Earlier this year, one of country’s leading and stock market-listed company, Delta Beverages, announced that it would be selling its products in United States dollars starting January 4, 2019.
The move by Delta was a wakeup call to the economy and emanated from a realisation that bond notes, the country’s surrogate currency, was losing relevance as a medium of exchange.
Delta, however, soon reversed its stance, after engagements with the Reserve Bank of Zimbabwe and reverted to selling its products in local currency.
However, since January, despite the full reintroduction of a local currency following when the Monetary Policy Statement was announced on February 20, 2019, very little seems to have changed in as far as commercial transacting benchmarked in United States dollars is concerned.
In fact in January, Delta had simply joined a long list of businesses including fellow listed company, Simbisa Brands, which in December 2018 had also openly started trading in hard currency.
Ever since, many other formal and informal businesses have been benchmarking their product prices in US dollars or using the parallel market rate to set local dollar prices at replacement cost value. It is beyond doubt that this phenomenon will continue into the foreseeable future.
The fact that authorities have so far chosen to bury their heads in the sand, pretending that the pricing phenomenon is a result of speculation, profiteering or some other evil intentions by businesses, while ignoring all the economic fundamentals and glaring facts on the ground that suggest otherwise, is a cause for concern.
For many years, economists pointed out that Government was fooling no one, but itself, by insisting that the bond, Real Time Gross Settlement (RTGS$) and nostro US$ were to be exchanged at par and yet the open market was telling the economy otherwise. Failure to act on market signals on time has led us to where we are today.
Government must take swift action to allow the new interbank market to work, otherwise we will see the economy is increasingly re-dollarising itself.
It will become exceedingly difficult to conceive how ordinary Zimbabweans, whose earnings are still denominated in the bond notes and RTGS dollars, will manage to pay for services and products that are being charged for in foreign currency.
For those products being sold in local currency, incomes are also not rising at the same rate as the depreciation of the exchange rate, which is further eroding the buying power of the populace.
Already, civil servants have raised issue with their incomes, asking for another raise, so soon after they were awarded an increase earlier in the year. In the private sector some workers are raising the ante, calling on their employers to pay them in hard currency or have their RTGS salaries benchmarked at the ruling exchange rates after realising that inflation is fast eroding their earnings.
This is going to be the order of the day, unless and until we act quickly to restore the value of the RTGS dollar by stabilising the exchange rate.
The steep increases in prices of goods which are in line with the loss of value of the local currency are strong signal for the authorities to act on the realities of the market. It is clear that retailers and producers can no longer follow inflation, which is historical, on product pricing, but now find it more convenient to simply use the parallel market rates to benchmark replacement costs.
This is a capital and value preservation strategy and is in fact sound economics. The major reason for this practice is that trade on the official inter-bank market has been very low due to shortages of foreign currency with the bulk of the importers relying on the parallel market for supply of forex and which has resulted in them pushing the exchange rate pass through costs to the final consumers.
With memories of the 2002-2008 era still fresh in people’s minds, prices of most consumer goods, industrial products and services have been quickly adjusted to match pre 2016 USD prices or the equivalent in RTGS dollars.
The result is that since October 2018 Zimbabwe has re-entered an hyperinflation zone with year-on-year inflation coming in at 67 percent for March 2019. There is a real threat that the re-dollarisation process will continue.
While the introduction of a “floating exchange rate” and allowed the devaluation of the local RTGs and bond notes, making locally produced goods more competitive against imported goods and the devaluation is expected the medium to long term, to help to improve the current account position of the economy, the measures have not done away with multiple tier pricing in the economy.
In fact in some instances, multi tier prices have become worse, with the divergence between prices determined at official rates and parallel rates becoming more pronounced. In many instances, businesses have simply gone back to the old USD based prices of three or four years ago and simply now mark these “USD” prices to the daily open market exchange rates.
Operational challenges in the interbank market
There are significant concerns that the interbank market has so far not operated as expected. The first signs of trouble appeared when the RBZ instituted a direct targeting of the exchange rate as was evidenced by the initial re-pegging of US$1.00:2,5RTGS$, which rate was not market based and a far cry from the RTGS$3,50 to 4.00 which was already obtaining in the market.
This has set up the new market for failure as no exporter feels the need to trade out of US dollars at the current interbank RTGS$3.2 per dollar, when there was a psychological opportunity to access the parallel markets and get better value.
Currently, RBZ has been employing moral suasion tactics on banks that have disallowed the exchange rate to move freely, beyond certain levels. Further to these distortions there are other sectors such as gold miners, who are being given preferential exchange, which are higher than the prevailing interbank market rates. As such distortions that existed during the pre monetary policy era.
The controls on the interbank market are thus sustaining the existence of a more lucrative parallel foreign currency market where, unfortunately, the majority of the formal businesses do not participate, thus starving them of the much needed foreign currency.
The slow implementation of the willing-buyer, willing-seller framework on the formal foreign exchange market has thus become a cause of concern for market players, as this is causing serious undesirable consequences, relating to continued sustenance of the parallel market where formal businesses do not trade. This development will negatively affect formal business operations, threaten business viability, resultantly may lead to company closures and loss of employment.
Failure to allow free operation of the interbank market is worsening the already fragile foreign currency supply situation, as exporters and those with foreign currency are unwilling to dispose it at controlled rates and are finding alternative markets to dispose their foreign currency.
This is further eroding market confidence, and may result in failure to realise the good intended results of the measures which relates to improved foreign currency availability, hence, may lead to delay of economic recovery process.
Re-dollarisation of the economy is, however, avoidable. The authorities should consider influencing the market through making RTGS dollars more attractive, Already the Ministry of Finance has indicated that the fiscal side, which previously had fuelled money supply growth through the monetisation of budget deficits, has come under control and money supply growth and domestic debt have been brought under tight control.
These measures should be complemented by a tightening of interest rates in order to stem any market tendencies for speculative position taking in currencies. On the whole, there is hope that the new RTGS dollars will be worth something and will not be debased, if this austerity trajectory is maintained.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.