Zim’s perpetual struggle with forex black market

bond-notes-1.jpg

A Zimbabwean man shows off new bond notes outside a bank in Harare on November 28, 2016. Picture: Philimon Bulawayo/Reuters

AS Zimbabwe continues battling a boisterous foreign currency black market, there are strong signs that a parallel goods markets will soon emerge.

Notwithstanding the distinguishable history of the destabilising effects of black markets, the Zimbabwean government’s industrial policy stance keeps gravitating towards the direction which will perpetuate the continued existence of parallel markets. In our homeland, parallel markets are metaphorically the nation’s brain tumour.

Countries which are currently battling with flourishing black market activities include Argentina, Iran, Venezuela and, as usual, Zimbabwe. It was Winston Churchill who once said: “If you destroy a free market, you create a black market.”

The message is that, any attempts to thwart the open (free) buying and selling of goods will eventually drive the intended activity (trading) to the concealed markets. As long as the willingness to buy the goods or services exists, the underground markets frequently make available that which is being demanded.

As such, restrictions to free-market trading cause the migration of goods from the formal market to the hidden (concealed) systems. Economic terminology basically describes such hidden or concealed economic activities as the underground economy. One will quickly notice that a number of interchangeable terms such as hidden, black, underground, grey, clandestine, illegal, parallel, etc. constitute part of the usual descriptors of economic activity which is outside the free market system.

Hence, as a working definition, a black market generally describes any economic activity that occurs outside the government-sanctioned production and trading channels. Basically, these are your under-the-carpet or under-the-table kind of transactions where economic inhabitants are circumventing the usual government controls or regulatory promulgations which are meant to prevent or deter the production and provision of certain goods and services.
Milton Friedman nuances that “the black market was a way of getting around government controls. It was a way of enabling the free market to work. It was a way of opening up, enabling people”.

A closer look at this market observation provides common reasoning that black markets are primarily a by-product of government controls. It is a commonly known argument for one to adduce that “to control is to distort”. Whenever any free market system is subjected to some regulation or control mechanism which endeavours to attain a certain desired outcome, some potential market distortions are inevitable.

This viewpoint should not be adjudged to be an extrapolation that governments should not intervene in the free-market systems (for the obvious reasons of dealing with free market systems demerits e.g. market failure).

Profoundly, finding the correct or accurate dosage of market intervention helps limit the potential market distortions. In Zimbabwe, the commonly observable predicament is the miscalculated, ill-timed and excessive regulatory intervention mechanisms.

Fundamentally, it is imperative at this stage to highlight that black markets are more than just a developing country’s headache, but also a worldwide phenomenon. What is however noticeable is their perpetual existence, re-appearances and proliferation. The big question is: why?

As a starting point, the Zimbabwean physical goods parallel markets are triggered mainly by the various economic cycles that the country has gone through. Notably, the most significant foreign currency parallel market activity was more pronounced between 2002 and 2003 where foreign exchange market premiums reached 2 898% in December and January of the respective aforementioned years.

Although in 2004 the market premiums subsided, the wave of excruciating parallel market rates and unabated illegal foreign currency trading between 2005 and 2008 deserves a special mention. One cannot choose to ignore the 2017-2019 foreign currency trading which is swiftly reversing the economic recovery efforts which had gathered momentum since the adoption of the multi-currency system.

A closer look at the goods market shows that the period from 2003 to 2008 was characterised by the massive trading of mainly basic commodities on the black markets. The black market activity was triggered by the scarcity of goods, a direct consequence of the mass de-industrialisation of the economy. Given the mass exodus of businesses between the years 2000 to 2009, the scarcity of goods has been ever-present.

Given the unpalatable economic conditions that prevailed in Zimbabwe since the early 2000s, a significant chunk of businesses closed offices, whilst some downsized operations and others relocated to safe havens within the neighbouring countries. Government has thus lamented the poor capacity utilisation which has largely triggered physical goods scarcity and if ever available, such goods are accessible at very exorbitant prices.

The death of commercial agriculture is an additional notable reason why the economy has plunged into the current black market abyss. For instance, given that the economy is perennially ill-prepared to deal with the ravaging effects of bad weather conditions, for example drought, a variety of grains turn out to be easily accessible on the parallel market.

During the hyper-inflationary days, police officers were usually up in arms chasing after grain traders (for instance maize and wheat). Government had to establish police units which had to patrol and police the buying and selling of grains. This was largely driven by the grain shortages emanating from the poorly implemented land reform programme.

Having failed to come to terms with the intractable national economic puzzle, the common tendency was to resort to commandist tactics. During Robert Mugabe’s tenure as president, even state funerals were utilised as platforms to attack entrepreneurs and/or opposition parties.

For illustration purposes, during the 2007 price control period, at one of the state funerals, the former president accused businesses of profiteering and acting as regime change agents. Through raising prices, entrepreneurs were assumed to be inciting civil unrest and public despondency. Such actions were thus assumed to be Western-sponsored projects.

The former leader would publicly denounce such businesses who would be entangled in the regime change “dirty game”. Threats of licence withdrawals and compulsory nationalisation were prevalent.

Notably, businesses were then depicted as “government rebels”, “regime change agents” and “economic saboteurs”.

Indisputably, Mugabe would broadcast that government would “play it rough” with businesses which failed to comply with government directives to reduce prices. The heavy hand of the military and police who enforced the June 18 price freezes attests to the “play it rough” discourse.

In 2019, local entrepreneurs have earned themselves a new name: financial terrorists. At this year’s Zimbabwe International Trade Fair in Bulawayo, Vice-President Constantino Chiwenga was quoted as saying: “… if one tries to fight or practise financial terrorism on Zimbabwe, we will react appropriately. And no one should cry that he has not been treated fairly …” The stern warning came at a time the Vice-President felt short-changed by a business community he accused of wanton profiteering.

On June 25 2007, the then minister of Industry, Obert Mpofu, ordered a price freeze and directed businesses to revert back to the June 18 2007 prices.

The government’s reaction came after prices had skyrocketed by an average 500% within a fortnight. Businesses were forced to open their doors to trade, but at the reduced prices. Those who refuted government directives were arrested and faced probable jail terms.

Back then, while it is open knowledge that Zimbabwean hyperinflation was a by-product of the worthless currency, the Mugabe government shifted the blame to businesses. Once again, the nation is back to the same “blame-game economy” again.

Let us consider the basics. The bottom line is this: Zimbabwe is not producing enough for its requirements. Be it grains, where the nation has a comparative advantage; the grain national output is insufficient. Industrial production has crumbled in a toxic business environment. Having such a deficit or structural shortcoming, our government then has an insatiable appetite for controls. Such a combination of factors deserves serious scrutiny.

Why would the government be so obsessed with controlling or regulating what it is not producing? The economy is largely import-reliant and a significant number of products on shelves are foreign-produced. It is common cause that resorting to price controls can be self-defeating. Additionally, we have a fresh history of how disruptive price controls are. Using a whip to establish some market discipline will achieve short-term results and create a buoyant goods market.

Openly, the solution is in the economy producing. The mantra of being “open for business”, while threats, price controls and a variety of restrictive business regulations are rife is surely a step backwards. Our land should produce for its people. A clear position regarding the land question is needed to shape a new policy direction.

Those who argue that Mugabe would not allow prices to increase are simply reminding us of how the children of Israel reacted when they were faced with the smell of death from Pharaoh’s army at the Red Sea. Let us not forget the years when we could hardly walk in a shop having some stock of basic commodities. The picture of empty shelves and having big retail shops with two or three cashiers should never be erased in our memories. Just to jog your memory, at some point in a retail shop, a commodity’s price would change whilst you were still walking in the isles. The frequency of price changes was record-breaking.

Who can forget that we could only access foreign currency through money changers? Places like Roadport (Harare) and World Bank (Bulawayo) were the parallel markets trading hubs. Fuel shortages are unnecessary. We cannot afford to be myopic and ignore the monetary reality that we were considered as a nation of “billionaires or quintillion account holders who could hardly buy a loaf of bread” that is if ever you could queue for it or buy it from the black markets.

Back then, the formally employed person’s average income earnings or salaries could hardly sustain their monthly transport costs. This largely explains why the period is commonly referred to as the “lost decade”. Instead of shifting the blame, let us use the memory of such economic developments to avoid future policy blunders.
While sympathisers of our former leader celebrate his historic public utterances, state of the nation addresses and speeches at national events which required businesses to have market discipline, the command nature of solving the economic problems was not only counter-productive but a mere stop-gap measure. In its worst-case scenarios, the command tactics created worse off economic conditions as goods disappeared from the formal economy.

The simultaneous mushrooming of clandestine (secret or underground) markets was unavoidable. Interestingly, the general populace became accustomed to parallel markets as the hidden markets morphed into people’s main markets. A privileged few would cross the Zimbabwean borders and access foreign products which they, in turn, consumed for personal use and some were channeled directly or indirectly through to the parallel economy.

Presently, as the current leadership is contemplating the command route, let our economic history guide us. The leadership should be reminded of their public commitments which were made after the military coup. Zimbabweans were made to believe that the new leadership is a “new dispensation” which is preaching the gospel of “Zimbabwe is open for business”.

Emanating from a broader economic standpoint, the country’s problems are not incubated by entrepreneurs. Instead, the country is in dire need of a fiscal stimuli (for instance, supply-side intervention mechanisms targeting industrial production, boosting of the aggregate demand as opposed to the demand d
epressing austerity measures).

Additionally, the country needs to do away with the toxic monetary experiments of the failed bond notes now having a new RTGS dollar face. The country cannot afford to have another mass exodus of businesses into safer havens. Instead of having a cat-and-mouse relationship between government and business, going forward the importance of a social contract is long overdue.

Understandably, it has been established from practice that no matter how appealing and well-crafted our economic policies can be, as long as the political environment is polarised, the economy’s economic aspirations will remain as cardboard achievements.

This simply describes a brief history of how command tactics (for instance, price controls) cultivate black markets. By their very nature, excessive market controls seemingly appear favourable in the very short-run, whilst harbouring a worst monster of breeding gigantic black markets.

While our leadership could probably be inspired with war strategies and tactics, invoking the same approach in the field of economics will surely be a recipe for perpetual economic plagues.

Masamha is an independent financial and economic analyst. — pmasamha@gmail.com and Twitter: @PMasamha.

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