AMHVoices: Zim’s forex black market in multi-currency system

Zimbabwe has a flourishing underground black or parallel market for foreign currency. This shadow economy is co-existing within the multi-currency regime. Comparable countries which are currently bedevilled with similarly vigorous currency black markets include Argentina, Iran and Venezuela.


In Zimbabwe, however, parallel markets are not a new phenomenon. The resurgence of the foreign currency black market still pays homage to the traditional driving force which is government’s obsession for exchange controls.

Historically, the widely known goods and foreign currency markets have been largely driven by price and exchange controls.

Presently, regardless of the current Zimbabwean leadership’s public proclamation that they are adopting liberal economic management policies, the regime is still obsessed with the desire to control foreign exchange rates.

Economic history teaches us that the underground economies are a perennial problem. For Zimbabwe, however, the most significant foreign currency black market activity was noticeable and more pronounced between 2002 and 2003 where foreign exchange market premiums reached 2 898% in December and January of the respective aforementioned years. Though in 2004 the market premiums subsided, the wave of unbearable parallel market trading between 2005 and 2008 deserves a special mention.

Reeling from a myriad of economic setbacks which date from 1998 to 2008, in February 2009, the Zimbabwean government abandoned the local currency and adopted the multi-currency regime.

Following this radical currency reform, the black market (both goods and foreign currency markets) activity was significantly curtailed down to paltry levels.

During the Government of National Unity (2009-2013), rent-seeking activity through parallel market trading was an unattractive venture. Before the introduction of the bond coins and notes, an insignificant number of illegal foreign currency traders was on Zimbabwean streets given the limited availability of foreign currency arbitrage opportunities.

Even in normal economies, a meagre number of illegal foreign currency dealers do exist in small numbers.

For instance, if one looks at Botswana and South Africa, some informal foreign currency exchange trading takes place, though the extent is insignificant if not unnoticeable.

Since the 2013 victory of the ruling Zanu PF; the liquidity crisis and foreign currency shortages slowly gathered momentum. The usual unrestrained borrowing to finance consumptive and recurrent expenditures further plunged the economy down an abyss again.

The final blow to the Zimbabwean economy was delivered by the introduction of higher bond notes denominations which were pegged at 1:1 with the US dollar. Despite overwhelming evidence of an unworkable fixed exchange rate system, the Zimbabwean government still maintains the already defunct monetary system.

With all the full knowledge of Gresham’s law, the monetary authorities adamantly introduced the bad money (bond notes).

Gresham’s law states that whenever any two monetary units (in this case bond notes and US dollar) are given the same face value (1:1 parity condition), the obvious result would be that the overvalued bad money (bond note) will be used, while the undervalued good money (US dollar) vanishes from the monetary system.

The Zimbabwean experience is evidence enough that Gresham’s law is a real-world economic theory which monetary authorities should not ignore.

The Zimbabwean leadership’s failure to learn from ancient economic and political history has brought Zimbabwe back to a 2008-like situation.

During the ancient days of Aristophanes and Gresham, the easily observable effect of bad money chasing good money was more significant between kingdoms (from one kingdom to another). Therefore, the usually common injustice was the value destruction and deprivation of better purchasing power of people within a certain kingdom to another.

Looked at from the lens of that ancient thinking, the rulers of the Zimbabwean kingdom established a multi-currency regime within its own kingdom. Faced with the liquidity crisis, the relevant authorities introduced the bond note.

The observable consequence is the flight of good money (US dollars, South African rand, Botswana pula etc.) from the official market landing in the hands of the greedy market traders and cash barons.

The bond note and RTGS are now the main forms of currency being used by the transacting public. The US dollar is now in the hands of cash barons and the small foreign currency traders who are charging market rates.

Monetary authorities have further opened a new wave of parallel market trading through separating the foreign currency nostro accounts and the RTGS bank balances (which they initially purported to be at par). The foreign currency parallel market has boomed following such monetary interventions.

Imperatively, the legal tender laws which include the bond note as part of the basket of currencies within the multi-currency regime. By their very nature, government controls like the ones we have today in Zimbabwe distort free market activity. Therefore, the bond note introduction was a bad strategy given that sooner rather than later Gresham’s law would take effect.

The Zimbabwean parallel market traders are likely going to remain enjoying brisk business and significant arbitrage opportunities given that Zimbabwe is import-reliant.

Foreign currency dealers have high demand for foreign currency. For instance, if one considers the significant number of car imports passing through our borders, particularly Beitbridge and Chirundu, the individuals importing the vehicles access the US dollars through the parallel market.

Additionally, considerable amounts are spent by members of the public through importing basic goods and services from the neighboring countries such as Musina, Francistown, Maputo, Livingstone, Lusaka. This increases the demand for foreign currency, particularly the US dollar, rand, pula and the metical.

The parallel market demand for cash is also increased if one also factors in the role of informal cross-border traders who bring in second-hand clothes, shoes, clothes, spare parts and a variety of small trader consumables.