Who is causing parallel market rates to spike? – Dr Tim Rainhard
By Dr Tim Rainhard
For the past 18 months, the country’s economy has been on a rebound, assisted by the stronger performance in the agricultural and mining sectors, an improved balance of payments and external sector position, as well as the introduction of an auction trading system that has improved access to foreign currency for the productive sectors.
All credible institutions, amongst them the International Monetary Fund (IMF) and the World Bank, are projecting Zimbabwe’s Gross Domestic Product (GDP) to grow by anything between 3% and 7%, which is also consistent with forecasts by the Ministry of Finance and the Reserve Bank of Zimbabwe (RBZ).
These projections had not taken into account other positives such as the injection of US$961 million from the IMF to support the country’s recovery from the disruptive Covid-19 pandemic, as well as commendable efforts by the authorities in keeping their vision of achieving herd immunity by year-end, within reach.
And yet, the Zimbabwean dollar has continued to lose ground against major currencies on the alternative market despite these positive fundamentals. The currency instability that has seen rates on the black market exceeding the internationally acceptable 15% margin by as much as 40%, has previously been blamed on the country’s dual economy, whereby a larger portion of the population wasn’t able to access foreign currency from the main auction.
But after the monetary authorities further liberalised the currency regime by introducing a small to medium enterprise (SME) auction for smaller bids, and allowed bureaux de change to sell foreign currency to all and sundry, this argument has fallen flat on its face.
A helicopter view of the goings-on seems to suggest that there could be more to it than meets the eye. Without even digging deeper, I will zero in on three possibilities.
First, the heavy demand for foreign currency in Zimbabwe has its foundation in the 2007/08 economic crisis when the entire population lost confidence in the Zimbabwe dollar, resulting in its banishment from circulation.
Fearing a repeat of the same, every little penny earned is now being channelled towards buying foreign currency in order to hedge against inflation notwithstanding the fact that the authorities have since September 2020 successfully tamed the inflation monster, which has been receding.
Second, there are some large corporates which are making a killing from funding third party institutions to bid for foreign currency on their behalf on both the SME and main auctions. When they eventually get to sell their products, their pass on rate is based on parallel market rates, which is criminal.
Such unbridled greed and selfishness is clogging the main auction system and contributing to the foreign currency backlog, which at one point topped US$175 million.
Third, contractors who are undertaking infrastructural projects in Zimbabwe are offloading large quantities of Zimbabwe dollars on the illegal parallel market where they have no qualms in buying greenbacks at whatever cost. The irony of it is that these contractors who are mainly foreign are paid large amounts of Zimbabwe dollars by the government for the infrastructural projects.
Instead of returning the favour by acting in the best interest of their host, they are stabbing the government in the back by fomenting instability.
It is also quite telling that for such contractors to offer high foreign currency rates for their Zimbabwe dollars which are in short supply on the formal market, they would have inflated their prices on tendering for the projects, perhaps to create headroom from which they could grease the palms of those who would have facilitated the sweetheart deals.
In a way, the government is shooting itself in the foot by paying these companies handsomely without first putting in place safeguards to prevent them from dabbling on the black market where any slight movement in rates erodes the purchasing power for the majority of its citizens.
In the end, government’s vision of transforming the nation into an upper middle class economy by 2030 risks not being realised within the specified period because of these few, greedy contractors who are prioritising their self-interest at the detriment of national interest.
For the country to produce, the exchange rate needs to be stable in order to inspire confidence and make long-term planning, possible. Such recklessness on the part of the contractors should therefore not go unpunished. Without further delay, the authorities must flush out the culprits, disqualify them from participating in government tenders in future, and report these bad apples to the RBZ’s Financial Intelligence Unit so that they could be hit where it hurts for ruining the country’s economy.
The naming and shaming of abusers of foreign currency by the RBZ should be widened to include the offending contractors and the big corporates that are being fronted by their surrogates because their shenanigans are a cancer to society. Participation on both auctions as well as tendering for infrastructural projects should also be restricted to law-abiding corporate citizens, with banks religiously sticking to the Know Your Customer principle in allocating foreign currency and monitoring suspicious transactions.
In countries that practice Sharia law, such acts of sabotage are punishable by death. One can also not rule out that there could be dubious political motives behind this, seeing that the 2023 elections are fast-approaching. History has taught us that merchants of chaos usually come alive ahead of make-or-break polls.
Having said that, it is also up to us, the citizens of Zimbabwe, to shun unhelpful, negative behaviours that are not informed by evidence; we can cure such negativity by first and foremost believing in ourselves and taking heed of 2nd Corinthians 5 verse 7, which says “for we walk by faith, not sight”.
Most importantly, there has to be categorical efforts to produce for local consumption and exports to arrest the haemorrhage of foreign currency through imports of trinkets that could otherwise be produced locally.
Dr Tim Rainhard has studied the work of some of the international financial institutions in developing countries. He is an economist with extensive knowledge on Africa’s financial systems. He can be contacted at [email protected]