RBZ needs to act swifter against black market

08 Oct, 2021 - 00:10 0 Views
RBZ needs to act swifter against black market Reserve Bank of Zimbabwe

eBusiness Weekly

The black market in foreign currency does, in normal circumstances, provide a living for the dealers who operate inside it, with its margins that they might describe as healthy and others might describe as on the verge of extortion.

In fact, the margins are what people pay for not having to set up their own supply chain, hunt down the people with foreign currency in cash, buy it and shove it together into the sort of sums they need for business. A lot of the untraceable cash foreign currency enters the economy in small sums via the quite legal foreign currency international transfer agencies and needs to be accumulated to become useful for a lot of business needs.

Once inside the economy, even if it is that part of the economy that Zimra find difficulty tracking and taxing, larger sums move around. People buying cars, for example, normally have a fairly large stash and it is not unusual for a car dealer to see tens of thousands of US dollars pass through the safe each week, money from buyers coming in and money to sellers, minus the commissions, going out.

To an interesting extent there are two economies in Zimbabwe. There is the fully legal local currency economy, where goods and services are bought and sold in Zimbabwe dollars and the foreign currency elements come from the auctions run by the Reserve Bank of Zimbabwe. It has, since about August last year, been a fairly low inflation economy, at least by Zimbabwean standards although many countries might reckon monthly inflation of two to four percent being on the high side.

At the same time there is a US dollar economy, again fairly isolated. A major example of this one is the fuel market. While some fuel is imported using auction money, most is imported using the foreign currency cash that people pay at the pumps, or the nostro payments made by exporters buying their own requirements.

The fact that many on the forecourts with a wallet of US dollars have had to buy these on the black market is immaterial to the service station owner, who is not obliged to interrogate customers.

But there are other vast swathes of the US dollar economy, especially in the informal sectors, where all buying and selling is in US dollars. Quite a bit of this money entering these sectors might have been bought on the black market, but then quite a bit is sold back into that market as the traders take advantage of arbitraging exchange rates when they want to buy groceries.

When the two sides of the economy do not interact much the actual exchange rates in each part do not matter much, and as the formal auction-fed part of the economy is so much larger, this is the part of the economy that tends to dominate the inflation rate calculations, especially as the monthly cost of living changes, which is what inflation rates are, are derived from the prices of goods and services in the real local currency economy. ZimStat goes to shops and the like to find the prices, not tuckshops or odd people on the sidewalk.

But in recent months there has been more interaction between the two parts, triggered by the delays between the acceptance of a bid on the foreign currency auction and the actual allotment of foreign currency. There is evidence, and this has been seen in pricing of some goods with a foreign currency component, of inputs coming in at the black market rate.

In many cases you do not find a major industrial company buying black-market currency. But what you do get is that company buying raw materials from someone who does deal in the black market, or who is a net exporter ready to use some of their retained earnings to buy goods for a net importer and who sets the profit margin for this middleman business at roughly the gap between the two exchange rates. In effect they are selling their legal currency at the black market rate, although this is not said, written down and would be impossible to prove.

A growing premium between the two rates has other effects, besides imposing inflationary strains, especially if the premium is growing. The seriously large profits come when there is inflation in one rate, the black-market rate. Buying currency at a lower price, hanging onto it for a few weeks in such an environment, and then selling it at a far higher rate can produce profits if the aim is to accumulate local currency for local currency payments, such as groceries.

This produces one set of temptations for the major dealers. Real businesses are also faced with temptations at this stage, and this is where we tend to get people who do have access to auction money wanting to use the black market rates. Profits can be a lot larger.

Of course this sort of manipulation cannot be self-sustaining. Once the linkages are established in pricing in the two parts of the economy the inflation rate in the larger local currency economy start rising, eating into the profits that can be made when there is inflation in the black market rate but not into the cost of living.

There is some extra manipulation profit to be squeezed by a bit more panic buying of foreign currency, but not much since those who have liquidity are already buying, and in the end the hoarding of foreign currency kills the volumes.

The Reserve Bank of Zimbabwe does make some effort to hit the manipulations. There is a group of large-scale dealers now in the remand cells who were recently arrested. But their huge dealings were in the first six months of last year and it is here that the Reserve Bank falls down. The problem was there, its scale was known but it took in some cases 18 months to have the perpetrators arrested.

The concept is fine, but this sort of currency dealing needs to be tackled as it occurs with dealers removed from circulation, or at least making their dealings almost impossible, as they happen. Instead the damage was done, and the damage was extensive, long before any action was taken. Eventually the Government and Reserve Bank plugged the mobile money loopholes used by those dealers now before the courts, but again that action, even though taken in the middle of last year, was on the late side.

Perhaps the 77 people who accounts have been frozen in the last couple of weeks is a sign that the Reserve Bank is now ready to move a lot faster.

The first prize would obviously be a big enough dent in the black market to make what has happened recently a bubble that can then be pricked. Once people start losing money in the black market a lot of stability will suddenly appear.

At the same time the Reserve Bank has agreed that the delays in auction allotments do have a lot to do with the present black market rates. Efforts are being made to cut the delays with new bids now getting currency much quicker. As we have said before, this is the most crucial problem: to ensure that the fact that Zimbabwe does have higher inflows than outflows of foreign currency manages to have this currency available for priority importers as it is needed.

The higher inflows than outflows is distorted by the hoarding of currency, in nostro accounts of net exporters and in the tin trunks of private individuals. The Reserve Bank, and the Government, need to tackle that urgently.

It has been suggested that reducing the percentages of retention in export incentives, or better still of forcing net exporters to sell more of their retained earnings on the interbank market within a few months of receipt, would work, and work certainly better than letting a black market once again become a major factor in the formal economy.

It will probably require both approaches: hammering the black market, or at least the major dealers in that market, and figuring out how to get more of the inflows circulating in the economy.

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