Businesses seem to have accepted the directives in the Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations published on Monday and are using the interbank exchange rate, plus 10 percent, when accepting US dollars for goods priced in Zimbabwe dollars or vice versa.
The common practice of using exchange rates set close to the black market rate, or using discounts for those paying in US dollars to achieve the same goal, appear to be fading in the formal economy and with a minimum penalty of $20 million this is not surprising. Some companies had been law-abiding all along, first using auction rates and then interbank rates when these became available.
Some of those who skated on thin ice or went over the edge reformed before the new legislation came into effect after they were spoken to, or had been the subject of action by the Reserve Bank of Zimbabwe after the Financial Intelligence Unit uncovered malpractice.
It is fairly obvious that the authorities are going to need to monitor businesses quite firmly to ensure that the new laws are obeyed, along with all the old laws that involve in just what can be sold in what currency. There will be many working out how to cheat and trying to find a loophole, although the authorities seem to have anticipated most of these attempts.
This setting of the interbank rate as the real and official rate puts Zimbabwe into the same group as most countries. Admittedly at the moment most currency buying is through the auctions and most trading at the interbank rate is done outside the interbank system. And there is almost zero speculative trade in Zimbabwe’s banking system, unlike what is allowed in some countries.
But the amount of trading is large enough to at least allow the banking system to come up with daily “buy” and “ask” rates that reflect the reality of an independent market that matches supply and demand.
In many ways there has not been an official exchange rate since the local currency was reintroduced in 2019. The auction system, introduced in mid-1020, did produce something that could be used as an official rate, but as this was a weighted average of bids for currency available on any weekly auction it was not really what most people would see as an ideal way to generate an official exchange rate.
Averaging out what a group of businesses were prepared to pay for their currency is a far cry from using supply and demand to generate a daily rate. For a start some businesses might be more desperate than others.
We had already tried to use fiat, that is the Reserve Bank of Zimbabwe writing down a number, and that had not worked either. Nor did the attempt to use a highly managed rate within the banking system.
It is only now that we are using an independently derived rate based on willing buyers and willing sellers, even if the trades are small in scale, that we have an exchange rate set by market forces with almost no way anyone, including the authorities, can manipulate that rate. So this is a major advance.
The regulations have been partially misunderstood by many people, although most businesses seem to have figured them out quite accurately. Except for the huge civil penalties for cheating there has been no change. Where local currency prices should be quoted this is still the same position and there is no change in the position that buyers are permitted to use local currency. That law was not altered.
The old exceptions, mainly for fuel imported with free funds, where US dollar prices are quoted alone are still the only exceptions. Businesses are allowed to quote in both local currency and US dollars, but the prices need to match at an exchange rate of interbank plus 10 percent and either currency can be accepted.
There was some initial thought in some circles that talking about using multi-currencies meant that Zimbabwe was moving towards redollarisation and businesses could operate in a pure US dollar environment. That is not the case. The general currency use before the regulations is the same as after the regulations, since these did not alter the Exchange Control Act or the myriad of legislation and statutory instruments on currency used in commercial dealings.
The government on Monday made it clear, as the regulations do, that there can be no de dollarisation until the end of 2023, the period while the National Development Strategy 1 in is force.
This means that there will be no more moves towards single use on only local currency, as some in the business world feared could be the case. But at the same time there can be no more moves towards sole use of foreign currency either. We are, in effect, in a time frozen zone until after then end of 2023.
Most definitely the paragraphs in the regulations talking about the multi-currency system did not mean anything to do that could accelerate de-dollarisation or could be meant to mean that prices and consumer currency had to be foreign currency. And those who thought differently are wrong.
Parliament will soon be asked to make the new regulations a permanent amendment of the Exchange Control Act. We do not see any problem with this although there might need to be some mechanism to continually increase the minimum civil penalty in line with inflation to prevent people who cheat from trying to increase inflation to minimise the penalty.
But what we now have is what amounts to an independent way of deriving our official exchange rate, and a system of easy to apply penalties put in place to make any use of any other potential rate a rather expensive process. This should settle our markets rather quickly and allow those who are in business to buy and sell goods and services, rather than play arbitrage games between markets, able with reasonable stability for some years to devote themselves to doing that.