DON'T MISS : Talking Africa Podcast – Mozambique's insurgency: After Palma, what comes next?

Zimbabwe’s command economics rattles the markets again

By Farai Shawn Matiashe
Posted on Monday, 21 June 2021 12:45

People walk past a money-changers sign at a market in Harare
People walk past a money-changers sign at a market in Harare, Zimbabwe, November 26, 2020. REUTERS/Philimon Bulawayo

A new decree from President Mnangagwa’s government to abolish the parallel market and shore up the ailing local dollar could prove counter-productive and drive up inflation again, according to traders in the capital.

Before the new policy put in place by President Mnangagwa’s government, the US dollar was trading on the black market at 1:120 Zimbabwean dollars (Z$), while the official exchange rate was $1:Z$85 at the time of writing.

On 26 May, the government passed the Statutory Instrument 127 of 2021 (SI 127) that amends the country’s financial regulations. Its key points are as follows:

  • Businesses are barred from selling goods and services at an exchange rate above the ruling auction market rate;
  • Buyers must be issued a receipt in Zimbabwean dollars for a payment made in foreign currency;
  • Buyers should get a discount for paying in foreign currency;
  • Businesses and individuals will be fined if they refuse to accept payment in Zimbabwe dollars.

But two weeks after the government introduced the new rules, the parallel market premium enjoyed by the US dollar over the local dollar remains the same but average prices for goods and services have gone up.

In mid-May, Zimbabweans were paying $83 for goods that cost Z$10,000 because retail outlets were using a rate of $1:Z$120.

Now the same customer would need $111 for the same goods using the official exchange rate of $1:Z$84.

Illegal money changers have returned to the streets in their multitudes and apparently black market dealers are now diverting the bulk of foreign currency that formal businesses had been using, to the detriment of the supply chain.

In 2019, the government outlawed the use of multiple currencies. This reversed the currency regime brought in by the power-sharing government which in 2009 had suspended the use of the Zimbabwe dollars and accepted several currencies including US dollars, South African rand and Euros as legal tender.

Zimbabwe has a febrile consumer market: sudden policy changes can create angst fuelling panic buying of dollars. Given the weak macroeconomic fundamentals, the risk of inflation outlook looks high.

The US dollar has become a preferred currency for many Zimbabweans who lack confidence in the local one.

Most businesses prefer payment in US dollars but allow customers an option to pay with local dollars but at rates higher than the official exchange rate.

Chasing away foreign investors

Economists blamed the government’s inconsistent policies for driving away  much-needed foreign investors in the country.

Jee-A van der Linde, an economist at NKC African Economics, says investors have a longer time horizon when exploring the possibilities of entering a new market, so policy stability is key.

“However, policy missteps have eroded Zimbabwe’s monetary credibility over the years, and the recent bout of currency stability has not changed that. In addition, the government has failed to do its part on the fiscal front to instill confidence in state institutions. The situation in Zimbabwe exemplifies the importance of policy credibility and how difficult it is to regain it, once it is lost,” he says.

Stevenson Dhlamini, an economist and senior lecturer at the National University of Science and Technology, adds that there was insufficient consultation prior to the introduction of this forex policy hence the resistance and lack of buy-in by industry.

“This is interpreted by the market as policy inconsistency because the market has a ‘long memory’ which is constituted of gross policy inconsistencies. Investors are likely to be skeptical about the policy consistency of the government,” he says.

Piling more misery on the people

Zimbabweans are grappling with the worst economic crisis in decades.

Prices of basic commodities were already beyond the reach of many before these new rules were announced by the government. The monthly cost of living for a family of five was costing Z$28,000 ($233) as of April this year, according to the National Statistics Agency (ZimStat).

The situation has worsened due to the global pandemic.

Esther Dzviti, an economist, says businesses will react to protect themselves, therefore, some of them are pegging the prices of their goods and services higher in local currency to cover the price gap that has been created by the SI.

“This will affect the poor majority because most people are already earning their incomes in local currency. Minimum wages have not been reviewed. People are earning low incomes in local currency. So, if businesses now push their prices based on this SI, it will affect the livelihoods that have already been hit hard by the country’s struggling economy,” she tells The Africa Report.

She says the new rules will encourage businesses to withdraw certain goods from the formal market and sell them in USDs within the informal market at exorbitant prices.

Fuelling inflation

The southern African nation slowed its inflation rate to 162% in May this year after having recorded 838% in July last year — the highest in a decade.

The government’s Dutch-inspired Foreign Currency Auction System launched in June 2020 is failing to hold the inflation.

“Firms may compensate their foreign currency exposure by increasing prices in foreign currency which will stir a rise in inflation,” says Dhlamini.

“For the past six months we have been having hidden inflation or suppressed inflation and the SI will give an outlet for the inflation to escape through. It also dents the business confidence that the general industry had grown to have. Also, we know in economics there is a law called Gresham’s Law, which says bad money chases away good money. This law will most likely see Z$ (bad money) chas[e] away USD (good money),” he says.

Van der Linde, an economist at NKC African Economics, says history suggests that Zimbabwe’s current path will lead to a dead end.

“Various changes in the country’s currency regime demonstrate how desperate officials are to quash exchange rate disparities but at the same time, [are] unwilling to make difficult decisions. Authorities have been kicking the can down the road when it comes to dealing with the currency issue,” he tells The Africa Report.

“Zimbabwe has a highly sensitive consumer base and sudden policy changes often create angst, which fuels panic buying of USDs, and given the weak macroeconomic fundamentals, the risk to the inflation outlook remains high.”

Through the forex auction system, some businesses have also been profiteering from the situation.

Denford Mutashu, president of the Confederation of Zimbabwe Retailers Association, says after the introduction of the SI, the prices of goods and services jumped – especially in the informal sector which makes up 70% of the economy.

“There is a general feeling that the S1 127, though carrying noble intentions, has rattled the market which was labouring towards stability owing to the introduction of the forex auction system,” he says.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options