Inaction over US-dollar pricing could be costly


After revelations — which were an open secret anyway — businesses and property owners were nonchalantly selling their goods and services in foreign currency, one would have ordinarily expected concomitant remedial action to enforce the law.

By Darlington Musarurwa

Well, to date there has been none.

For the avoidance of doubt, Government has already promulgated laws that provide sufficient legal underpinning for the use of the Zimbabwe dollar as sole legal tender in local transactions.

Statutory Instrument (SI) 142 of 2009, which was enacted on June 24 this year, followed by two additional statutes — SI 213 and SI 213 of 2019, gazetted under the Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations, 2019, in September — effectively buttressed the mono-currency regime.

Put simply, the import of these legal niceties is that trading goods and services in foreign currency is illegal, and in instances where the law is violated, sanctions should naturally follow.

But there currently exists an anomalous situation in Zimbabwe, where goods and services are increasingly quoted and sold in foreign currency, while wages and salaries are paid in local currency.

It is not uncommon that where prices are quoted in the local unit they are invariably marked higher, to allow the retailer or service provider both the ability to restock at projected future prices and make a tidy profit in the process.

The assumption inherent in this practice is that the value of the Zimbabwe dollar will continue to slide against the US dollar and, by extension, prices will continue to trek northwards.

And this is what economists define as “negative inflation expectations”.

What is rarely explained, however, is that such negative sentiments continuously feed into inflation and gives it a life of its own.

It does not take a brain surgeon to conclude that in an incongruous situation where salaries are paid in the Zimbabwe dollar while expenses are pegged in the US dollar, there is likely to be an exponential rise in demand for the greenback, which ultimately weakens the domestic currency.

By implication, if transactions were strictly conducted in local currency, the reverse would be true, as this would likely force people to liquidate their foreign currency holdings to facilitate ease of local transactions.

Creating demand for the Zim-dollar naturally increases its value.

Seeming inaction against the persistent and pervasive violation of the law would imply trading in forex is either optional or is tacitly approved.

It actually emboldens the practice.

However, most damagingly, it is tantamount to what financial experts call “shorting the currency”, which simply means trading the currency in the belief that its value will go down compared to another currency.

This is simply untenable.

Admittedly, the allure of trading in foreign currency, particularly the US dollar, is quite apparent.

It is a reserve currency, which means it can be used as gold and stored by central banks for future cross-border transactions in the same way that it can be used as a store of value by individuals.

The ease with which it can be converted into other currencies makes it the most sought-after currency, especially among the burgeoning ranks of cross-border traders.

So, in essence, while we have a de jure mono-currency regime, we actually have a de facto multi-currency system.

But in view of the advent of the African Continental Free Trade Area (AfCFTA) — whose operational phase was launched in July 7 this year in Niamey, Niger — it is clearly no longer sustainable to keep holding on to the US dollar.

We have to let go, and for good reason.

There is no way we can be expected to compete in a 54-member US$3,5 trillion open market when our goods are produced using predominantly US-dollar priced raw materials and operational expenses.

The products will ultimately be priced disproportionately higher relative to competitors.

Overall, we run the risk of descending into a trading and retail economy, which is simply a euphemism for de-industrialising.

But, using the local currency will tremendously improve our prospects to compete.

Already, there are signs of nascent recovery.

Reserve Bank of Zimbabwe (RBZ) statistics for the nine months ended September 30 2019 show that export receipts in the manufacturing sector jumped by a staggering 69 percent to US$224,4 million from US$133 million a year earlier.

This represents an annual increase of US$91 million, which is remarkable.

Zimbabwe Stock Exchange (ZSE)-listed cables manufacturer Cafca also reported that exports for the year ended September 30 2019 had risen by 70 percent.

And this is notwithstanding the current multiple operational challenges on the local market.

However, if we are truly committed to a mono-currency regime, as we surely should, there is need to remove ambiguities that currently exist, where some businesses, especially those in the tourism sector, claim they have the prerogative to sell in foreign currency.

This clearly opens the window for arbitrage and militates against the functionality of the local unit.

Elsewhere around the world, tourists pay for services using their debit or credit cards, and this should also be the norm in Zimbabwe.

Alternatively, there is also an option to convert hard currency to local currency at bureaux de change.

But again, our bureax de change do not readily have cash owing to obtaining shortages on the market.

Hopefully, the progressive injection of cash by the central bank will be able to solve this challenge in the medium term.

All told, while weaning the local market from using the US dollar is not an exact science, there is still need to ensure no equivocation when implementing the mono-currency system.

Those who have the responsibility of enforcing the law should do so effectively. – Sunday Mail