THE Zimbabwean government gazetted Statutory Instrument (SI) 185 of 2020 on July 24, 2020. The latest regulation compels sellers of various goods and services to display, quote and offer prices in both the Zimbabwean dollar and foreign currency at the ruling exchange rate (that is, the last established auction rate).
analyst The exchange rate from the July 28 auction is US$1:ZW$72,15. The latest policy change comes exactly 12 months after the government had outlawed multiple currencies through promulgating SI 142 of June 2019 and declaring that only the Zimbabwean dollar was the sole legal tender.
The regulation also follows initial exemptions to trade in foreign currency for certain sectors of the economy, re-introduction of excise duties in foreign currency for commodities sold in foreign currency such as fuel and extension of the Intermediated Monetary Transaction (IMT) Tax to foreign currency transactions by Treasury.
The local economy is rapidly re-dollarising with transactions done in cash for US dollars now outweighing those done in cash for the Zimbabwean dollar while informal traders are now declining the local currency. Inflation has virtually rendered smaller denominations such as the ZW$2 note and all coins worthless less than a year after introduction. When the US dollar was outlawed on June 24, 2019, year-on-year inflation for May 2019 was 97,85%. Fast forward to May 2020, inflation had skyrocketed beyond 786%. Within the same period, reserve money (notes and coins in circulation plus local bank deposits held at the central bank) rose from ZW$2,522 billion to ZW$13,815 billion in May 2020 despite the economy shrinking by 6,5%.
However, the dual pricing directive comes as a sigh of relief for the telecommunications sector players that were being adversely impacted by price ceilings set by the Postal and Telecommunications Authority (Potraz) on voice and data tariffs. Tariffs for voice calls will now cost just above ZW$4 per minute for calls across mobile networks, up from ZW$1,50 while fixed call tariffs will cost ZW$2,71, up from ZW$0,94. Mobile data and internet tariffs have also gone up in accordance to telecommunications pricing models.
The fate of SI 142 of 2019
In March 2020, the central bank sanctioned the use of multiple currencies by consumers in the market under the guise of Covid-19 responses despite insisting that the de-dollarisation plan was on track.
Dual pricing in the economy is an implicit admission by the central bank and government that introducing the Zimbabwean dollar was an ill-conceived and rushed policy. The latest regulation means that SI 142 of 2019 is no longer valid.
Taxation in foreign currency
The sanctioning of multiple currencies partially or in totality inevitably signals future taxation in multiple currencies. The Zimbabwe Revenue Authority (Zimra) has been using the Finance Act of 2009 to collect various taxes such as import duty and excise duty in foreign currency even after SI 142 came into effect. As an introduction, all transactions above US$5 will attract a 2% IMT tax and a maximum tax of US$2 000 will apply for transactions with a value exceeding US$100 000. As re-dollarisation deepens, the government is expected to announce further changes to the tax regime that will safeguard government revenues which are being battered by informalisation and increased use of hard currency outside the formal channels.
Indirect price control effect
The directive to display dual prices for all goods and services provides a measure of stability and certainty for the consumers on paper. However, the reality on the ground is that producers and retailers can only use the prices that are informed by where they source their foreign currency so as to stay profitable. The strict enforcement of SI 185 of 2020 will therefore act as an indirect price control for retailers and producers who access their foreign currency from the parallel market, considering the fact that the auction market can only cater for a small fraction of the required foreign currency. Producers and retailers will simply display the prices that maximise value for them; anything less than that will act as a price control and cause artificial shortages.
Dual pricing consistency
SI 185 of 2020 will be mainly observed by major retailers and producers where law enforcement agents have visibility. However, the statutory instrument will not change the modus operandi of the informal and small to medium enterprises (SMEs) sector just as much as SI 142 of 2019 was largely ignored. The negative impact of piling more regulations on the local market (where confidence is low) is that it pushes formal enterprises to informalise and evade taxes. Businesses will rarely bank their hard currency proceeds, considering the numerous incentives of trading in hard currency.
In the retail sector, major players have lost significant market share to informal traders and grocery tuckshops who sell in a stable hard currency and push volumes. Manufacturers now prioritise these so as to get foreign currency than to hunt for it from the parallel market. The enforcement of SI 185 of 2020 will largely impact major wholesalers and retail chains such as OK Zimbabwe, TM Pick n Pay, Choppies, Gain Cash n Carry, N. Richards, Metro Peech & Browne, Spar, Food World and Others who have limited choices than to comply with the regulations. It is however unfortunate that the major retailers, who are key economic players in terms of formal employment creation and tax compliance, will be negatively affected by the strict enforcement of SI 185 of 2020. They will have to price their goods using an auction rate from the previous week while being expected to replenish that stock using a future exchange rate or using foreign currency from the black market. Ordinarily, government regulations need to protect the biggest taxpayers.
Impact of the auction system
The foreign currency exchange auction is still in its infancy and needs market-wide confidence to capture foreign currency from exporters and other foreign currency account (FCA) holders who are sitting on more than US$1,2 billion. In the past 30 days, a total of US$71,1 million from the central bank has been traded on the auction system versus official demand for foreign currency amounting to over US$375 million per month to import various merchandise into Zimbabwe. The figure does not account for foreign currency needed for use in the domestic market, savings needs for both businesses and households and foreign currency needed to settle foreign obligations by local producers.
The foreign currency auction system will largely be effective if it is allowed to float (with limited central bank intervention) and if it is decentralised to commercial bank level so that it gives true value to foreign currency holders. The central bank estimates that US$2 billion is circulating in the informal economy and a significant portion of this amount can only be traded on the auction system provided the holders perceive the rate to be fair for them to sell freely and get that foreign currency freely when they need it. The auction system has to adequately cater for the needs of both the informal and formal enterprises in order for SI 185 of 2020 to be voluntarily observed.
It may have been too early to gazette SI 185 of 2020, considering the fact that the foreign currency auction system is still finding its feet and only a fraction of foreign currency needs for the tax-compliant producers can be met. The economy is now dominated by non-tax-compliant players who rely on the parallel market for their foreign currency needs. The dual pricing mechanism will become practical when the auction rate aligns with the parallel market rate.
This can only be possible provided money supply growth is capped and the central bank decentralises the management of the auction system to commercial bank level so that market forces determine the rate on a daily basis. If the two rates align and foreign currency holders freely liquidate their proceeds through their banks, the regulation will not actually be needed in the market.
Regulations alone — without addressing the foreign currency supply side concerns and reining in on money supply — will not provide the moral suasion that the government hopes to get from local businesses on dual pricing.
Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — firstname.lastname@example.org or Twitter: @VictorBhoroma1.