The foreign currency black market is currently thriving, if the number of foreign currency dealers lining up our streets is anything to go by. While two years ago you could count foreign currency dealers while driving past the usual hot spots such as 5th street and Eastgate, now you will have to stop and do the counting if you want an accurate figure or anything close to that.
But the question that needs to be answered is who or what is fuelling the parallel market, where rates are now ranging between 30 and 35 percent for an electronic transfer in exchange for cash?
On the parallel market, some individuals are even accepting a much worse exchange rate in order to discard of their bank balances which have been rendered almost useless for foreign transactions. Mobile transfers have an even higher premium, given their costly transaction charges.
First we need to examine the actions of the Reserve Bank of Zimbabwe (RBZ) in all this. By commission or omission the central bank could be fuelling the foreign currency (forex) black market.
Take for instance what the central bank has said with regard the decision by most banks to ask depositors to fund their international debit cards with foreign currency before using them abroad.
The RBZ governor Dr John Mangudya reportedly supported the rationale for banks to require their clients to use cash to fund their cards, saying it “is based on the need to motivate the banking public to part with the forex that they are holding”.
Fair and fine, but the question is, where will the law abiding depositor, with no cash pile under the pillow, get the foreign currency to fund their international debit cards?
The only available option is to go the black market route, where cash is selling at anything above 30 percent for an electronic transfer.
The request for cash is also not limited to those who want to use international debit cards, but anyone who wants to do a foreign payment without any hustle of waiting in a queue for the transaction to be processed.
Now all these people and institutions are forced to swarm illegal channels to buy US dollars for way above the official rates simply because they can’t get forex anywhere else.
Current controls, as implemented by banks and supported by the RBZ also makes getting forex through official channels a mammoth task.
Financial institutions make it extraordinarily difficult for their customers to have their foreign payments processed. Not only are there major restrictions in the amount one can obtain, but the frustration of the process alone would turn anyone towards the parallel market.
In order to formally get the prized foreign currency, locals must jump through several hurdles to prove their dedication to the cause.
For instance, any depositor wishing to travel abroad must provide details on when and why they need foreign currency. Even after this, and withstanding exhaustive workarounds, one can still be denied the US dollars, or be given hardly enough to cover a day’s spend.
Allocation of foreign currency is another challenge. The RBZ came up with a priority list to be used to allocate foreign currency, but before we look at complaints that banks are not adhering to the list, we need to look at the priority list itself. Is it inclusive of all important economic players?
How are we catering for the remaining sectors because if they are not taken care of, they will look for the currency on the black market and in the process starve off the very same productive sectors we so much want to protect?
This is already happening as there is now more cash outside the banking sector than what is inside.
There are genuine concerns that the priority list gives a non-transparent and unpredictable level of protection to some economic players, while others are assigned lowest priority forex allocation.
The RBZ has also announced plans to include foreign currency proceeds from platinum miners under its management, after it issued a directive saying, “80 percent of all foreign exchange receipts from Platinum Group Metals (PGM) and Chrome shall be transferred to the Reserve Bank Nostro Account on receipt.”
This move might, however, force more and more exporters to choose to smuggle their products instead of going through official channels, thus lowering the amount of forex that authorities could allocate to importers and again fuelling the demand of forex from the parallel market.
Cutback on EcoCash debit card transactions
The premium on the sale of foreign currency on the parallel market is both a signal and cause of major distortions in the economy. It is being kept high by demands for forex that are not being satisfied under the priority list or allocations being managed by banks.
A high premium between the official exchange rate and what is prevailing on the parallel market will further fuel black market activities.
This growth in the level of parallel market activities implies a loss of control by the central bank on the bulk of economic activity and related to this, a loss in fiscal revenue.
Often those that resort to the parallel market will not feel obliged to meet their tax obligations with the argument being I hustled on my own to keep this business going.
The parallel market also spawned from the RBZ’s introduction of a surrogacy currency which created uncertainty and distrust in the sustainability of the multicurrency system.
Moreover the persistent overvaluation of the surrogacy currency, encourages capital flight. This is where a pegged bond note to the US$ comes into question as it leads to increasing importance of black market activities. We have since seen foreign investors using Old Mutual share as a conduit to repatriate funds outside the country.
What does it all mean?
Essentially, the opinions surrounding the currency challenges alter drastically depending on which lens you adopt.
Exchanging money illegally is leading to billions of undeclared dollars at play in Zimbabwe. A lot of these dollars are in the hands of money launderers, and those who engage in illegal activities such as sale of gold or diamonds.
In addition, with the Zimbabwean Government borrowing heavily on the local market, there are far fewer resources available for the government to build a sustainable, trustworthy economy.
As such, the value of our currency would be much more stable if everyone wasn’t trying to convert their bank balances into real dollars.
Trading illegally is often the only way that Zimbabweans can get their hands on a more stable currency. In riding the wave of an unreliable economy and a surrogacy currency, the right to trade-out risk for greater security should be available to all economic players through an open market
If the RBZ gave banks control of their nostro balances, the banks would allocate forex to those people who they know will produce for local and export markets. The banks are efficient in resource allocation and if left to play their role rent seekers would quickly be pushed out from the system and forex reserves will in theory increase.
The lack of foreign currency is a real problem for Zimbabwe, but sometimes it does not need too much regulation to try and manage it. The RBZ can try all it can to abolish the hunger for hard cash, but unfortunately this hunger will never waver, but can only encourage more illegal banking on the streets. Poor economic decision-making has destroyed all loyalty and confidence toward bank balances. Until the underlying economic issues are resolved, a parallel forex market will continue to dominate the country’s hold on foreign currency.