Economy Uncensored with Tapiwanashe Mangwiro
The past two weeks have seen an onslaught on consumer purchasing power, as prices of goods have been on a rampage in the formal and informal retail space.
Currency depreciation has notched up a gear as the Zimbabwe dollar has depreciated by 42,31 percent on the parallel market this year, and resultantly retail prices have been on the rise, in both US and Zimbabwe dollar terms.
Those I have interacted with on the issue have placed the blame on Statutory Instrument 127 of 2021 (SI 127/21), as the reason for US dollar inflation currently being felt in the country.
SI 127/21 was passed by the government on May 26, 2021 as an amendment to the country’s financial regulations, compelling all persons (natural or legal) to sell in foreign currency using the ruling exchange rate while penalties would be imposed for issuing of local currency receipt for a foreign currency purchase, pricing goods and services above the ruling exchange rate.
The law was aimed at enforcing a dual pricing system as there were complaints from various quarters that beneficiaries of the foreign currency auction were turning around and selling their goods and services at black market rates to maximise on profits.
Unfortunately, the law forced even businesses that are not beneficiaries of the auction system to use the official rate when charging prices in US dollars.
Ultimately, the legal instrument prohibited businesses from giving buyers a discount for paying in foreign currency, which is what consumers are missing today.
What is really happening?
Because the law did allow discounts on US dollar prices, chaos ensued and retailers have resorted to chasing the parallel market rate as they try to cover their replacement costs, especially on goods that are imported and those provided by manufacturers who do not get money from the auction market.
Retailers and manufacturers have devised a method of coming up with prices, using the US dollar as the base price to find their local currency price level. Essentially this is unlawful, but they are left with no choice as the parallel market premium is fast not stopping.
After obtaining such a price they then try to comply with the law (SI 127/21) by dividing the local currency price obtained from the official rate to get to an elevated US dollar price.
For instance, a roll-on deodorant that costs US$2 in the informal shops, the retailer multiplies it by the parallel market rate of 3 600 to give them a price of $7 200. However, in order to comply with the law, they divide the local currency price of $7 200 by the official auction rate, say, of $1 400/US$1 to get a US dollar price of US$5,41.
At face value, it looks like madness, but there is a method to the madness, all this is a creation of the law that was supposed to protect the consumer.
However, some of the prices are very high, like a Nivea Q10 body lotion going for $75 000, which is US$53 at the official rate and US$21 converted using the parallel market rate.
We have come to realise that some retailers are now just pricing consumers out to preserve value by making it a case not to sell at all. They will keep their stock, monitoring expiration dates, and only sell when the storm has settled.
Suppliers have taken the rational route of supplying only those who pay in hard currency in order to fund their operations without waiting for their turn for forex at the auction market.
So rampant have been the survival tactics that we have seen many goods on the streets and in the informal sector, and not registered retailers, which should not be an offense as they should have freedom to sell to anyone who meets their criteria.
This eliminates the hue and cry that there is sabotage in the market.
All this in honesty, has been caused by the lack of efficient pricing of foreign currency in the market, resulting from attempts to control the depreciation of a currency when letting it crawl and walk might have avoided all this.
How can the situation be resolved?
Unfortunately, all the solutions to be proffered today have been said before and have fallen on deaf ears, but we will continue to proffer them until they are like the biblical seed that falls on good land.
The authorities need to swallow their pride and let the local currency float with banks taking charge.
The economy has proven to be foreign currency liquid as the auction market has met requirements for just 27 percent of total foreign payments, with the crippled interbank market accounting for a measly 3 percent while the remainder was settled through nostro payments, which has become another trading platform in itself.
Numerous calls have been made to float the local currency and let money on the parallel market find its way to the formal market, which will make any form of currency defending easier as the central bank can also participate in the market and influence the circulation of money better.
A floating exchange rate functions in an open market where speculation, along with demand and supply forces, drives the price. Floating exchange rate structures mean that changes in long-term currency prices represent comparative economic strength and differences in interest rates across countries.
Changes in the short term will partially achieve the elimination of the premium, especially with the rate in the banks coming close to the open market one if they float the rate.
For example, the latest flotation under Dutch Auction System, done in Egypt in October 2022, caused the exchange rate of the pound to equal over 23 pounds a dollar, from 19,67 pounds a dollar earlier on the same day. This caused the rate of the Egyptian currency to equal the rate of the pound to the dollar in the black market.
However, black market dealers will always counter by raising the price of the US dollar in the days that follow but the premium will be equal to the risk associated with trading on the alternative market.
The trick that the central bank will have to do is to look for a new injection of the US dollar in order to be able to feed the market when the need arises.
This will allow authorities to allow companies to offer US dollar discounts again without undermining the prices of the local currency as the currency will be priced rightly through the liberated currency market.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.