The Zimbabwean government gazetted Statutory Instrument (SI) 118A of 2022 on the 28th of June 2022 as an amendment to the existing Exchange Control Act. The presidential temporary measure compels businesses and traders to sell their products at an exchange rate above 10 per centum the prevailing interbank rate that is published by the Reserve Bank of Zimbabwe (RBZ).
By Victor Bhoroma
Failure to observe the above carries a civil penalty of ZW$20 million or an amount equivalent to the value of foreign currency charged for the goods and services in question (whichever is greater). Thus, sellers of various goods and services must display, quote, and offer prices in both the Zimbabwean Dollar and foreign currency using the exchange rate pegged by the central bank. The pegged interbank rate as of the 28th of June when the law was promulgated was US$1: ZW$365.24 while the market exchange rate was US$1: ZW$680.
Galloping cost of living
Annual consumer price inflation soared to 191.6% in June 2022, from 131.7% in May. This is the highest level of inflation recorded since May 2021. Month on month (MoM) inflation has increased from 5.3% recorded in January to 30.7% in June 2022. The mean MoM inflation rate for 2022 (January to June) was 14.3%, up from 4% recorded from January to December 2021. According to the Zimbabwe National Statistics Agency (ZimStat), the cost of living for a family of six has skyrocketed to ZW$110,550 for monthly expenses for them not to be deemed poor. The Total Consumption Poverty Line (TCPL) for one person rose to ZW$18 425 (from ZW$14,041 in May).
The data shows that food requirements for Zimbabweans are among the most expensive with one person requiring ZW$13,875 per month just to meet basic consumption demands. The increase in the cost-of-living flies in the face of various households whose income has not kept pace with the inflationary developments obtaining in the economy with most citizens currently earning salaries below ZW$60,000. The government recently reviewed fuel prices to US$1.77 per litre for petrol and US$1.88 for diesel, while prices for electricity, bank charges, council rates, road toll fees, internet, school fees and insurance premiums have also skyrocketed. Thus, SI 118A of 2022 was promulgated to address the increase in the cost of living with the harmonized elections in mind.
Tacit Price Control
The temporary presidential powers are a tacit price control in that they compel businesses and traders to sell at a price which is not in sync with stock replacement cost. Similarly, it ignores the source of foreign currency used by the business or the trader to buy stock or raw materials used for production considering the fact that only a handful of businesses can access foreign currency from the auction system. On average, the auction allocation system is taking 2-3 months to settle winning bids with the backlog running as far back as February 2022. And for the few firms privileged to access the cheap foreign currency, the auction only caters for 25% of their foreign currency needs in an economy which has completely self-dollarized. Furthermore, local manufacturers import close to 80% of their raw materials. The key input to production (fuel) is sold exclusively in foreign currency which means producers and traders can only stay afloat by pegging prices using a market rate used to source their foreign currency, transport, and replace their stock.
Zimbabwe formally imported goods worth US$7,574 billion in 2021 which means that the country requires at least US$631 million per month in foreign currency for imports (Before domestic needs are factored in) versus an average US$105 million currently being allocated on the auction allocation platform. The figures above do not factor in the estimated US$1 billion in foreign currency for goods smuggled into the country or under invoiced at the country’s porous borders. This means that the manipulated auction or interbank system cannot cater for the foreign currency needs of the economy and the two are not efficient allocators of foreign currency in the absence of a real market determined exchange rate.
Impact on product availability
The enforcement of the latest regulations mean that major producers and retailers cannot display prices in foreign currency as that will put them in the firing line, instead they will hike prices in the local currency to match the replacement cost in foreign currency. For the few that dare to display foreign currency prices, the prices will be set higher to ensure that any conversion to the undesirable Zimbabwean Dollar can be made using the pegged interbank rate. This will have an effect of increasing US Dollar prices on the surface while in practice, backdoor US Dollar sales will continue to happen. Retailers will observe the enforcement of the law with one hand ready to take products off the shelves. This may lead to bottlenecks to the availability of fast-moving consumer goods (FMCGs) such as cooking oil, sugar, milk, and flour.
Zero Impact on Informal Market
Zimbabwe’s economy is dominated by the informal sector which adjusts to formal policy announcements but does not obey any laws that infringe business. This sector is estimated to be 75% of the local economy with 80 to 90% of Zimbabweans are engaged in informal economic activities. The government has no capacity to police or monitor every informal trader. Therefore, the pricing dilemma is only limited to major producers and retailers who are ordinarily targeted by law enforcement agents. In the informal sector, business continues to boom with cash and carry tuck-shops and traders in commanding mood to producers because they pay in hard currency. This gives an advantage to the informal traders who can easily get discounts from manufacturers and buy from major retailers in local currency and still make huge profits right outside. As with other exchange control regulations and policies, the latest statutory instrument adds fuel to the rate of informalization because formal businesses are finding ways to sell to the informal sector and keep foreign currency in their hands instead of banking proceeds.
History of price controls
The Zimbabwean government has resorted to explicit price controls on 2 occasions in the past. Price controls were introduced during the 2007 hyperinflation period as well as in 2017 after the introduction of the Bond Notes. On 25 June 2007, the government directing all producers and retailers to revert back to the prices of 18 June 2007.
Business owners were accused of profiteering and sabotaging the economy for a regime change agenda with names such as economic saboteurs. By July 2007, retailers had run out of products and could afford to restock or pay their suppliers, effectively shutting businesses. Following a sharp rise in the price of basic commodities, the government announced price controls of 16 basic products in November 2017. The justification was to normalize macro-economic indicators and solve rampant illegal price increases. Fearing for a repeat of 2007, consumers started hoarding basic commodities. The result was market shortage and increase in US Dollar prices for the same commodities on the informal market. Various statutory instruments such as SI 185 of 2020 and SI 127 of 2021 have been used in the past through tacit price controls with none yielding the desired result of price stability and maintaining uninterrupted supply or availability.
Real cause of inflation
The real cause of inflation in Zimbabwe is unrelenting growth in money supply growth and an inefficient foreign exchange market where the central bank insists on pegging prices and allocating foreign currency to importers of various commodities. This makes foreign currency a hot commodity in the economy. Between March and April, broad money supply grew by ZW$82 billion, taking the total amount of broad money circulating in the economy to ZW$671.37 billion. Each month, broad money is growing at over 100% year-on-year. The growth in money supply partly emanates from the central bank quasi-fiscal operations, export retention credits (virtual money) and other off budget financing programs which have an effect of increasing pressure on foreign currency. Similarly, skyrocketing inflation, supported by low interest rates created an incentive for corporates to borrow heavily in local currency for repayment in future.
Despite the existence and enforcement of the law, businesses and traders will never sell at a loss as that will take them out of business. Foreign currency will remain scarce in the formal market if the central bank continues to dictate prices or manipulate the interbank trading rules. The strict enforcement of SI 118A of 2022 is a tacit price control for formal businesses. However, regulations alone without addressing the foreign currency supply side concerns, confidence issues and reigning in on money supply will not provide the moral suasion that the government hopes to get from local businesses and traders. The regulations cement the lack of trust in monetary policy, create an uneven playing field between formal and informal retailers, and cost the very same consumers that the government purports to protect. After causing considerable damage to the economy, SI 118A will gather dust as with hundreds of previous statutory instruments that failed to yield intended results or be tabled in parliament.
Victor Bhoroma is an economic analyst and free market lobbyist. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email firstname.lastname@example.org or Twitter @VictorBhoroma1.