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President of Zimbabwe Emmerson Mnangagwa delivering his solidarity statement during the Southern African Development Community (SADC) Solidarity Conference) Heads of State and Government. www.theexchange.africa

President of Zimbabwe Emmerson Mnangagwa delivering his solidarity statement during the Southern African Development Community (SADC) Solidarity Conference) Heads of State and Government.

Business, government relations frosty as currency tumbles

Government and business are at logger heads over how the latter should conduct its activities in the economy.

by Laurence Sithole
July 28, 2022
in Countries
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  • Business and government relations in Zimbabwe are at an all-time low, the general economy slows down, and the value of the local currency tumbles
  • The government has had an adversarial relationship with businesses because of conflicting interests in Zimbabwe
  • The business stands accused by the government in Zimbabwe of sabotaging efforts to stabilise the economy by indexing the price of goods and services to a parallel market

Relations between the government of Zimbabwe and the business community have been at an all-time low.

After the central bank summoned retailers and manufacturers for the Sunday Mail, a Zimbabwean government publication called a “no holds barred” meeting slated to take place on Tuesday, July 19. The agenda of the meeting offers no end in sight to the frosty relations between the two parties. The Sunday Mail carried this story with the headline, “RBZ summons retailers, manufacturers”.

Even though the publication called the meeting, a no-holds-barred one as if to suggest that the participants in the meeting will have the room and space to speak their mind in a candid and frank matter, in Zimbabwe, this is seldom the case. The fact that the publication says retailers and manufacturers have been summoned to the central bank should give stakeholders pause because of the ominous connotations it invokes.

Foreign currency auction fails to meet soaring demand

The meeting at the Reserve Bank was convened by the Financial Intelligence Unit of the central bank, which is charged with monitoring financial developments and activities in the economy. The gathering was made necessary by what has been described as “revelations that some leading companies are drawing foreign currency from the auction but pegging prices using black market rates.”

This practice, the paper said, is feeding into extortionate prices that are affecting consumers. This is a sound and justifiable reason for the convention of such a meeting because whatever the outcome of the meeting, the central bank is operating within the ambit of its mandate to ensure price stability.

In Zimbabwe, prices are anything but stable. Inflation in the country has reemerged. Official statistics published in June 2022 peg the country’s inflation rate at 191%.

Government and business hostilities undermine Zimbabwe’s economy

This places Zimbabwe’s inflation rate at one of the highest in the world. There are some essentials to appreciate for any person interested in doing business in Zimbabwe and those with a casual or passing interest in the economic landscape of the southern African country.

First, the country uses a multi-currency system which it officially reintroduced in June 2022. Before that, the country had reintroduced its own currency after a 10-year hiatus. Zimbabwe heavily relies on imports of goods and services and raw materials its factories use to produce goods. Since the 1980s, there has been an acute shortage of foreign exchange.

This shortage of hard currency implies that those businesses that rely on foreign exchange have often had to source it from the parallel market, where it is easily available relative to the formal market.

To mitigate the inflationary pressures caused by businesses looking for foreign exchange on the parallel market and passing on the effect of higher exchange rates to consumers in the form of higher prices, the central bank instituted the foreign currency auction system, which allocates foreign exchange to importers.

This foreign exchange shortage affects all businesses across the economic spectrum and is not limited to retailers only. Manufacturing companies import raw materials and spares. They have recently experienced viability challenges from charging prices in local currency. Those companies that can procure hard currency from the auction do so with the understanding of the central bank that they will charge prices to the consumer that are consistent with the exchange rate they would have used to purchase the hard currency through official channels.

Exporters in Zimbabwe were ordered to pay power utilities in hard currency

This has not been the case, and hence the meeting with the Financial Intelligence Unit of the central bank so that the government can understand why prices have not come down in the retail outlets and companies that have been drawing hard currency from the foreign currency auction system.

According to the state publication, companies are wantonly charging prices at up to four times the official exchange despite receiving funds from the auction system. A central bank official commenting on the matter said that “…the FIU has summoned leading manufacturers and retailers to a meeting to be held on July 19, 2022, to discuss and stop the practice. This will be followed by an intensive blitz where the FIU will partner with law enforcement agencies and take legal measures against the culprits”.

It would be naïve to believe that the discussion was no holds barred. Such is the atmosphere of the relationship between government and business in Zimbabwe. It is characterised by mutual suspicion and downright animosity in most instances.

The comments by the central bank are menacing in that they threaten some unspecified action against those found to be on the wrong side of what the central bank deems correct business practices. What is unfortunate is that the central bank appears ready to mete out punishment on errant businesses without first seeking to establish the reasons for the said errant behaviour.

According to the Exchange Control Act and the Bank Use Promotion Act, pegging prices at parallel market rates is illegal. There are entities that are breaking in absolute terms the social contract they entered with the central bank in exchange for acquiring foreign exchange on the auction system. They were identified by investigations conducted by the Financial Intelligence Unit.

What has not yet been given sufficient consideration is that the foreign exchange auction system has been fraught with inefficiencies from its inception in June 2020.

  • The Zimbabwe dollar’s local currency has lost more than half of its value since the beginning of the year
  • Through the central bank, the government has worked to clear the backlog on the foreign currency auction system. Foreign exchange obtained through the auction is sold at the official exchange rate, which is much lower than the parallel market
  • In return for receiving a foreign exchange at the concessionary official exchange rate, business is expected by the government to price goods and services in a manner that does not result in inflation

It is not unusual to hear exasperated businesspeople complain that they submit bids for foreign currency auction system and do not receive the hard currency they would have won for prolonged periods, sometimes up to ten weeks at a time. Through this auction system, the central bank has allocated more foreign currency on its books, resulting in a backlog where importers can wait as long as three to four months for them to receive the foreign currency they would have asked for.

During these times, many businesses have had no option but to obtain foreign currency from the parallel market to keep their operations afloat. For its part, the backlog on the foreign currency auction system stems from its financing model, which is hardly sustainable.

Zimbabwe punches above its weight in international trade

Funding for the auction system comes from surrender requirements levied on exporters and from domestic transactions in hard currencies. Exporters generally must surrender not more than 40 per cent of their export proceeds in hard currency.

They then receive the equivalent in Zimbabwean currency at the official exchange rate of at least half the parallel market rate.

Any deposits and transfers between hard currency accounts warrant surrendering at least 20 per cent of foreign exchange to the central bank in return for the equivalent in Zimbabwe dollars at the official rate.

This funding model of the auction system has been a major pain point for exporters and those entities conducting transactions in hard currency. They themselves are hard pressed for foreign exchange and must surrender a considerable and or substantial portion of it to the central bank. The central bank recently directed exporters to settle a portion of their power utility bills in hard currency.

This policy position by the central bank is viewed by exporters and other generators of foreign exchange as punitive because of the vicious cycle it creates. The funding model of the auction system needs revisiting. Alternative forms of funding for the auction need to be explored away from the surrender requirements levied on the generators of foreign exchange.

More needs to be done to mend the rift in relations between government and business because economic growth and progress require them both. Their relationship is symbiotic. Businesses can only create wealth and jobs in an environment made conducive by the government through enabling policies.

Presently the auction appears not on the face of it but rather more latently to be an instrument of price control through an implicit social contract between whoever acquires foreign exchange on that platform.

Read: To dollarize or not? Zimbabwe’s monetary headache

Tags: economygovernmentPolitical EconomyzimbabweZimbabwe dollar

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ASSESSING EAST AFRICA

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Laurence Sithole

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