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Arbitrage: The terminal wound bleeding Zim economy

Opinion & Analysis
Zimbabwe’s economy has been tittering on the brink for a good two decades. Some would aver perhaps for more, like three decades. The reasons for this are as varied as the number of people from whom one solicits an opinion on the matter.

Zimbabwe’s economy has been tittering on the brink for a good two decades. Some would aver perhaps for more, like three decades. The reasons for this are as varied as the number of people from whom one solicits an opinion on the matter.

guest column:Admire Maparadza Dube

Some say Zimbabwe’s downward trajectory was brought about by the government when it instituted the Economic Structural Adjustment Programme (Esap) at the bidding of the International Monetary Fund (IMF) in the 1990s.

Some say Esap was well intentioned. Only its effectiveness was hampered by recurring droughts.

Some say the haphazard land acquisition of the early 2000 destroyed the base for the agro-based economy and that coupled with inefficient (if not downright corrupt) reallocation of the land to new farmers who mostly did not have the means and/or the technical know-how to make meaningful contribution, spelt doom for Zimbabwe’s economy.

Others mention government’s intervention in 1998 in the conflict in the Democratic Republic of the Congo (DRC). Not only did the cost of this intervention drain what little remained of Zimbabwe’s bank reserves, it also alienated the country from the international community. In 1999, both the World Bank and the IMF suspended aid to the country due to unwillingness to fund Zimbabwe’s military spending in the DRC.

Yet a lot more are convinced Zimbabwe’s economy has been strangulated and choked by Western powers who imposed economic sanctions on the nation. The reasons for these sanctions, and their nature, are a major topic on their own and will not be dealt with here as they deserve thorough examination.

What is, however, being dealt with here are the efficacies of economic interventions being made by the authorities to arrest and, perchance, improve the country’s growth prospects. More so, how these mitigations have themselves turned into economic scourges that are bleeding the economy instead of aiding it, in the form of arbitrage wounds.

Is the arbitrage an oversight, a result of incompetence or deliberate opportunity cracks intentionally ignored to allow pilferage which benefits a select few? This is the main import of this article. The political and social assuagements being employed to improve the economy (along with their effectiveness) will not be interrogated here as this discussion is from an economics and finance angle, in the main.

Arbitrage, in the purest sense is the act of buying financial instruments (assets that can be traded on an open market like contractual right to deliver or receive cash or evidence of one’s ownership of an entity that represent partial ownership of a company, shares, stocks and the like) in one market and simultaneously selling them in another market at a higher price, thereby enabling investors to profit from the temporary difference in cost per unit.

This would happen without any inherent change in the stock itself but mostly by taking advantage of a loophole. Loopholes like trading hours (before computerisation) where a trader bought stocks in the Asian market and offloaded them later at American trading times when Asia has closed for the night before it adjusts prices to what is happening in America where it will still be daylight.

In general economic terms, arbitrage has come to mean the practice of taking advantage of a price difference of the same item or financial instrument due to gaps like policy, practice, distance, time and others, without any beneficiation, improvement or normal profit mark up.

Arbitrage, therefore, becomes a transaction that involves no negative cashflow in any probabilistic or temporal state and a positive cashflow in at least one state. In simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to “instantaneously” buy something at a lower price and sell it at a higher price.

Zimbabwe has many such arbitrage examples and these have been allowed to exist to the detriment of the economy and they are a terminal wound bleeding the economy and thus working against commendable economic interventions.

The first example that jumps to mind and which inspired this article in the first place, is on gold. This is easily the first as it is a very topical issue currently following the recent arrest of Zimbabwe Miners Federation president Henrietta Rushwaya on October 26 2020 at Robert Gabriel Mugabe International Airport for allegedly trying to smuggle over 6kg of gold on a flight to Dubai.

Government’s sole gold buyer is Fidelity Printers and Refiners (FPR). Dealings in gold in the country are governed by Gold Trade Act (chapter 21:03). A few entities and individuals are authorised under section 14(1) of the said Act to deal in gold under licence.

These are official miners, licensed gold buyers and jewellers and gold recovery works licence holders. Licensed gold assayers are only allowed to handle gold which is “not in the form of alluvial, amalgam, retorted, smelted or refined” form.

This means trade in this mineral is heavily regulated. Those under licence can only sell to other licence holders who in turn sell to FPR. In fact, licence holders are compelled by the Act to sell all their gold by the 10th of the month next following the date of securing or procuring that gold under section 6(1), necessarily meaning gold ultimately flows to FPR with the government through relevant departments retaining the right to export.

The arbitrage arises in the gold pricing model by FPR and the differing United States dollar retention regimes after a licence holder gets paid. It is imperative at this juncture to point out that this has always been the case for a long time where various prices and schemes are given to different gold suppliers.

This is very tempting for people to exploit and make money. And very damaging to the fiscus each time they do.

Large-scale miners (LSM) from May 2020 received 70% of their sales proceeds in foreign currency, up from 55%, with the balance to be paid in local currency at the prevailing exchange rate, which the Reserve Bank of Zimbabwe (RBZ) announces every Tuesday after auction. Yet small scale miners were for a while paid in full in foreign currency.

Now, if one considers that for the past three years, from 2017 to 2019, artisanal and small-scale gold miners (ASGM) delivered more gold to FPR than LSM and that the ASGM sector accounted for 63% (17 478,74kg) of total gold deliveries (27 650,26kg) to FPR in 2019, it does not take much analysis to deduce that many LSM were delivering their gold under ASGM licences to take advantage of this price distortion. The benefit for the LSM being they got paid 30% more foreign currency if they used ASGM licences instead of using their own.

Classic arbitrage The loser in this is the State (and, therefore, the people of Zimbabwe) as FPR depleted more national foreign currency reserves than it should have as it pays for this legislated distortion.

Gold delivery figures to FPR have, however, plummeted. Granted, production has also gone down but not by the same percentage as deliveries. This likely means gold is now finding its way out of Zimbabwe through unofficial channels.

It is no coincidence that this reduction in deliveries happens after three years of exponential growth in gold production in the past three years of over 500% and also coincides with yet another introduction of price distortion.

ASGM are still being paid 100% in foreign currency but now at a flat fee of US$45 per gramme of fine gold.