Zimbabwe cracks whip on illegal forex dealers

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  • The vice president masterminded the palace coup that overthrew long-time ruler Robert G. Mugabe and installed the current president.
  • The Reserve Bank of Zimbabwe (RBZ) has published a statement naming and shaming individuals in the illegal foreign exchange market.
  • Zimbabwe took the decision to demonetize its defunct currency in favour of a basket of foreign currencies led by the US dollar.

There are several activities that pose a serious and real threat of physical harm when conducted in Zimbabwe.

These include political activism, especially if you are anti-establishment or anti-government. If an individual is an activist for human rights, he or she is more likely to have brushes with the law the way a common criminal would.

It is tragic but true.

Added to this list are the illegal foreign exchange dealers. The government has determined to crack down on these individuals whom it blames for sabotaging the economy and the resultant economic crisis.

Read: The benefits of investing in low and high-frequency forex trading

This stern warning came from the nation’s powerful vice president while addressing the annual Zimbabwe Agricultural Show. The vice president has gained a very fearsome reputation for dealing ruthlessly with opponents and for being the mastermind of the palace coup that overthrew long-time ruler Robert G. Mugabe and installed the current president. He is a man whose words carry a lot of gravitas.

The vice president during the same meeting warned businesses against procuring foreign exchange from the parallel market where these illegal foreign exchange traders operate.

Not long after making these statements did the Reserve Bank of Zimbabwe (RBZ), the country’s apex bank publish a statement naming and shaming individuals it believes are kingpins of the illegal foreign exchange market.

The list included individuals who are directors of microfinance institutions as well as regular citizens who are possibly fronts of other businesspeople. The apex bank then issued a raft of punitive measures against these individuals which included among other things having their personal and business bank accounts frozen and a two-year ban from the banking sector.

This means that these individuals would not be able to access financial services from the banks for a period of up to two years. The matter is still unfolding, and further developments will be advised in due course.

Zimbabwe, after attaining the highest inflation record in world history and especially for a country that was not involved in an armed conflict, took the decision to demonetize its defunct currency in favour of a basket of foreign currencies led by the United States dollar.

After a period of relative economic stability, the country took the decision to reintroduce the Zimbabwe dollar initially as a surrogate currency known as the Zimbabwe bond note. This was a response by the monetary authorities to a shortage of foreign currency and banknotes.

Exchanging Zimbabwe currency for the dollar. The government is pursuing individuals it terms illegal forex traders. [Photo/The Africa Report]
The bond notes said to be worth the same as the US dollar quickly began to lose value against the greenback which saw the emergence of the parallel market that had been redundant for a decade.

Read: How forex trading market works

This economic perspective from a walk down history is essential to understand how the country has arrived at the place it has. After a considerable period of time in circulation households and businesses alike began to show their preference for hard currency and when civil servants began demanding their remuneration in hard currency the government moved swiftly to ban the use of all hard currency for the settlement of transactions.

This position then changed at the onset of the coronavirus pandemic when the government made a dramatic turn and permitted the use of free funds or US dollars in conjunction with the not-so-newly reintroduced Zimbabwe dollar.

The reintroduction of the US dollar did not halt the loss of ground of the local currency unit whose confidence in the eyes of both households and businesses has never been lower. It is not uncommon for individuals who after earning their salaries from work immediately liquidate their earnings to purchase US dollars or South African rand to preserve the purchasing power and/or the value of their funds.

This is also a common savings strategy for people in general especially those who are not fortunate enough to earn their salary in foreign exchange.

The move to reintroduce the use of foreign exchange in the settlement of transactions although welcome has resulted in a dual economy characterized by goods and services whose prices are indexed to the US dollar. This phenomenon is because Zimbabwe is heavily reliant on imports to produce goods and services.

Businesses will rationally seek to recoup their costs and hedge their financial position by indexing the prices of their goods and services in hard currency. This scenario coupled with a rapidly depreciating currency results in inflationary pressure and reduced purchasing power of earnings for the broader population. This has resulted in a lot of financial pain for people generally.

From about 1987, Zimbabwe has experienced stubborn and incessant foreign exchange shortages. This shortage of foreign exchange from formal channels has led to households and businesses to seek the precious financial commodity from the parallel market where rates are as high as ZWL$160/US$1 compared to the formal market where rates average anywhere between ZWL$84 and ZWL$86 for the greenback.

On the parallel market, there is hardly a shortage of foreign exchange. It is not unusual to find individuals on the streets of Harare and Bulawayo carrying wads of local and hard currency.

When businesses cannot get access to foreign exchange to fund their operations, they are left with no option but to get it at a much higher rate. These higher rates translate into high prices for goods and services. Therefore, the parallel market is an irritation for the central government which believes it is throwing a spanner in the works of rebuilding the battered economy.

The vice president asked delegates gathered at the Agricultural Show to have confidence in the local currency.

Zimbabwe currency. The country is cracking down on what it calls illegal forex traders. [Photo/Bloomberg]
A good and well-meaning statement, however, confidence in the local currency needs to be fostered through meaningful and substantive economic reforms.

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

Several things must occur before confidence in the Zimbabwean monetary system is restored. The first is to understand why there is even a parallel market, to begin with. Whenever two currencies circulate households and firms will prefer to hold one over the other.

In the case of Zimbabwe, there is a clear preference for US dollars which even the governor of the central bank noted over the local currency for the settlement of transactions from small day to day items to big-ticket high-value items.

This preference for the US dollar means that economic agents are inclined to pay a premium for the greenback which is not always available through formal channels and as such the parallel market emerges.

It would therefore stand to reason that if the parallel market is to be decisively eliminated then the currency unit (the Zimbabwe dollar) that has given impetus to it must either be demonetized or allowed to float freely against the US dollar in the markets.

Neither option is desirable for the authorities as one would imagine fully dollarizing again would impose a very hard budget constraint on the government which relies on dwindling revenues from taxes. Full dollarization would mean that there is no room for the government to manipulate the money supply in terms of monetary policy.

However, carrying on the Zimbabwe dollar leaves the economy open to shocks from volatility in the parallel market which affects business more than the official exchange rate does.

Going forward requires that a clear decision be made on whether the country adopts the greenback fully or allows its currency to float freely against the dollar. Additionally, the country needs to pay attention to the development of its foreign exchange reserves and productive capacity.

Both have a strong bearing on the value of the currency.

The Zimbabwe dollar will be able to hold its ground in the currency market once it is underscored by considerable to substantial reserves and a stronger balance of payments position resulting from the substitution of imports of goods and services that can be produced locally.

This should be a priority to policymakers if it is not already.

The management of foreign exchange reserves and the balance of payments is imperative. Once these are properly in place the country will be able to withstand external and internal shocks that require the expenditure of foreign currency and naturally, confidence in the local currency will follow.

Read: Online Forex Trading in Kenya – Insight on local regulation and risks of retail investors

I am a financial services professional with a strong background in diverse areas of banking. My skill set includes among others International Banking, Trade Finance, Commercial Lending, Customer Service, Finance, Banking, Corporate Finance, and Investment Banking. Africa is my home and I am passionate about its development,

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