Foreign currency ‘burning’ and the distortion in markets

Terence Zimwara

The coming on board of bond notes heralded a new era of cash ‘burning’, a 2007/8 phenomenon that is credited for hastening the Zimdollar’s demise. The distortions that now characterize retail markets can be traced back to this practice of selling cash at a premium, as well as the emergence of a foreign currency black market.

The Reserve Bank of Zimbabwe (RBZ) introduced bond notes against the backdrop of suspicion then that it was returning the Zimdollar through the backdoor. Perhaps as a confidence building step, the RBZ printed a limited number of bond notes to ease fears that the economy could be sliding back to the era of uncontrolled cash printing.

Sadly, the cash shortages that preceded the bond notes have persisted nonetheless.  Cash shortages (for both bond notes and US dollars) have naturally created arbitrage opportunities that cash dealers quickly seized. Cash dealers demand a premium from clients who wish to get cash in exchange for money in the bank or in mobile phone wallets. A premium is also charged for clients seeking to exchange bond notes with US dollars. This practice has been going on for sometime now.

The premiums charged have grown steadily since cash shortages began and some dealers now charge rates as high as 60 percent. Basically this means, a client seeking US dollars with money in a bank, will pay an extra 60 cents on top of a dollar to get their hands on a liquid US dollar bill. Conversely, this means the local currency in banks has in effect depreciated by up to 60 percent against the greenback. The implications for businesses and consumers are real and far reaching. Strangely though, the RBZ refuses to accept this by insisting that bond notes and indeed all local money remains at par with the US dollar.

Meanwhile, businesses responded to this state of affairs by creating a multi tier pricing system where the price is adjusted in relation to the method of payment. US dollar customers pay the lowest price, followed by bond note cash customers and lastly by bank transfer or ‘swiping’ customers. The latter pay the highest prices because on the currency black market, exchanging a bank transfer for cash attracts the highest premium. Unfortunately, many consumers have money trapped in banks and for this reason they can only pay via bank transfers, the most expensive way.

Although this practice is widespread, the multi tier pricing system is actually illegal according to the law and businesses caught on the wrong side of the law risk prosecution.

Still this multi tier pricing system has brought with it a new phenomenon, where products are sold at or just below their cost price thus causing distortions that we see in retail markets. Clever businesses have since devised ways to manipulate the three tier pricing system by selling products at or just below cost only to realize a profit upon selling cash at a premium to cash dealers. To illustrate, lets take the example of cooking oil. A wholesaler in Harare sells a box of cooking oil containing 12 two litre bottles at $42. Established wholesalers cannot charge different prices depending on the form of payment and are obliged to accept all forms of payment.

Clever businesspersons are buying cooking oil from the established wholesaler at that price ($42) and pay via a bank transfer. However, the product will then be sold at exactly the cost price of $42 for the box or $3.5 per unit. The only difference here is that the reseller will demand cash as the only form payment they will accept. When the product is sold, the cash received from the sale is then sold to cash hoarders at premiums ranging between 20 and 30 percent. The premium becomes the profit. Apparently, this is a faster way of selling because the product will appear to be much cheaper when compared with bigger retailers, who cannot employ the same strategy.

Such are the distortions that characterize the retail market today. Ignorant retailers will continue with the business as usual approach and lose out, while those in know will use this knowledge to their advantage. I recently visited Rushinga, approximately 250 kilomitres north-east of Harare where I discovered in one well stocked retail outlet, a 2kg packet of sugar selling at $1.60. That price is below the wholesale price of $1.70 obtained in Harare!

How many times have we seen airtime wholesalers selling the product at prices well below the cost price? In the streets of Harare, it is now common to see vendors selling products like Mazoe, cooking oil, laundry soap, etc, at prices below the cost. All these traders have one thing in common, they are all trying raise cash which they intend to sell at a premium.

All this stems from a combination of cash shortages and the foreign currency black market. Sadly for the economy, parity will only return once the bond notes are withdrawn and replaced with a stable currency, preferably the South African rand. So far the RBZ has steadfastly refused to even entertain this idea insisting it has better ways of dealing with the crisis. Media reports suggesting that the central bank intends to increase bond notes in circulation to ease current shortages are disconcerting.

Instead, the RBZ is advised to step back and rethink this decision (to inject $300 million bond notes) if it wishes to halt the current economic slide.

Terence Zimwara is a writer and commentator. Contact him on 0771799901 or tem2ra@gmail.com