- Businesses refusing payments in local currency to be fined ZW$50,000
- Discounts for foreign currency transactions now illegal
- Command economics is detrimental to economic stability
Harare – The Zimbabwean government has recently published statutory instrument 127 of 2021 (SI 2021-127) detailing civil penalties for all economic agents that ride roughshod over the Banking and Use Promotion Act (24:24) as well as the Foreign Exchange Act (22:05).
According to SI 2021-127, businesses that do not accept Zimbabwe dollars (ZW$) at the official exchange rate for goods and or services priced in United States dollars (USD) may face a maximum fine of ZW$50,000. Zimbabwe adopted dual pricing in 2020 through SI 185 banning exclusive use of forex. Also, economic agents who use forex obtained directly or indirectly from the Reserve Bank of Zimbabwe (RBZ) auction market for purposes other than that specified in their application for forex will be guilty and liable to a fixed penalty of ZW$1 million.
More so, any business that puts a premium on goods and services in local currency to induce consumers to pay using foreign currency will face a penalty of ZW$50,000. In other words, the pricing of goods and services above the auction rate is now illegal. Further, all receipts issued to customers by businesses should reflect the currency used with a fine of ZW$50,000 for would-be offenders.
In light of the above, the government has officially re-introduced sector-wide price controls last seen in 2007/8. Price controls are detrimental as they lead to lower market supply, severe shortages and strengthen black markets as people try to overcome rising shortages by paying above the market price.
It is not economically sensible for the government to ban the pricing of goods or services above the RBZ auction rate when not everyone can easily access forex on the same auction. The local currency is currently overvalued on the auction market as shown by heightened depreciation of the ZW$ in the alternative markets. Parallel market premiums continue to widen. In April, the parallel rates were averaging ZW$120 before rising to the current range of ZW$125-135 to US$1. With the RBZ exchange rate at ZW$84.7, parallel market premiums have now surged past the 50 percent mark. For starters, this means that it is now 50 percent more expensive to buy 1USD on the black market relative to the official market.
Typically, surging parallel rates indicates fundamental disequilibrium in the foreign exchange market. The demand for foreign currency continues to rise overwhelming its supply and this trend is expected in an economy coming from a deep recession. Business activity has started to peak in line with the re-opening of the economy from COVID-19 induced lockdowns.
In my view, the government has all the tools to tame exchange rate depreciation without instituting toxic ‘command economics’. For instance, apart from increased forex demand, parallel rates are being driven by rising market liquidity emanating from increasing government expenditures. It is reported that the government offered a 25 percent salary hike to civil servants in April with another 45 percent hike set for June. Also, the Grain Marketing Board (GMB) has started injecting billions of ZW$ buying maize and other crops from farmers. All these and other pending programs were not initially budgeted for the 2021 fiscal year and have the effect of increasing ZW$ in the system thereby destabilizing its value.
The government should focus on liquidity management to stabilize exchange rates. Economists widely believe that when money stock grows in tandem with the growth of activity in the real sector, exchange rate depreciation and inflationary pressures will be dampened. Consequently, parallel rates which are currently high would start to move towards convergence with official rates -a case witnessed in the second half of 2020. Generally, for sustained exchange rate stability, black market rates should not be 20 percent above the official rates.
So, without addressing burgeoning market liquidity (ZW$) to clamp down runaway exchange rate (parallel market), the move by the government to institute price floors will negatively affect domestic production, market supply leading to acute shortages and price instability.