of the surrogate currency. It's going to be a hard year but one in which, i think, the country will be forced to new settings. Because current settings have, quite frankly, become moribund.

WaMagaisa

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