Black market war: No one wins

PRESIDENT Emmerson Mnangagwa’s government has launched a fierce and intensifying sweeping crackdown down on foreign currency traders in the volatile market to stem the tide of a currency crisis, amid growing fears of an exchange rate-driven economic meltdown.

 It is understandable why government is panicking, while it is also not hard to appreciate the reason currency traders think they are not responsible for the recent exchange rate crash. The exchange rate has been moving at a tremendous pace and it is now scaling new heights at US$1:ZW$200, and beyond.

Government blames currency dealers for fuelling the exchange rate in relentless pur[1]suit of arbitrage; margins gained by the simultaneous buying and selling of currency in the foreign exchange market. Authorities say illegal foreign currency trading is driving the exchange rate to new unsustainable levels, while also sabotaging the economy. Thus government wants to crush illegal traders driving the rate spiral[1]ling out of control.

 Officials fear that an uncontrolled ex[1]change rate crash might have a serious contagion, a damaging spread of the economic crisis from the currency collapse. Fiscal and monetary authorities, led by the Reserve Bank of Zimbabwe’s Financial Intelligence Unit (FIU), and capital market regulators, are currently tightening forex trading regulations by adopting a tight monetary policy in a bid to weed out what they variously describe as “saboteurs” and “fraudsters” in the market who are destroying the economy.

Authorities say illegal forex trading is sabotaging the economy and will trigger inflation, while weakening the local currency. Zimbabwean leaders are scared of a repeat of the 2008 economic meltdown that almost cost the late president Robert Mugabe and Zanu PF power. In fact, Zanu PF lost the elections. Mugabe lost the first round of polling.

 Analysts say given the weak economic fundamentals and increased money supply, mainly through infrastructure projects, this currency crisis was somewhat predictable and may scale 2008 heights unless quickly contained.

While exchange rate volatility can be attributed to a combination of complex issues, it can caused by fiscal and monetary authorities’ actions, investors, central banks, black market dealers, lack of confidence, uncertainty or indeed a combination of actors and factors.

Some of the manifestations, drivers of a currency crisis and their causes include:

•  Dramatic decline in the value of a currency, which causes negative ripple effects throughout the economy;
•  It is not an intended policy measure like devaluation; but a depreciation largely due to market forces, laws of supply and demand;
•  Generally any increase in the money supply could lead to a depreciation in the exchange rate. This is for two main reasons: Inflation — Ceteris paribas, an increase in the money supply is likely to be inflationary. This is because with more currency chasing the same quantity of goods, firms will respond by putting up prices. Alternatively, if expansionary monetary policy involves cutting interest rates — lower interest rates will tend to increase aggregate demand leading to possible inflationary pressure; and
•  Fiscal and monetary authorities may intervene to help stabilise a currency by selling off reserves of foreign currency or gold, or by intervening in the forex markets.

In this case, they have intervened through law and order, and monetary policy measures. This has been done before under Mugabe’s rule. Yet the result is always the same: A negative outlook causes wide-scale economic damage, exchange rate volatility, inflation and a loss capital.

However, analysts say a repressive approach to markets — that is arrests and intimidation — will not address the economic problem that is deeply entrenched, complex and has many complicated dimensions and dynamics, including government’s activities that fuel the black market.

It is not difficult at all to understand why the authorities want more dealers arraigned in a bid to prevent foreign exchange market chaos, an economic contagion and political unrest that may lead to popular uprising.

 The problem with this repressive method is that it is addressing symptoms of the problem, certainly not the causes. It is common cause that this grappling with symptoms of a disease can never cure the ailment. Government needs a pathological approach that is first find out the nature, causes and effects of the disease.

It is critical to appreciate the anatomy of the problem before acting. Many variables are involved in causing exchange movements, ranging from shifting fundamentals, money supply to confidence and uncertainty, as well as black market activities.

Only that way can we begin to think of a lasting solution. Addressing people is not a solution. Authorities must address the problem holistically: deal with it at the level of economic fundamentals, structural issues, macro-economic factors, money supply, and black market and arbitrage activities.

Repressive measures against currency dealers may sound appropriate for the authoritarians in government, but in reality that is not the solution even though currency dealers’ exploitation of profitable arbitrage opportunities may be damaging to the market and economy.