The mid-term monetary policy statement at the end of last week fired a warning shot over the bows of those who desire a return to a dollarised economy, or who feel that dollarisation is inevitable.
Reserve Bank of Zimbabwe Governor Dr John Mangudya made a modest, but crucial, change to the permission granted around the beginning of the lockdown at the end of March this year allowing Zimbabwean businesses to accept US dollars, or any other agreed currency, over the counter from their customers.
Admittedly all Zimbabwean businesses and professionals had to accept Zimbabwe dollars, with the currency of payment being a decision of the buyer, not the seller, but many saw this as the start of a process that would confirm re-dollarisation, a process they had already seen in progress in the black markets and in, of all places, the health sectors.
Last year that trend had been blocked by the decision that all prices and payments had to be in Zimbabwe dollars, which did reverse the process that had been moving forward, but the retreat from that absolute stance in March seemed ominous to those who felt that a return to a full dollarised economy would set back a lot of the progress made so far to rebuild Zimbabwean industry.
Dr Mangudya’s change was to insist that 20 percent of the foreign currency accepted in payments had to be surrendered, at the prevailing auction rate, when the money was banked.
One factor is how much of that money is actually banked. Smaller businesses probably do not bank it, or certainly not much of it, while larger concerns probably do. Generally larger corporations and the bigger companies have to obey far more rules simply because it is cost-effective for the authorities to check up and force compliance, while ending out teams to check on small shops requires a lot of work with little practical gain.
But with more incentives coming on stream for whistle blowers, and with hot-lines being set up, it is going to be harder. While Zimbabweans have tended to complain a lot, few so far have been willing to make those complaints formally to the authorities, possibly because of the effort that would be required and a fear of getting involved in a complex bureaucratic process where victims could be treated as perpetrators.
That did change when a large number of shops suddenly stopped accepting bond notes, and insisted on the identical banknotes, identical except for the sign “bond note”. That was criminalised and there was a trickle of people going into the police stations and laying a complaint. So businesses are going to have to be more and more careful to obey the rules.
But, for the compliant, Dr Mangudya’s new rule puts all foreign currency earners, domestic and exporter alike, into the same boat. They can retain various set percentages of their foreign currency earnings, the actual percentage depending on sector, but no one, outside the peculiar special case of petroleum fuels, can retain all.
The retail and professional service percentage of 80 percent retention is at the highest level, that granted to industry, and higher than mining or tobacco get. But it is still a percentage and pulls US dollars from being an “ordinary” form of payment to being something that is different from local currency transactions.
In other words there is no longer a de facto multi-currency system, rather a system that allows foreign currency earnings, part of which at least have to be converted to local currency with greater enforcement now being promised.
This has to be considered in the light of an insistence that when there are dual prices, the exchange rate has to be the auction rate. Again compliance is patchy, to put it mildly, with wide swathes of the smaller retailers and most of the health sectors continuing to use the black-market final-user buy-rates.
The black market rates have wide margins. A person selling US dollar banknotes on the street in small quantities, those generally getting small remittances from relatives via a money transfer agency, definitely do not get the $90 cash or $110 digital that people talk about. They can get, if they search, around $92 digital and up to $70 cash. It is the final buyers from the fairly complex chains that concentrate these collections of US$10 notes who pay the prices that many call the “parallel rate”.
That huge gap between the pavement and the rate used by small retailers with imported stock and by most in the health sector encourages people with US dollar banknotes to pay in US dollars, since they get a better deal than if they convert at a lower rate on the street and pay at a higher rate when making their purchases.
The sustainability of such practices is now dubious; a lot of people are gambling on whether the authorities will put in a tougher inspection system, or even start offering whistle-blower rewards. The present position appears to be to concentrate more on compliance of accepting the option of local currency payments, since a person denied goods or medical treatment might well make a complaint, but let the exchange rate violations drift a bit a longer. How much longer is now a question that must start to worry businesses.
Part of the reason for allowing the drift was obviously to keep the wheels on the economy. If the official rates had been enforced, many goods and services would have disappeared. Sellers and providers had to buy black-market dollars to import the stuff they needed.
The auction system, with near total successful bids at the beginning and total success in both the major auction and the associated SME auction in the last three weeks, has already seen major and medium producers pricing more often on the auction rate, since they can actually get their money at that rate.
Admittedly there is still some slack in the pricing because at the start of the auctions prices had been based on black-market rates and that rate was accelerating upwards. No Zimbabwean was going to risk insolvency by cutting prices, although with the black-market rate remaining largely stable since the end of June and the auctions supplying a greater percentage of currency for imports no one has been raising prices.
We are likely to see smaller retailers selling luxury or near-luxury goods continuing to use a higher rate, since even if they manage the transition to legal sources and start using bureaux de change, as those take over chunks of the black-market, they are not going to get auction rate very easily.
But there seems little reason for the health sector, a major business in Zimbabwe, continuing to use the black-market exchange rates. Pharmaceuticals and the like have appeared in every list of successful auction allotments since the start and obviously will continue to have a high-category priority.
The danger, if the present tolerance is left too long, is that people will get used to the higher profits and will push up the US dollar prices if they are forced to use the auction rate when offering payment options. There is an interesting psychological problem facing the authorities, rather than just a legal and economic problem.
But it does need to be tackled, and tackled soon. Hopefully negotiation and prodding can do the job, rather than heavy handedness, but to obtain successful and fair results the legal methods must exist, even if they are kept in the background. The old advice to “speak softly but carry a big stick” applies.