The Zimbabwean government passed Statutory Instrument (SI) 127 of 2021 on May 26, 2021 as an amendment to the country’s financial regulations. Key provisions of the temporary measures prohibit businesses from selling goods and services or quoting at an exchange rate above the ruling auction market rate, issuing buyers with a Zimbabwean dollar receipt for payment received in foreign currency, giving buyers a discount for paying in foreign currency and it sets out penalties for businesses and individuals that refuse to accept payment in the Zimbabwe dollar at the ruling auction market rate.
The government justifies the SI as necessary to ensure that known businesses that get foreign currency from the auction market do not use the parallel market rates to price their goods and services. As such the SI is intended to provide a level playing field in the market and protect consumers from profiteering businesses.
Within the past two years, exchange control and financial regulations in Zimbabwe have been changed through SIs countless times such that it is difficult for market players to keep track of the actual law of the land and temporary measures which would have expired for guidance in business operations.
After the failure of the bond notes that were introduced in 2016 (Once promoted as being on par to the greenback), the formal interbank market returned through Exchange Control Directive RU28 of February 2019, with US$1 quoted as equivalent to ZW$2,5 to start formal trade.
In June, SI 142 of 2019 then banned the use of foreign currency in the economy and enforced the use of a mono-currency. However, the government maintained several taxes in foreign currency through reverting back to the Finance Act of 2009 and 2012.
After eight months, SI 85 of 2020 was passed to legalise the use of foreign currencies after serious economic decline and high inflation. SI 185 of 2020 was later passed to compel businesses to quote both in local currency and foreign currency using the ruling interbank rate.
In the past few months, the government had left SI 185 to die a quiet death as businesses that received foreign currency from the formal auction market (introduced in June 2020) used a blended approach in costing and pricing their goods depending on the component of foreign currency they would be allotted from the auction market. Those that relied on the parallel market used the parallel market exchange rate.
The Dutch auction system, supported by slow growth in money supply and free trade in foreign currency had ushered in price and exchange rate stability, recovery in consumer demand and heightened business confidence on economic prospects. The forecast was that capacity utilisation in the industry would eclipse 60% while the economy would register real GDP growth of at least 3% in 2021 (after two years of successive decline and instability).
The decline in inflation had been key in resuscitating the credit market, growing the consumer basket in the retail sector, and improving real income for labour among other multiple benefits. Despite the stability, the economy remained fragile and lacked long-term policies aimed at stimulating production to ensure sustainable growth.
Impact of SI on inflation
The clause that compels all persons (natural or legal) to sell in foreign currency using the ruling exchange rate means that US dollar prices increase by at least 45% in the market (spread between parallel market rate and auction rate). Complying with this directive prices out formal producers or retailers out of business. This gives an advantage to the informal businesses who can easily trade in foreign currency and give discounts at will.
Formal producers are now displaying or quoting in Zimdollar prices only (informed by the parallel market rates), but they will adjust these prices consistently to factor in exchange rate movements and transaction costs of buying foreign currency on the parallel market. This will result in constant price increases in local and foreign currency.
Impact on foreign exchange market
The auction market allocates foreign currency to formal businesses (which account for less than 40% of businesses in Zimbabwe) that intend to use the foreign currency for foreign obligations and importing commodities into the country only. This means the bulk of winning bidders’ foreign currency needs required for domestic operations (fuel, consumables and salaries) are sourced from the parallel market or directly from customers.
SI 127 also ignores the fact that not all formal businesses actually apply for foreign currency on the auction market because they are self-funded from revenues, and it further ignores that the auction system has delays of six-eight weeks in allotting winning bids (backlog now over US$150 million).
If all formal businesses apply via the auction facility, the system will not be able to cope with demand which exceeds US$420 million per month (compared to the US$140 million allocated mainly to the same players in the economy). The eight-month stability witnessed in the local economy was to a large extent founded on the fact that foreign currency was freely flowing to formal producers in the economy from daily sales operations.
Closing that tap for formal producers means more pressure on the auction market when there is not enough to cater for all producers and when the auction operates with massive backlogs. However, the parallel market will realise increased demand on a daily and weekly basis for the Zimdollar sales generated by producers and from losing or disgruntled bidders.
Impact on consumer demand
The increase in annual inflation from 164% realised in May (Increase in local and foreign currency prices) means that real household incomes decline and consumer demand in the economy takes a significant knock. The consumer basket will consistently increase in line with the changes in Zimdollar prices. This will hit labour, from the civil service to pensioners and sustain the current high levels of poverty in the country. On the contrary, government policy should stimulate demand to achieve economic growth, not thwart it.
Imact on production cost, trade
The economy is dollarised because of a tainted past where economic players lost millions in income, assets and savings because of arbitrary monetary policy changes and governance failures. Low levels of confidence in government economic policies and hyperinflation (from rampant money printing and monetisation of fiscal deficits) add to past painful experiences for economic players.
Dollarisation means all prices in local currency are informed by US dollar free market exchange rates, not the soft pegged auction rate. An increase in production costs will in turn hit local production, export competitiveness, and increase propensity to import cheaper processed imports.
Additionally, purchasing power will tilt to the hard currency funded informal sector which will import all consumables at the expense of local production, and this will increase the country’s trade deficit and increase informalisation. Therefore, the SI contradicts government policy on local value addition, boosting export competitiveness, re-industrialisation and above all entrenching economic stability.
Impact on tax mobilisation
Through the Finance Act of 2009 and 2012, the government collects various taxes from local taxpayers in foreign currency. This foreign currency should be used to support the auction market and settle foreign debt.
The existence of SI 127 does not mean businesses and individuals will decline US dollars from their customers (foregoing hard currency sales). They will simply evade taxes and find innovative ways to record US dollar sales as local currency knowing fully well that the government has no capacity to monitor them. Past trends also inform that those who monitor can equally profit from delinquent businesses than turn those culprits to the government for no personal gain. Any move to monitor pricing strictly will result in goods being removed off the shelves to curb losses.
The latest SI was passed in a huff to punish known errant businesses who benefit from the auction system and crush US dollar promotions passed by well-resourced corporates. However, the regulations lacked due diligence as the government simply needed to deal with errant businesses than punish the entire market and create instability.
The regulations have no benefit to government efforts to mobilise increased tax revenues, incentivise local value addition, and boost employment, foreign currency earnings or export competitiveness. What the government will achieve is surface compliance by formal businesses.
The regulations cement the lack of trust in monetary policy, create an uneven playing field as other sectors such as petroleum are protected by other SIs and cost the very same consumers that the government purports to protect. It is in the best interest of economic stability to suspend the instrument, act decisively on known errant businesses who abuse the auction facility and allow the auction market rate to be determined by market forces.
Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe. — firstname.lastname@example.org or Twitter: @VictorBhoroma1.