Eric Bloch Column

Too many currency markets in Zimbabwe


ELOPED, deregulated and free economies operate a single, open currency market that is conducted wholly through the banking system. Almost entirely, exchange rates are determined by market forces, the only exception being occasional interventions by the central bank, usually motivated to maintain exchange rate stability.

These interventions are generally limited to the central bank either selling foreign currency into the market, or purchasing foreign currency within the market, or movement of its base lending interest rate to such extent as will, as desired by the central bank, attract foreign currency inflows or stimulate outflows, thereby influencing the market’s determination of exchange rates.In contrast, Zimbabwe operates four different foreign currency markets, only two of which are wholly lawful.

The first is a Reserve Bank (RBZ)  controlled market where exporters are obliged to sell between 15 and 25% of all export proceeds as are not received by way of prepayments, or within 30 days of export, to the RBZ at a grossly artificial and ludicrously low exchange rate of US$1:$824. The extent of the mandatory sale to the RBZ is driven by the period of time that has elapsed from date of export to date of receipt of payment and acquittal of the relevant export authorisation (Form CD1). The foreign currency thus received by the RBZ is sold by it to government and to parastatals at the same rate. Effectively, therefore, this market is naught but a vehicle whereby exporters are victimised, being forced to subsidise the state by making foreign currency available at a rate markedly below a realistic exchange rate. To all intents and purposes, exporters are subjected to a highly discriminatory, and economically destructive tax.

The second foreign currency market is that operated by the RBZ by way of a “controlled” auction. Those foreign currency inflows that not forcibly directed into the first mentioned market to serve the needs of the State, and as exceed amounts which recipients are lawfully entitled to retain as foreign currency, mandatorily must be sold on the RBZ’s foreign currency auctions. The seller has no option but to sell, and cannot even specify a reserve price below which the foreign exchange may not be sold, and is obliged to accept a Zimbabwean currency payment at the weighted average auction rate. Purchasers of the currency are also subjected to extensive controls, which include that they are barred from bidding for currency unless in receipt of prior RBZ authorisation, determined according to the intended usage of the foreign currency. The controls further result in bid rejections in the event that the purchaser’s bid exceeds a level determined, but not pre-notified, by the RBZ, or if the intended usage of the foreign exchange, although pre-authorised, does not meet the RBZ’s decided priorities for a particular auction. In addition, of course, bids that are too low are also rejected.

That which is known as the parallel market is the third of Zimbabwe’s foreign currency markets. The authorities deem trading in that market to be unlawful, and have been descending with draconian force upon many who traded within that market. Essentially, the parallel market comprised the sale by possessors of foreign currency to others who were in desperate need for that scarce commodity in order to pay for imports, service loans, and fund legitimate business expenses such as commissions to agents in export markets. To a very pronounced extent, the transactions were initiated by, or effected through, registered banks. They being authorised dealers of the RBZ, there was a widely held perception that the transactions were wholly lawful, for authorised dealers were viewed as being duly appointed agents of the RBZ. That perception was recurrently reinforced by the fact that it was widely believed that the government was a very major, if not the greatest, trader in the parallel market, sourcing much of the foreign currency required by it and its parastatals, including Noczim, Zesa and the Grain Marketing Board.

Moreover, there were ready and frequent references to the parallel market in parliamentary debates and ministerial statements. But the authorities suddenly decided, only eight months ago, to descend heavy-handedly upon private sector enterprises and individuals who had been engaged in parallel market operations, and subject them to prosecution. In contradiction, banks that had been reprimanded by the RBZ, had fines imposed upon them and licences suspended, were “forgiven”, the fines refunded and licences reinstated. Clearly, double standards of justice were applied and they have been great contributors to the near demise of business confidence and the exodus of many highly skilled and greatly needed executives. Notwithstanding the authoritarian descent upon the parallel market, there are many indications that it still exists, even if to a lesser extent. One of such indications is the ready availability of many non-essential and luxury imported goods of a nature as does not qualify for currency from the foreign currency auctions.

There is little doubt that the survival of some businesses is contingent upon continuing availability of foreign exchange through the parallel market, albeit if accessing thereof is now far more surreptitious and underground.

On the other hand, the directing of foreign currency through the parallel market has two very major negative consequences. In the first instance, such usage of the foreign exchange is to the prejudice of importation of many critically essential imports upon which many enterprises, if not the economy as a whole, are dependant.Secondly, the premiums payable within the parallel market are inevitably fuellants of inflation.Finally, Zimbabwe has a virile and thriving black market.

Most of the foreign currency traded in that market emanates from tourists and other visitors to Zimbabwe, expatriates in the employ of foreign NGOs and like bodies, from Zimbabweans abroad, and from resources usually unlawfully accumulated outside of Zimbabwe by businesses in and residents of Zimbabwe.

The methods of such accumulation are diverse, including transfer pricing of imports and exports, and externalisation of unutilised travel allowances.In other instances, the funds have been acquired lawfully by way ofinheritances, gifts, assets acquired when non-resident of Zimbabwe or for services rendered externally of Zimbabwe.

In contradiction to parallel market trading, which has generally been effected through interbank transfers and like transactions, the black market dealings are almost entirely transacted by exchanges of bank notes, and the dealings are negotiated and concluded in back streets of Bulawayo and Harare, at bus terminii and in areas heavily patronised by tourists, cross-border traders and other visitors to Zimbabwe.

The worst characteristic of the black market is that most of the monies traded exit Zimbabwe. Buyers resort to the black market in order to externalise their assets, and in order to fund purposes which do not qualify under the foreign currency auctions, such as holiday travel. Thus, the Zimbabwean market, which is desperately starved for essential foreign exchange, is further emaciated by the operations of the black market.

Admittedly, there is some economic benefit flowing from the market in that not only do the black marketeers derive a livelihood, but in addition, some of the funds are used for informal sector operations. However, these economic benefits are outweighed by not only inflationary repercussions, but also the prejudices of the diversion of the foreign exchange from higher priority needs, and by diminished revenue flows to the Fiscus.What is incomprehensible is that the authorities are now so vigilantlypursuing those who transacted in the parallel market, believing from theexamples set by the State that they were operating within the law, and doing so in order to keep their businesses operational, their employees employed, and the wheels of commerce and industry turning. At the same time, and with extremely rare exceptions, they do nothing to contain the black market but allow its operators to trade almost without hindrance.

An amnesty in respect of past parallel market trading would not only be just and equitable, and is long overdue, concurrently with determined measures to curb the black market. The medium term objective must be the restoration of a single, decontrolled currency market, but in the meanwhile too many markets exist and, as a first step, the US$1: $824 exchange rate and the black markets must be eliminated.