eBusiness Weekly
The Reserve Bank of Zimbabwe finally stepped in a week ago to take resolute action against those who had created the huge bubble in the black-market exchange rate and pricked the bubble rather effectively by freezing the bank accounts of a handful of companies, and has kept them frozen while investigations continue.
But three major questions arise from the September bubble. What were those pushing the black market rate up so fast trying to achieve and what were they doing with the cash they were buying? Why did a surprising percentage of manufacturers and retailers switch to costing on black market rates, rather than interbank rates? And finally why did the RBZ take so long to find out what was being done by whom and then take the required action?
Ordinary legitimate businesses seeking raw materials, external services and even finished consumer goods now use the intermarket to obtain foreign currency. It works well. The importer submits the required paperwork, and the importer’s bank, who is required to know its customers, processes everything and then pays the foreign supplier direct. It is important to note that the importer does not get a suitcase of banknotes nor is given foreign currency on trust in a nostro account to spend at will. The Zimbabwean bank processing the transaction ensures the money reaches the legitimate bank account of the legitimate foreign supplier and takes a small fee for performing this service.
Those resorting to the black market, even when a registered company, are thus not seeking currency for ordinary business. They want suitcases of US dollars or money in foreign bank accounts away from the control of the RBZ. And we all want to know not only why, but also why they are prepared to pay such a high premium for this uncontrolled cash.
During the creation of the bubble over the previous two weeks it became obvious that far too many in business in Zimbabwe, including some large concerns listed on the Zimbabwe Stock Exchange and others that are big enough to be listed if they applied, regarded the black-market rate, set by street vendors, as the fundamental rate rather than the rate set on the interbank market, which now processes the bulk of Zimbabwe’s currency trading.
A stroll around shops operated by the major supermarket chains established two facts.
First, one chain appeared to be adjusting retail prices on the basis of the black-market rate, selling some brands for almost twice the price its rivals were seeking, rivals who seem to use more rational accounting standards based on the interbank rate and the actual cost of the products. Fortunately there are several supermarket chains in Zimbabwe and shoppers are not stupid, so the damage was mainly localised, hitting the overpricer.
The second fact was more damaging. There is normally a spread of prices for brands on almost identical products, but the gap between the highest price for a product as simple as, say, parboiled rice is rarely more than about 20 percent higher than the cheapest brand and often the gap is narrower. It became obvious during September that one of the largest manufacturers and packers of basic goods was using the black-market rate since its products were selling for almost twice the price of its competitors’ brands.
The competing brands were also rising in price, but at the same speed as the interbank rate. Again we saw shoppers were not stupid, but the net effect is that after three weeks of this, the expensive brands are the ones still on the shelves while the rationally priced brands are frequently sold out.
And regrettably having pushed up prices to match the black market rates of a week ago, the prices have not fallen to match the black market rates of today. The longer-term damage will be to the supplier who uses black-market rates, but in the short term it is the consumers who cannot find alternatives who are being stifled.
Discounting greed, and obviously that was a factor in some cases, this problem of respectable businesses seeing street vendors as a more reliable guide to value than bankers is a perception problem. When rates were set artificially and had no basis in reality there was some grounds for looking at the black-market rate as a more useful indicator. But since an official, properly supervised and regulated market in foreign currency has been set up, it is difficult to understand why the back door is still regarded as “more real”.
Regrettably this misconception influences the interbank rate. If the street rate is crashing far too many assume that the interbank rate must follow, although the two are not linked.
There have been lonely voices calling for accelerated progress towards a fully-fledged local currency with all the normal rules and regulations that almost every country puts in place for automatic conversion of foreign earnings and with foreign reserves held by the central bank rather than by individuals.
Those cries are now starting to swell into a chorus as more and more people realise that we cannot stay in the present half-way house for long. Having dumped the multi-currency system we are now riding a tiger and need to get to our destination a lot quicker. As usual, those who abuse the looser systems are the ones who create the opportunities to accelerate progress towards normalcy.
Meanwhile we need to work out ways of convincing everyone that the street rate is not important.
While the RBZ eventually did react, it took its time. In theory the RBZ can monitor the entire banking system. In practice it is obvious that it does not have suitable software or other assistance in seeing red-flags over dodgy transactions.
When you think about it, the RBZ monitoring of transactions should be like what a decent police traffic department does with vehicle traffic. Such police do not care where cars are coming from or where they are going; that is the private business of the drivers. But they do want to see licensed drivers behind the wheel of licensed vehicles, obeying speed limits and traffic signs and generally not being a danger to other road users.
The RBZ needs that sort of monitoring presence, letting the ordinary legal transactions proceed without really noticing; after all people can spend their money pretty much as they like. But the RBZ should be able to pick up the speeders and the light-jumpers, and pick them up a lot earlier as they just start to break the law and not wait until they cause a major accident and wreck the economy. And just as an advance traffic unit has cameras and radars, so the RBZ needs automatic systems in place that raise the red flag when danger threatens.
In the past 12 months the RBZ has moved from the prime allocator of foreign currency and the hands-on manager of imports and exports to its present and more normal role as the regulator and rules-enforcer. But to enforce rules it needs, probably, to redeploy manpower and take other active steps so it can perform this role efficiently, but also without infringing constitutional and other legal rights. Other countries do it and the RBZ must learn. Although, let us be fair, and congratulate the central bank on finally taking required action last week.
This is the second time within a few months that a major black-market bubble has been pricked. The first bubble caused the sudden cancellation of the multi-currency system. This month’s bubble has seen the RBZ move forward a couple of steps in its enforcement role. It now needs to work out how it can perform that role more swiftly and efficiently.
