EDITORIAL COMMENT: More now conform to interbank rate, when pressed
THE high level of practical and market-led approaches to ensuring that the law on foreign currency trading is obeyed and the systems automatically follow the interbank exchange rate, are taming the black market and bringing errant entities in the public and private sectors into line.
The latest breakthrough came with a decision by the Financial Intelligence Unit of the Reserve Bank of Zimbabwe to simply freeze the bank accounts of those abusing the systems or breaching regulations that force everyone to use interbank rates for converting currencies and to accept payment in both local and foreign currency.
Harare, which announced with a great blast of trumpets a month ago that some services would have to be paid in US dollars with local currency not accepted for these, last week quietly reversed that decision at a full meeting of the city council.
The pressure came from the freezing of its foreign currency bank accounts, meaning that Harare could not move money into or out of those accounts without seeking permission from the authorities, who possibly wanted to think about each request.
Harare can now operate its foreign currency accounts after the FIU acknowledged the retreat.
Bulawayo was not quite as bad. That city council though, was accepting payment in foreign currency for rates, fees and charges raised in local currency, which is legal, but was offering a significant discount by using the black-market forward exchange rate, which is not.
The city council, being somewhat nimbler than Harare City Council, managed to escape a freeze of its accounts by doing a high-speed U-turn when approached by the FIU, switching its policy before the axe fell.
FIU director-general Oliver Chiperesa believes from reports he receives that other councils were either doing something similar, or at least thinking about it, but he now sees such plans being dropped and similar U-turns if anything has started.
By going after the two largest councils first, the FIU has made its point.
Harare and Bulawayo are not just the largest urban councils, they are the largest by population, assets, revenue and expenditure of all 92 local authorities, urban and rural. And when numbers one and two are pinned down then the rest, all the way down to number 92, must get the message.
The FIU has been doing the same in the private sector. Three major hotel companies were caught using an exchange rate of US$1:$1 200, in effect cheating their customers and guests paying in local currency.
Among these customers were the Government, according to information coming out of the Ministry of Finance and Economic Development when it started checking out invoices before payment.
Mr Chiperesa said he had been forced to freeze the hotel accounts before they suddenly saw reason, acknowledged the error of their ways and are busy changing their systems.
Because they did eventually change their attitudes when the accounts were frozen, he has decided not to name them, yet, so long as they reform, fast.
This is an extra incentive for them to move swiftly. Getting a reputation of cheating people you do business with is not likely to enhance your market share.
Major hotels do a lot of business with tourists and foreign business visitors, and so their US dollar prices probably align with others in the region and offer adequate value for money.
But they also do a lot of business with Zimbabweans, and so need to ensure that the Zimbabweans are not being treated as some sort of excuse to print money and being cheated. Zimbabweans also like value for money.
That 1:1 200 exchange rate goes some distance beyond what the present black market is charging and suggests very strongly that these hotels were either trying to predict what the black market rate would be in a month or so, and even then they were overdoing it, or they just wanted to profiteer on their neighbours.
That attitude was common in a lot of business. Consumer pressure and competition has helped a great deal to reverse many decisions, which is why a wide range of products are now having prices lowered.
Part of this is due to other practical policies by the Government and the Reserve Bank of Zimbabwe that have drastically lowered the premiums offered in the black market and put stress on the black market rates generally.
Those practical policies basically saw a major drying up of local currency inflows into the black market, with borrowing to play the markets an idiot’s game on 200 percent interest, Government contractors having their legitimate needs sorted out, and alternatives to the black market for storing value put in place.
What we are now seeing is that the old game of those holding US dollars, selling these on the black market and then buying goods priced at the official rate is now not really worth doing much.
The premium offered by the street dealers for US dollars in a digital deal is now only about 3 percent above the “till rate”, the interbank rate plus 10 percent that shops are allowed to offer.
This is actually way below the ordinary interbank rate, let alone the till rate, when the deal involves Zimbabwe banknotes, only really needed for bus fares.
The near merger of the black-market buy rate with the “till rate” is why we are seeing a lot more foreign cash from those with diaspora relatives going straight into tills, again embedding the interbank rate and providing stability as shops are less likely to be playing their own games to raise currency. All this stabilises prices and diminishes the black market.
The interbank rate is set independently of the authorities in the banking system as a result of deals between willing sellers and willing buyers.
We are even now seeing alignment between the many small interbank transactions and fewer large auction transactions every Wednesday, the day after the large bulk transactions on the weekly auctions, when the two rates converge to within a thousandth of a Zimbabwean cent.
If the interbank rate is below the auction average, the willing sellers see no reason why they should be behind, and if the auction rate is below the interbank rate, then the willing buyers will demand a correction.
The other party now accepts this happens. The official markets are now interacting quite well, with what amounts to a weekly reset.
In time almost all foreign currency dealing will be done within the interbank market, as is the case with most countries in the world, and largely what the authorities are now doing is letting the market grow and develop, and link with the auctions, so it can perform this vital function. So the cheats need to accept that it has arrived.