HomeAnalysisSI 127 of 2021: Govt swimming against the tide of free market

SI 127 of 2021: Govt swimming against the tide of free market

TAURAI MANGUDHLA

THE decision by President Emmerson Mnangagwa’s government to promulgate Statutory Instrument 127 of 2021 last week, which effectively bars and penalises the pricing of goods above the official auction rates, yet again shows its heavy handedness and overbearing interference with market forces.

Fears are rife the move will promote re-dollarisation and possibly crush the market due to hyperinflation.

In an attempt to “create a level playing field” — given that unscrupulous and errand businesses were benefiting from foreign currency allocation on the office auction at about ZW$85 against the United States dollar, but pricing goods at parallel market rates of as much as ZW$125 against the US dollar — the central bank introduced heavy penalties and tight controls to reduce arbitrage.

In terms of the SI, as noted by Zimnat Asset Management, there will be penalisation of natural and legal persons guilty of being a seller of goods and services not authorised by law to charge for them exclusively in foreign currency, including businesses and individuals that refuse to allow any buyer to tender payment for them in Zimbabwe dollars at the ruling exchange rate.

The instrument also bars authorised dealers from submitting to the Reserve Bank an application for foreign currency or exchange control authority, or a return or any other document without exercising reasonable due diligence to verify the correctness of the information in or accompanying the application.

It also penalises a natural or legal person who, being a seller of goods or services, issues to a buyer thereof a receipt in Zimbabwe dollars for payment received in foreign currency, or records sales other than in the currency in which the sale was conducted.

Businesses who fail to open an account will also be penalised as the SI effectively amends the Bank Use Promotion Act (Chapter 24:24). The penalty amounts to the amount equivalent to a single day’s banking of cash, based on the estimated average daily banking of cash in a continuous period of seven business days within 21 days preceding the issuance of the order.

The Confederation of Zimbabwe Industries on Tuesday said the new SI attempts to control inflation, eradicate the use of the black and informal markets, bring stability or sanity to the foreign currency markets, prevent abuse of the foreign currency obtained on the auction for profiteering and other opaque activity, but it sadly achieves the opposite of its intentions.

In a statement, released Tuesday afternoon, the CZI said instead, the SI will create US dollar inflation to achieve a perceived required return by business, bring businesses that previously were able to generate forex into the auctions, effectively putting pressure on the auction which failed to meet demand adequately.

The CZI projects that the immediate impact of applying the SI would be that US dollar prices will be hiked so as to result in the same Zimdollar price prevailing prior to the SI and this means an immediate spike in US dollar inflation, a component of our blended inflation rate.

The industry body said companies have been relying on local US dollar sales to generate the bulk of foreign currency used to sustain operations hence use of the auction rate would result in consumers converting their US dollars to Zimdollar on the parallel market prior to purchasing, a practice already rampant outside the major retail chains such as Pick n Pay, OK and Bon Marche and this will deprive companies of what has become their main source of foreign currency.

“Demand for foreign currency on the auction is going to increase significantly as this becomes the only source of foreign currency in the absence of domestic sales in US dollars. There is not likely to be a corresponding supply side increase in the amount of US dollars coming onto the auction, which will either result in an increase in the delays on disbursements, or a sharp increase in the rate,” CZI wrote. “To date, our members still have their allocations on the auction pro-rated, thus a surge in demand on the auction is likely to exacerbate this problem and cause a slowdown in the economic recovery and job creation witnessed to date.”

The industry body added that goods such as fuel are priced in US dollars and companies cannot bid for local payments at the auction. Inability to sell in US dollars locally will, thus, cause supply chain issues unless service stations are also compelled to sell fuel in Zimdollar at the prevailing auction rate. But similar situations in the past have resulted in massive fuel shortages that even threaten industry.

“Business is mostly interested in long-term survival and therefore will take positions that may lead to a defensive posture. Trading takes a back seat to balance sheet integrity should the black-market rate start to devalue the ZWL. This leads to further inflation as fewer goods come to the market,” said the CZI.

Going forward, the CZI called the central bank and Ministry of Finance to dialogue with industry urgently around the issue.

CEO Africa Roundtable CEO Kipson Gundani said SI 127 is fighting a losing battle against market forces. He said the best response for the government was to price the forex correctly, instead fixing the price through suppression.

“Everyone had the liberty to charge what they wanted in US and Zim dollars. The variation is that literally, people are being forced to use the government determined exchange rate,” he said. “People do not want to make losses; they will price in local currency but use the black market rate at the back of their minds. The SI will result in a runaway black market. There will be more demand for the US at the black market.

“This also results in borrowed inflation; inflation stimulated via the exchange rate. The prices of goods will go up. People will be indexing prices in US dollars.”

Gundani projects a sharp decline in hard currency deposits with most people being forced to keep their US dollars under the pillow.

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