HomeAnalysisCurrent five-tier pricing system rewards arbitrage

Current five-tier pricing system rewards arbitrage

THE unofficial five-tier foreign currency pricing system now prevalent in the Zimbabwean market space, comprising different applicable rates for the United States dollar, bond note, mobile money, Real-Time Gross Settlement (RTGS) and the Old Mutual Implied Rate has, in real terms, made Zimbabwe fuel prices the cheapest in the region.

Martin Majaji,Financial analyst

This has led to the current massive spike in the demand for all fuel grades imported into the country. According to official figures, in the six months to June 2018, the country consumed 752,4 million litres of fuel, representing a 24% jump from the same period last year. The country now needs about US$80 million a month to pay for fuel imports and the demand for fuel continues to increase, leading to frequent shortages and the resurfacing of the dreaded queues.

The International Monetary Fund (IMF) recently adjusted Zimbabwe’s projected economic growth rate to 2,4% for 2018, yet real demand for fuel has shot up by 24%. The increase in demand for fuel is a result of the fact that Zimbabwe now has the cheapest fuel in the region if one makes use of the five-tier forex pricing system to trade fuel in the country. A real-life example works as follows: a trucking company plying the South Africa-Democratic Republic of Congo (DRC) route will ensure that drivers carry US dollars in cash. Upon arrival in Zimbabwe where diesel prices are officially pegged around US$1,40, the driver sells his dollar notes at US$1 to $2 in bond notes. The driver then uses the bond notes proceeds to pay for diesel at a Zimbabwean service at the marked price of US$1,40. In real terms, the cost of fuel in Zimbabwe then is US$0,70 or 70c, since the truck driver obtained his bond notes at a rate of 1 to 2 for his precious US dollar notes. The price of fuel can even be way cheaper than 70c where RTGS is used for payment after trading US dollar notes at the higher discounted RTGS rate.

In comparison, diesel prices per litre in South Africa are currently pegged at about US$1,15, in Zambia at US$1,41, the DRC at US$1,21, in Botswana at US$0,84 and Mozambique at US$1,07.

The Reserve Bank of Zimbabwe (RBZ) is allocating real US dollar cash to import fuel and yet the country only receives half or less of the real US dollar price paid to acquire the fuel. In real terms, Zimbabwe is now subsidising the price of fuel and this explains the spike in demand for fuel and the concomitant increased pressure on scarce US dollar monthly allocations towards fuel imports, to the detriment of other key national imports such as raw materials for manufacturing companies, medicines and other critical payments.

The situation will continue getting worse, as South Africa records the highest increase of more R1 in fuel pump prices in October, Zimbabwean fuel will become more attractive, with more pressure for monthly forex allocation by the RBZ and fuel stockouts and queues becoming more frequent.

That is why fiscal and monetary authorities this week intervened by ordering foreign truckers to pay for fuel in foreign currency, a good but difficult to enforce measure.

Other arbitrage opportunities

l Export of fuel and scarce local products to neighbouring countries at a discount.

The same five-tier forex pricing system creates arbitrage opportunities for traders to buy fuel using either bond notes or RTGS transfers and sell the fuel in US dollars in neighbouring countries and trade the US dollars for bond notes or RTGS at double the official rate, and immediately more than doubling their profits.

Traders can also export scarce locally produced products like cooking oil, cement, beverages, etc, even at a discount into neighbouring countries. If they receive payment in US dollars, they will trade the US dollars for bond notes and RTGS at more than 100% margin, hence making huge profits from arbitrage. This could explain some of the recent spikes in real volume sales of beverage companies, cooking oil and cement companies, leading to supply shortages in the domestic market and an increased demand for forex allocation to import more raw materials.
l School fees payments and international medical treatment.

A Zimbabwean who lives in Johannesburg can buy US$5 000 in a South African bank, crosses the border into Zimbabwe, trades the dollars for an RTGS deposit of US$10 000. He then presents an application to the RBZ to pay real US$10 000 for school fees for his kids studying outside Zimbabwe. If the RBZ approves and allocates the forex payment for school fees, in real terms, the Johannesburg-based parent has been gifted or subsidised to the tune of US$5 000 for his kid’s educational costs.

The same could apply to international medical costs and any other costs which are deemed critical on the forex approval list of the RBZ.

The economic ramifications

The distortions in forex pricing are now causing massive inflationary pressures in the economy, bringing fears of the recurrence of the previous dreadful hyper-inflationary environment of the 2000–2009 decade.

Both demand-pull, and cost-push inflation are now at play as a result of the forex pricing distortions. Demand-pull inflation is at play because of the massive demand for domestic products which, in real terms, are cheaper in the international markets because of distorted forex pricing. Cost-push inflation is being fuelled by importers who resort to sourcing forex on the parallel markets to import products as the RBZ fails to provide forex allocation for their needs.

No amount of further forex injections into the system will improve the situation, instead the arbitrageurs will continue to make more profits and the forex deficit will continue growing to massive proportions, adversely affecting real production and causing further inflationary pressures into the economy.

Immediate policy solutions required

The five-tier forex pricing system needs to be addressed urgently if the forex haemorrhage is to be addressed and allow the country to focus on real production, value creation and real economic growth which create formal jobs. The arbitrage opportunities created by the five-tier pricing system are creating distortions to real productive activities by rewarding arbitrageurs at the expense of the real producers.

The newly-appointed cabinet should immediately implement the following key and bold economic policy measures to arrest the situation once and for all:

The immediate de-monetisation of the bond notes. There is currently about $400 million worth of bond notes printed and in circulation. The government and the Finance ministry should use the US$500 million of recently arranged funding facilities to de-monetise the bond notes. This is the only sure way of arresting the current pricing distortions in the market. Injecting this funding into the market under current market distortions will just add fuel to the arbitrage practices and is akin to throwing the money into a bottomless pit. De-montising the bond note will force people storing US dollars for trading purposes and store of value, to start using them for transactional purposes and hence increase the supply of US dollar notes.

Opening of customer forex currency (CFC) accounts — which authorities did this week — and removal of central bank forex allocation system. Treasury must legislate for the opening of CFC accounts with banks that are liquid at all times, with customers accessing their cash on demand. Exporters can trade their export receipts with importers at market-determined rates. The market pricing and allocation of foreign currency will remove the need for parallel markets and allocate the scarce forex to those that really need it for productive purposes and eliminate all the opportunities for arbitrage.

Allow for multiple pricing for US dollar, mobile money and RTGS. The government should in the interim allow multiple pricing of goods and services in RTGS value and real US dollar value, and values between RTGS and real US dollar dictated to by the markets. This is mere acknowledgement that the market does not equate same value to the US dollar notes and the RTGS electronic bank balances. In the longer term, the government must gradually eliminate the RTGS balances and substitute them with real forex currency or the new domestic currency under an independent central bank.

Close the government overdraft facility with the RBZ. To help rein the government’s insatiable appetite for funding for fiscal expenditure, the new Minister of Finance Mthuli Ncube must immediately put a stop to the unprecedented and harmful practice of government’s direct borrowing from the RBZ via a central bank overdraft. This practice creates a carte blanche for the government’s fiscal expenditure patterns.

Craft legislation for an independent central bank. The new Minister of Finance must immediately initiate new legislation for an independent central bank with the sole mandate to maintain the value of the local currency and the stability of prices in the domestic market. Hopefully, with a new central bank governor at the helm, the newly legislated independent central bank can start crafting plans for a new stable Zimbabwean currency. This will put an end to the repeated macro-economic balance destabilisation caused by a subservient central bank promoting uncontrolled fiscal expenditure through uncontrolled money supply activities.


Anything short of eliminating the current economic distortions caused by the three-tier currency pricing system will not bring about any relief to the current macro-economic disequilibrium. Pricing and supply stability of goods and services can only be restored after eliminating the market distortions caused by arbitrage opportunities currently prevailing in the market space.

Arbitrage opportunities destroy real production as real economic benefits are transferred from real producers to the arbitrageurs and rent-seekers. Real economic growth which creates formal employment can only be achieved by a real increase in production of goods and services in a stable macro-economic environment.

Majaji is a member of the Institute of Chartered Accountants in England & Wales and read for an MSc in Finance from the University of London. He is a financial, treasury and economics practitioner based in Johannesburg.

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