Rampant arbitrage practices emerge in Zimbabwe (Part 2)
By Carter Mavhiza
In the first instalment (Part 1) of tracking the multi-layered arbitrage practices that are becoming rampant in the Zimbabwean economy due to currency shortages, we defined arbitrage as exploiting market imperfections in order to make a gain.
We maintain the consistency of the same definition as we focus on another form of arbitrage that is becoming rampant in the economy.
Statistics from the regulators of mobile money indicate that in the 12 months leading to February 29, 2016, EcoCash handled transactions valued at US$6,6 billion, which was a 20 percent increase from the 2015 transactional value of US$5,5 billion.
This indicates massive uptake in mobile money by the Zimbabwean populace with EcoCash undisputedly enjoying the huge chunk of the mobile money market share.
Do you realise that EcoCash’s Cash In and Cash Out transactions (from the quoted statistics) translate into arbitrage premiums that run into millions of United States (US) dollars, which do not find their way into banks and the taxman’s purse?
This is the second arbitrage practice that is becoming rampant in the Zimbabwean economy as a result of currency shortages.
Ecocash transactions in this arbitrage spotlight are largely Cash In transactions and Cash Out transactions.
With a Cash In transaction, the EcoCash agent accepts cash from the transacting public and they in turn transfer equivalent monetary value to customers’ EcoCash wallets, while with Cash Out transactions, customers transfer money from their EcoCash wallets to the agent, who in turn gives them equivalent currency in notes (US dollar or South African rand).
It is the Cash In and Cash Out transactions that the EcoCash agents are using to reap gains from the transacting public.
The laws of supply and demand have taught us that when the supply of a product goes down, prices of the same product go up due to scarcity or unavailability regardless of the cause.
Shortages of US dollar notes or other basket currencies (rand, pound, euro) have resulted in premiums being realised by holders of such notes.
Arbitrage pertaining to EcoCash transactions is occurring on two levels, which is at premium level and at volume level.
At premium level, the agents are charging the transacting public outside the parameters set by EcoCash. They are not supposed to charge commission to the transacting public.
An agent is paid on commission by EcoCash (the Econet subsidiary that owns the mobile money platform) and at no time should the agent charge the Cash Out customers any form of transactional or facilitation fees.
The agents have taken it upon themselves to double dip by charging a premium to the transacting public while receiving commission from EcoCash.
The premium charged by the agents to the public to cash out customers range from US$5 to US$10 for cash out transactions amounting to US$100.
At this rate a premium of US$50 to US$100 is realised by a single agent for every US$1 000 that they cash out per day depending on their location.
In a month, this rent-seeking behaviour earns nothing less than US$1 500 for the agent, which will be way below what EcoCash pays as commission to its agents.
Upon visiting numerous EcoCash agents in the central business district (CBD), none of the agents said they had cash for Cash Out transactions.
This is against a background of witnessing some of them receiving notes and transacting on a daily basis.
An agent near the newly re-named Simon Muzenda terminus in the CBD, who cannot be named for professional reasons, said: “It is the transacting public that now offer the premiums on their own volition for Cash Out due to the currency shortages and we only serve those customers that put the premium proposal upfront.
With the commission that EcoCash offers, it is impossible to refuse such an offer.”
Due to the prevailing currency shortages that have seen banks limiting withdrawals even below the threshold set by the central bank, the appetite to accept EcoCash as payment for informal traders has grown.
This in turn has also fuelled the arbitrage tendencies on the volume level for those EcoCash customers who want to Cash Out their sales for re-ordering in South Africa, which is the major cross-border trading destination.
The need to cash out revenue from sales for re-order purposes by informal traders or cash out huge amounts has necessitated the volume level of arbitrage on EcoCash transactions.
On the volume arbitrage practice, the EcoCash agent holds on to all the Cash In amounts that they receive from the transacting public for offloading to one “bourgeois” client who will cash out and in return pay handsomely a premium to the agent.
The later mode of arbitrage (based on volume) from the research on this practice has proved to be the less risky model.
Risk is minimised because in most cases the agent is familiar with the clientele and the number of people involved in the premium transactions is small.
Premiums on the volume mode of transaction range from five-10 percent depending on the familiarity and need of the cash out client.
It is the currency shortages in the economy that have opened these holes of imperfection on the market.
Economic agents in the informal market are stopping at nothing to reap from these unregulated practices.
The premiums which translate into millions of dollars that are realised on this informal market do not find their way into the banking system neither do they find their way into the taxman’s coffers.
Rampant arbitrage practices are the costs that the economy is bearing due to failure by monetary authorities to smoothen the financial intermediaries and make currency readily accessible.
Noble initiatives such as mobile money are now hijacked by imprudent oversight on part of the regulators and other stakeholders who have the mandate at their disposal to regulate the same.
Carter Mavhiza writes in his personal capacity and is reachable on [email protected]