A month ago, this column advised authorities to desist from threatening businesses by freezing accounts or suspending/revoking operating licenses as this will lead to severe unintended outcomes such as the disappearance of goods in formal markets.
The attainment of durable macroeconomic stability is only possible if there is a swift implementation of crucial reforms, consistency of policy, and the existence of mutual trust between the government, private sector, and labour. This week, the column focuses again on the latest authorities’ policy moves akin to price controls to highlight why they will likely lead to unintended outcomes.
On the 11th of July, the Ministry of Finance and Economic Development released a statement titled ‘Violation of Exchange Control Directives and Government Policy’ in which it named players in the pharmaceutical sector who were exhibiting ‘destabilizing forward pricing and speculation’. Forward pricing is a practice of front-loading anticipated exchange rates in the current prices leading to self-fulfilling exchange rate depreciation with negative knock-on effects on prices.
According to the Reserve Bank of Zimbabwe (RBZ) exchange regulations, corporates are only allowed a 10% margin above the official interbank rate when setting ZWL prices. For example, if the official rate is at ZWL/USD 5000, companies must not exceed ZWL/USD 5500 when valuing their stock in ZWLs. However, the continued fragility of the local currency has forced many companies to defy these regulations by engaging in forward pricing to cushion themselves from excessive exchange rate losses associated with a volatile macroeconomic environment.
The government has since introduced a cocktail of economic stabilization measures.
including suspension of import duty on basics, preannouncing as well as limiting the weekly forex auction envelop, introducing the wholesale forex auction system for banks, and Treasury taking over both exporters’ forex surrender requirements and RBZ external debt obligations. Treasury has also decided to promote the use of local currency in the economy, for instance, by directing all government ministries, departments, and agencies (MDAs) to collect taxes & other fees in ZWLs and it has in June 2023 directed companies to settle their 50% of Quarterly Payment Dates (QPDs) be settled in ZWLs to increase appeal and demand of the ZWL in the economy.
These measures particularly the wholesale Dutch forex auction systems have managed to mop up excess liquidity that was prevailing in the formal markets, a shift that has brought sanity to the markets. Forex auction statistics show that a combined US$77.42 million was sold by RBZ at the auction market between June 7 and July 11, mopping up about ZWL457.82 billion held by banks and importers.
In other words, the sale of forex through the auction has significantly reduced ZWLs
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available for use by economic agents thereby causing an acute shortage of ZWLs in the market. Consequently, ZWL decline moderated and has now started gaining in both markets. Between June 28 (ZWL/USD 6326.58) and July 13 (ZWL/USD 4988.26), the local unit gained 26.8% of its value in the interbank market while recouping 8% in the alternative markets from ZWL/USD 8100 to ZWL/USD 7500.
Buoyed by this ZWL stability, the government is now coming against companies not benchmarking ZWL prices at the official rates. As alluded to earlier, a total of 17 pharmacies that were named in the latest statement are at risk of losing their trading licenses. Also, in early June 2023, the Financial Intelligence Unit (FIU) of the RBZ reportedly froze the bank accounts of 12 major suppliers of goods and services including four (4) supermarkets for allegedly refusing ZWL payments, diverting goods to the informal markets, and engaging in forward pricing practices.
To deter the so-called delinquent business practices, the FIU has further threatened to take remedial and punitive measures including inter alia imposing administrative fines, freezing bank accounts indefinitely, referring culprits to authorities for suspension/revocation of trading or operating licenses, and prosecution.
Following, it is my view that the government is trying to treat the symptoms while ignoring the root cause of the ailment. This is because transacting business has all but rejected the local currency due to its continued massive fluctuations experienced since its re-introduction in 2019 trapping Zimbabwe into hyperinflation.
For instance, the latest ZimStat June 2023 MoM inflation statistics show the general prices mounting by 74.5%, a characteristic of a hyperinflationary economy.
Hyperinflation is a period of very high, accelerating, and out-of-control general price increases generally measured by a rate of more than 50% per month.
As I always say in this column, there are two (2) main reasons behind economic agents’ demand for foreign currency assets during hyperinflation: currency substitution and asset substitution. On one hand, currency substitution means that foreign money is essentially used as both a medium of exchange and a unit of account.
Since high inflation increases the cost of using domestic currency for transacting purposes, economic agents are prompted to be on the lookout for cheap alternatives. On the other end, asset substitution entails agents’ risk and return considerations between domestic and foreign currency-denominated assets.
Generally, forex-denominated assets provide insurance against macroeconomic risks.
So, to me, the non-adherence to official rates by businesses can’t be regarded as intentional or mischievous but is purely based on the rationality principle. Authorities must understand that even though the exchange rates have stabilized in both markets, businesses can’t just lower prices overnight. The essence of sustainable enterprise is hinged on cost minimization and profit maximization.
Many businesses have restocked when the exchange rates were going haywire hence forcing them now to sell at a price far much lower than the product cost will result in these businesses incurring huge losses. Secondly, the firming of the ZWL exchange rate in official markets is occurring at a greater pace than what is happening in the alternative markets.
This is leading to the widening of parallel market premiums. For instance, while the rates are falling in both markets, the average premium is burgeoning from 14% (21 June) to 50% (13 July). High parallel market exchange premia promote excessive rent-seeking behaviours in the economy.
Thirdly, markets are drawing lessons from experience. When the foreign auction system was introduced in June 2020, the economy enjoyed a period of ZWL and price stability but for a short period as the authorities quickly reverted to fiscal and monetary indiscipline. This affected businesses that have largely embraced and
amassed ZWLs.
So, it is highly conceivable to the market that the ongoing stability will be temporary due to the government’s track record of policy inconsistency.
A granular analysis shows that the current ZWL stability has not come on the back of implementation of meaningful reforms or fiscal and monetary discipline but is just the government starving the market of ZWLs by not fulfilling its obligations.
Treasury is yet to pay contractors undertaking ongoing infrastructure projects, settle exporters’ forex surrender requirements, and fulfil financial obligations on RBZ external debt it recently assumed.
More so, without considering rising spending pressure coming from the pending elections, Treasury is expected to offer a salary increment to all civil servants lest it risk jeopardizing public service delivery as a result of likely devastating labour strikes.
It will also foot the bill for grain purchases from farmers during the ongoing 2023/24 marketing year.
Last but not least, we are still experiencing a huge confidence deficit in the ZWL and there is a clear lack of public trust in government due to increased corruption and impunity.
All these will lead to increased uncertainty and likely increase ZWL liquidity in the economy which will force the ZWL to significantly plummet again.
A standing challenge in the way that government regulates the economy is the inconsistency in the application of policy/law. While private businesses are being hounded for charging high exchange rates and taking payments in the more secure USD, there are virtually no fuel stations trading in ZWLs anymore.
Public offices such as the Registrar General are taking USDs for passport applications while NetOne, a government-owned telecommunications companies continue to prefer selling some products in the USD. Allegations stand that the fuel sector is allowed due to cronyism and the interest of the ruling political elite in the fuel cartels. If the law and policy are not applied fairly across the economy, the government cannot hope to retain control.
The issue of control itself presents another challenge as the current moves by authorities gravitate toward price controls and risk causing acute shortages of goods and services in formal markets.
This is because price controls lead to prices that are not related to the cost of production, cannot address scarcity, fail to tackle the underlying reason for inflation, and distorts market forces of demand and supply. In the end, they affect the direly needed mutual trust between authorities and the corporate world.
Also, introducing price controls at a time the market is full of negative perceptions and holding adverse expectations for the future due to the likely disputed and contested election result will exacerbate macroeconomic instability.
As such, there is a need to allow the price stabilizing effect caused by the ongoing moderation of ZWL decline in the foreign exchange markets to cascade to prices with little interference from the “Visible Hand”.
The core problem and elephant in the room that requires addressing is the lack of significant production in the nation due to the lack of implementation of meaningful political and socio-economic reforms to improve the deteriorating social contract, upgrade poor international relations, enhance property rights, respect for human rights and freedoms, thwart existing pricing distortions and increase market competition and innovation.
Sibanda is an economist. He is a research associate with Zimcodd. He is a staunch advocate for inclusive and sustainable development. He writes in his personal capacity.
