MONEY-GO-ROUND
A new law in Zimbabwe bans the pricing of goods and services in foreign currency. It’s supposed to ensure fair pricing — but so far it only seems to have fuelled inflation
ust days after Zimbabwean President Emmerson Mnangagwa outlawed the quoting of prices in foreign currency and compelled businesses to use the official exchange rate in currency transactions, all hell seems to have broken loose.
Prices of goods are rising again — and fast. Just two weeks ago, a basket of goods worth Z$10,000 would have cost $83 (at the black market rate of Z$120/$). Now, at the official rate of Z$85/$, that same basket costs $115.
In Zimbabwe dollar terms, prices are also up sharply. In the past two weeks, the cost of 2l of cooking oil is up 37%, from Z$340 to Z$465, while a 2kg packet of brown sugar now costs Z$299, up 50% from Z$200.
It’s a shock for a country that has enjoyed relative price stability since last April. This followed the introduction of an auction market for foreign currency — those seeking forex bid in the central bank-run auction — as well as the decision to allow payments to be made in US currency.
It brought inflation below 200% in May, from a peak of more than 800% last July.
But concerns arose that the system was being abused by companies charging for goods and services in US dollars at the black market rate for currency they should be sourcing at the official rate.
In an attempt to ensure the fair pricing of
Jgoods and shore up the use of the local currency, the government gazetted Statutory Instrument 127 of 2021 on May 28. With that, it became an offence to charge in foreign currency, or to source forex outside the auction system.
But not everyone is convinced by the move. “Every time there is some kind of failure in monetary policy, the government intervenes with a drastic policy or legal instrument,” economic and political analyst Rejoice Ngwenya tells the FM. “In this instance, this is strange because this is the same government that told us recently that the foreign currency auction was working nicely, and we had companies shouting praises of the same auction.”
In Ngwenya’s view, the central bank is at fault — for controlling the rates at auction (he believes the bank should “let the market set an optimum rate”) and for not taking decisive action against those who violate exchange control rules.
“Ultimately, our central bank has a problem. The foreign currency auction market is controlled by about 10 companies that benefit from the auction … Why punish the whole nation on account of 10 known companies that are benefiting from the auction system and supposedly profiteering?” he asks.
Ngwenya is not alone in his scepticism.
Harare-based economist Victor Bhoroma says the law compelling businesses to sell goods in local currency is retrogressive.
Before the decree, disposable incomes were slowly improving, buoyed by growing consumer demand and a decline in inflation — a drop Bhoroma attributes to “free trade in the US dollar in the market, and access to foreign currency for import purposes from the auction market by formal businesses”.
Now, all these positives have been reversed.
“The latest statutory instrument inflates US dollar prices for goods and services in the economy as it uses a lower pegged rate from the auction market, as opposed to the free market rates.
“This means prices for goods and services will immediately go up by at least 45%. Retailers will deliberately price in Zim dollars only, but those prices will constantly track upwards too, in line with free market rates.”
In Bhoroma’s view, this will lead to inflation in both currencies, with consumers feeling the greatest pinch. The only way out is to allow businesses to trade freely in foreign currency so that prices stabilise.
As it is, Zimbabwe is grappling with a foreign currency shortage — a big problem for a country that relies on imports. So while the currency auction allocates $140m a month to the market, that’s against demand of $420m.
Meanwhile, the Confederation of Zimbabwe Industries (CZI), a body representing the country’s manufacturing sector, has warned that the law will stop businesses from generating foreign exchange from their operations, which will put more pressure on the currency auctions.
“Demand for foreign currency on the auction is going to increase significantly as this becomes the only source of foreign currency,” the CZI said in a recent statement. “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.”
The result is that businesses will take defensive positions, cutting back on trading as the black market devalues the local dollar. “This leads to further inflation, as fewer goods come to the market.”