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Zimbabwe is cracking down on illegal money changers but that is not stopping its runaway inflation

By Farai Shawn Matiashe
Posted on Wednesday, 20 October 2021 10:07

A street vendor poses as he displays bond notes, before the introduction of new currency in Harare, Zimbabwe, 11 November 2019. REUTERS/Philimon Bulawayo

In mid-September, the Reserve Bank of Zimbabwe ordered banks and mobile money operators to freeze accounts of over 30 individuals it accused of facilitating illegal foreign currency trade via mobile platforms and social media. Analysts argue that while the government says it is seeking to fight inflation, such moves do not address the root causes of Zimbabwe's economic problems.


This comes one year after the government banned mobile-money services, accusing the dominant Econet of running a Ponzi scheme.

Officials at Zimbabwe’s central bank alleged that Econet’s Ecocash platform, which boasts of 11 million users, contributed to the country’s spiralling inflation by facilitating illegal foreign-currency dealings.

The government later allowed-mobile money users to continue using the Ecocash services, but only if they abided by the weekly and monthly transaction limits imposed on them. Nevertheless, mobile-money agents remain banned.

Despite all these measures, the local currency keeps on losing value against its benchmark, the United States (US) dollar. This is despite inflation slowing down to 162% in May this year, after having reached 838% – the highest figure in a decade – in July 2020.

As of mid-October, the Zimbabwean dollar (Z$) has been trading at 175 against the greenback, a sharp rise from 130:1. At the official rate, the Z$ is trading at 88 against the US dollar.

Zimbabwean authorities are also at loggerheads with firms they accuse of abusing the foreign currency acquired at the auction rate.

Some of these business entities are refusing to accept local currency at the official rate, while some are facilitating illegal foreign-currency, yet they get the foreign currency from the RBZ at the official rate.

In early October, the RBZ revised its inflation targets upwards to 53% by year-end, from a previous projection of 35%, according to RBZ governor John Mangudya. Initially, the central bank was targeting less than 15% inflation.

Foreign currency auction system not helping

Since 2018, President Emmerson Mnangagwa – who ascended to power through a military coup – has been struggling to gain control of the economy.

In June 2020, the central bank introduced the Foreign Exchange Auction System, which was aimed at stabilising the spiralling currency rates after dumping the pegged interbank exchange rate that failed to address the situation.

There are political objectives and blame-shifting goals. It is more of aiming at symptoms than addressing fundamental aspects.”

Farai Mutambanengwe, an executive officer at Small to Medium Enterprises Association of Zimbabwe, says the official rate is manipulated and does not reflect the actual market rate.

“The Foreign Exchange Auction System was supposed to be a price-discovery mechanism for foreign currency, but it has failed to do that. The rate [at] the auction is […] manipulated because it is a rate set by buyers and the RBZ. That rate is not a market rate,” he tells The Africa Report.

“There is also a backlog. This means that the auction is failing to provide foreign currency. […] in essence, we do not have a formal market for foreign currency in Zimbabwe and the only way that one can get foreign currency is through the informal markets,” he says.

Victor Bhoroma, an economic analyst, says the crackdown on illegal money traders who use mobile money platforms is not working because the government is not addressing the fundamental issues.

“There are political objectives and blame-shifting goals. It is more of aiming at symptoms [rather] than addressing fundamental aspects. The government needs to allow the Auction Market to operate in the true Dutch Auction spirit where price discovery is market-determined, not pegged, as is the case now,” he says.

“There is also [a] need to reign in […] money supply so that it is in line with economic growth, as that is the biggest cause of local currency depreciation,” he says.

Since last year, the Southern African country has been increasing money supply into the market, which does not correspond with its production.

“Money supply growth in Zimbabwe over the past year [has] actually been in excess of over 100%. […] if your money supply increases at that level, and your productivity is not increasing at the same rate – neither are your foreign-currency inflows – it translates to depreciation in the exchange rate,” says Mutambanengwe.

At best, they are mere receptionists of bigger, politically-exposed people who have unfettered access to foreign currency and protection from law enforcement agencies.”

Esther Mapungwana, an economist, tells The Africa Report that the central bank cannot solve the symptom of an illness without addressing the root cause.

“Spiraling rates are because we are an import-based economy. The focus to boost production and investment is long-term, but it is a start. As long as we focus on short-term solutions we are not going [anywhere],” she says.

Political bigwigs

There have been allegations that political bigwigs are behind the illegal foreign currency trading in the country.

“At best they are mere receptionists of bigger, politically-exposed people who have unfettered access to foreign currency and protection from law enforcement agencies,” Bhoroma says.

Dzviti concurs with Bhoroma and says the fact that there have not been serious arrests on illegal foreign currency dealers shows that there are big fish behind these traders.

The US dollar is king

In Zimbabwe, there is a different rate when one buys currency. It depends on whether one uses the mobile money platform Ecocash, US dollar, electronic transfer or Zim dollar notes.

The majority of Zimbabweans prefer the US dollar as compared to the local currency as prices of most basic goods and services are priced using the latter.

Every morning, Zimbabweans share the day’s prevailing rates on social media platforms such as WhatsApp. Dzviti says even if the illegal money traders are arrested, others will still create the parallel market as there is demand for the US dollar.

“The issue is the need for forex and not the traders. Once you remove the need, you do not have time to chase the illegal foreign currency traders,” she says.

Mutambanengwe says the crackdown is not likely going to succeed in terms of controlling the rate.

“In fact, it will make the rate even higher as it becomes more illegal for people to trade using the parallel rates. It becomes expensive. It drives the illegal trade underground,” he says.

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