This week has seen a number of advances as exchange rates in the black market and the legal markets continue to converging with a lot of behavioural changes now being seen as margins become very tight.
First this week sees the black market for the buy rate for those who want Zimbabwean bank notes is less than the interbank mid-rate. That who want to sell US dollars for Zimbabwean banknotes can get generally get $600:US$1, and since Wednesday the interbank rate is has been greater than $600 for US$1.
The gap between the sell rates and buy rates in the interbank market is a rather steep 9,5 percent, people can still get a marginal advantage exchanging US dollars on the street corner rather than selling US dollars for bank notes at a bank, but the gap is very small. We are now in the position for the first time of having to look at the sell and buy rates in the interbank market, rather than just the mid-rate since one black market rate now lies within the gap between the two bank rates.
Even the electronic exchange rates does not give much a premium for the seller of US dollars in the black market, just 15 percent. But once we look at the black market electronic buy rate of $700:US$1, and the fact that most people selling US dollars want electronic Zimbabwe dollars to buy goods or services in the retail sector, the premium is very small.
The retail sector is allowed an exchange rate of 110 percent of the interbank mid-rate, or just under $665:US$1. This gives a premium of just over 5 percent between what someone getting money from a diaspora relative will receive from the dealer on the pavement and the till in the shop. And once you calculate the 2 percent transfer tax you are down to just 3 percent margin.
About the only gain between the till and the pavement is the ease of change, but even here shops accept or provide local currency for the sums less than US$1.
At the same time the black market dealers have trimmed their profit margin. The sell rate is still $800 to $850 for US$1, but that gives a margin of just 14 percent, rather than the up to 40 percent a couple of months ago.
The behaviour changes are coming through. About the only think people need Zimbabwe bank notes for are for bus fares and the odd single vegetable from a vendor. The mushikashika and non-Zupco kombis switched to the black-market sell rate of $800 a few weeks ago and with the US50c standard fare charge $400.
But with all the rate changes it is now a significant advantage for those using mushikashika and pirate kombi to buy US dollars using mobile money and then pay US$1 for a trip and accept $400 change. This has led to the oddity that mushikashika now rely on having at least half their passengers using local currency, so they have the change for the US dollars. Sometimes there is the curiosity that the driver or conductor insists on local currency as they have no change.
Zupco fares, also usually $400, are almost always in local currency because Zupco uses the interbank rate and while conductors take US dollar notes they only give $200 change, half the next fare.
The very marginal gap between till rates and official rates, especially when the transfer tax is factored out, has seen a return to more customers using US dollars if this is what they have thanks to their special businesses or what they get from the diaspora. Even the respectable shops, that used to warn customers that they use legal rates, have largely stopped doing so since the gap is so small.
The other shift that occurred this week was the almost perfect alignment between the auction rate and the interbank mid-rate. On Tuesday the weighted average came out at $604,2580:US$1, with the Reserve Bank still rejecting those who seek serious bargains although that number is falling as most bidders now come much closer to the interbank rate.
The following day there was a jump in the interbank mid-rate by close to $5 to $604,2583, a difference of a remarkable 0,000 049 percent, or 3 hundredths of a Zimbabwean cent from the auction rate set around 14 hours earlier.
This implies there must have been some collusion within the banking sector to ensure that the two rates came into almost perfect alignment, implying in turn that the Reserve Bank of Zimbabwe had given its nod. The banking sector would have had to do a little buying on its own account, although not much, to get the rate up.
The following day, Thursday, saw the interbank rate inching up by a mere 25 Zimbabwe cents, suggesting the previous day’s $5 jump was the result of a deliberate decision to get alignment.
The interesting problem as exchange rates start coming into alignment, and the premiums between the black-market buy rates and the interbank rate continue to fall is that the “till rate” will become gradually superfluous, although in the short term it has now become absolutely critical in stabilising exchange rates and killing the black market dealers.
The huge profit margin set by banks, 9,5 percent between their buy and sell rates, also justifies the present till rate.
But as convergence takes place something closer to the bank sell rate would work as well, since the shops would need to use that rate to buy foreign currency as the interbank market takes over.
But that bank margin seems on the high side and in time it might require Reserve Bank intervention to cope with the greed of the banks, if you look at it that way, or if you see the exchange rates becoming sufficiently stable that the lower risk factor justifies a lower buy-sell margin, if you accept bank excuses.
At present it appears the destruction of the black market is still the higher priority, and for good reason, but as successes are chalked up then the other factors start assuming greater importance.
Besides margins, till rates and the like these include the hassle of small change. While the desire of the Reserve Bank to continue moving towards a cashless society and stopping hoarding of local currency banknotes, there is still the need for small change.
The experiment with tap cards, a good idea to reduce a lot of demand for banknotes, appears to have failed. Even Zupco buses no longer have card readers, and the extension of the system to the pirate transport operators let alone the vendors never really took off. But something similar could be introduced, and this time made to work.
In fact if working fully with cheap readers this could eliminate the need for small change, and since it operates at the bottom levels where transfer tax is not charged, should be possible.
Another area where the convergence is killing the black market is the growing trend for those wanting modest amounts of foreign currency to link up directly with those with foreign currency.
These private deals, a fair number now working through WhatsApp groups and the like, are using what amounts to a mid-rate for the black market, with deals done at $750.
This does reduce the cost of black-market currency for people wanting to buy petrol or some other goods where foreign currency is needed or useful, while raising the income of those with diaspora relatives. While higher than the interbank rates, by cutting out the dealers it is hammering the whole black-market system, and that is desirable.
One point still needs to be made. While growing convergence in rates and continued liquidity pressure to prevent much local currency entering the black market in the first place, there will always be an informal market, since people need to buy or sell currency at 10pm or in an area far from any bank or bureau de change.
But this can just be like convenience stores, useful but not dominating any economic activity. Being a tiny market it becomes a curiosity, and everyone expects a convenience store to add a little extra margin, but no one fusses or thinks this is the typical price.