Government controls fuelling the black market

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Illegal money changers pose while exchanging a new Zimbabwe bond note (L) and U.S. dollar notes in the capital Harare, Zimbabwe, November 28, 2016. REUTERS/Philimon Bulawayo

Victor Bhoroma

BUSINESS at the country’s parallel (black) market for foreign currency and other commodities has never been as brisk.Billions of dollars in local or foreign currency exchange hands on a daily basis in a shrinking economy that is rapidly turning informal and unruly.

Black market dealers have mushroomed in every city, town and growth point in the country with fast-moving consumer goods (FMCGs), foreign currency and fuel being sold virtually at all busy corners.

In 2019, the government passed a plethora of Statutory Instruments (SIs) and directives to exert control on the economy.The regulations cover the marketing of grain, foreign exchange, petroleum importation and retailing, customs and excise duty and the compulsory use of the Zimbabwean dollar as legal tender.

However, these regulations have all but fuelled the fire as key producers in the economy channel their produce to the black market in search of the coveted US dollar, quick cash or competitive prices.

Producers are also running away from the biting inflation whose year-on-year rate ended the year above the 500% mark, up from 481% recorded in November.

Zimbabwe is predominantly a mixed economy but the government has been leaning towards command economics in the past few years.

The government now dominates in key sectors such as agriculture, media, rail transportation, power generation, telecommunications and mining; either directly or through state entities and parastatals (SEPs).

The dominance is further heightened by the central position played by the Reserve Bank of Zimbabwe (RBZ) in the allocation of foreign currency for the importation of various commodities and raw materials into the country.

Sub-economic subsidies in agricultural inputs, electricity, petroleum, grain and basic commodities have underwritten the government’s dominance, rendering the private sector by-standers in the economy.

Excessive government control has created record levels of corruption, maladministration and nurtured black market activities that will be hard to eliminate in the foreseeable future.

Energy sector

Despite licensing various private businesses to import and engage in downstream marketing of petroleum in the country, the government controls the importation of petroleum through the National Oil Company of Zimbabwe (Noic) pipeline.

Importation of the liquid gold is subject to foreign currency allocations from the central bank while price ceilings are set by Zimbabwe Energy Regulatory Authority (Zera).

As a result, petroleum companies with free funds have no incentive to use their own funds to import the commodity and sell it at sub-economic prices set by the government. This has led to unrelenting fuel shortages which give room to black market activities in retailing, smuggling of fuel to neighboring countries and hoarding of fuel for speculative reasons.

On average, fuel costs US$1,07 per litre if the Interbank rate is used, however, if the widely referenced black market rate is used the price falls to US$0.77 per litre making Zimbabwe’s fuel cheaper than the Sadc (Excluding Angola) regional average of US$1,03.

Angola has the cheapest fuel in the region at US0,47 as it produces the commodity.To end the fuel shortages, the government needs to partially liberalize the importation of the commodity which will free up foreign currency while taking pump prices closer to the regional average.

The same is also expected in electricity pricing where sub-economic subsidies led to massive losses for the state utility (Zesa) in 2018.
Competitive prices on electricity allow the utility to meet its operational needs, service foreign debts and above all, import sufficient electricity to power local production of goods and services.

Foreign exchange market

The government gazetted Statutory Instrument 142 (Legal Tender Regulations) on June 6 in 2019 so as to stop the re-dollarization of the economy and quell demands from civil servants for remuneration in foreign currency.

On that date, the US dollar to Zimbabwean dollar rate was 1:5,65, now the rate has tumbled to more than 1:16,85 on the Interbank and 1:23 on the black market.
The spread between the two rates provides incentives to sellers to shun the interbank, thus fuelling the black market.

To reduce black market rates, the central bank needs to provide more foreign currency to producers who import raw materials that add value to the economy especially manufacturers of consumer goods, plastic products, pharmaceuticals and agriculture inputs especially fertilizers.

Allocating more foreign currency to these producers saves the country millions of dollars worth of imports in finished products.Given the fact that only 50 corporates control over ZW$10 billion in bank balances on the local market, the black market rates are very susceptible to huge swings if a few of these firms invade the black market for foreign currency to meet their operational needs.

A spread between the black market and interbank rate can be minimized if large producers’ foreign currency needs are met through the interbank as opposed to the black market.

This will also help channel millions of diaspora remittances to the interbank market.The central bank will also be expected to exercise restraint on any money supply growth that feeds government consumption, in order to maintain value for the local currency.

Fast moving consumer goods

Local producers of fast moving consumer goods are being forced by inflation to supply products to Cash n Carry tuck-shops and the thriving black market so as to get instant cash or foreign currency.

Some manufacturers have also increased their export component even at discounted prices so as to get the coveted foreign currency and settle external obligations.

The major challenge with the black market in this case is that the market has very few economic players in terms of tax contributions, banking and compliance to council by-laws.

Grain marketing

Recently, the government enacted and suspended Statutory Instrument 145 of 2019 (Grain Marketing Control of Maize Regulations) which banned the buying and selling of maize among unauthorized persons in Zimbabwe.

The law prohibited any person or entity from buying or acquiring maize from producers other than through the GMB.To deal with side marketing of grain to the black market, the government simply needs to pay competitive prices for delivered grain (maize and wheat) to farmers instead of paying less to local farmers, while being comfortable in paying world prices on importing grain.

Paying a competitive price for grain supplies also serves to incentivize commercial grain producers who have been slowly migrating to tobacco and other export crops.

Mining

Minerals are the economic mainstay of the country. Zimbabwe’s minerals exports receipts stood at US$3,2 billion in 2018, a figure which represented 76% of the country’s official total export earnings.

However, exports from the mining sector plunged 20% to US$1,240 billion from January to June 2019 as a result of Gold smuggling.All other minerals are expected to register growth except for Gold and Silver which are controlled by the central bank.

The country’s biggest Gold miners such as Freda Rebecca, RioZim, Metallon Gold and Falcon have been facing operational challenges while small scale miners have been diverting produce to the black market for smuggling in protest to the export retention threshold of 55%.

The miners want to retain all the export proceeds or the government to revert back to the 2017 level of 70%.It is imperative for the central bank to settle for a higher retention threshold while getting commitment from the miners on the liquidation of retained foreign currency on the interbank market.

The black market threatens economic viability in the country as it is twined to corruption and cartels that control the local economy from mineral exports (especially Gold and Chrome), importation of grain and agric inputs, and petroleum, foreign currency allocations and its subsequent trading in the streets.
Over-regulating the economy has dented Zimbabwe’s economic recovery path while fuelling fire to the black market.

There is a strong cause to let free market policies lead in the allocation of national resources instead of government interference, dominance and control via statutory instruments.

Victor Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or follow him on Twitter: @VictorBhoroma1.

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