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New forex regulations plunge market into chaos

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THE new foreign currency measures which, among other stipulations, prohibit business operators from charging above the official exchange rate and punish those who refuse to take the Zimbabwean dollar in local transactions, will cause chaos in the market including igniting price hikes, shortages and a surge in inflation.

PALESA MUWANI
Government last week gazetted the new rules under Statutory Instrument (SI) 127 of 2021, seen as an attempt to tame the exchange rate on the parallel market while stabilising the local currency.

Under the new regulations, companies will be fined ZW$50 000 or its equivalent in foreign currency for refusing to take payment in local currency at the official exchange rate.

A ZW$50 000 penalty will be imposed on anyone selling goods at an exchange rate above the official exchange rate. A similar fine will be slapped on companies that issue Zimdollar receipts on goods sold in US dollars.

However,  business and labour have raised alarm pointing out that the new forex measures will have an adverse impact on the country’s fragile economy, already buffeted by a debilitating liquidity crunch, low capacity utilisation, three-digit inflation and an increase in job losses.

The impact of the new measures is already being felt as businesses have begun increasing the prices of goods and services, further dwindling the disposable incomes.

Zimnat Asset Management has warned of the dire consequences of the latest foreign currency measures which include a surge in inflation.

“The Government of Zimbabwe has over the last eight to nine months implemented good policies that have stabilised the local currency and have yielded positive results in taming inflation, as reflected by the deceleration of inflation during this period,” the asset management company said.

“We have also seen, over the last six months, a stabilisation of the parallel exchange rate, which we believe was also a function of the improved fiscal and monetary discipline, combined with a stable and improving economic policy environment.

“Against this background, we are deeply concerned about the possible negative implications of the recently promulgated SI 127 of 2021, which we strongly believe may derail the economic gains and momentum achieved over the last nine months.

“In our opinion, SI 127 of 2021 is too heavy-handed in its approach in stabilising the local currency and may do more damage than good to our already fragile economy, which is still gasping from the after-effects of the Covid-19 pandemic.”

The company said although the statutory instrument is temporary, as it will lapse after six months, the damage inflicted on the local currency and economy may take a long time to reverse.

Zimnat said the impact of this decision could result in increased US dollar domestic inflation as formal businesses, such as pharmacies, may be forced to increase their US dollar prices to align them with the parallel rate-pegged local currency prices.

It is also likely to result in increased demand for cheaper foreign goods as higher domestic US dollar inflation may force economic agents to demand cheaper foreign goods which will increase smuggling via the country’s porous borders and ultimately widen the country’s trade deficit.

It may also result in increased demand for foreign currency on the parallel market as more formal companies abandon the auction due to foreign currency shortages.

Zimnat also warned that the Zimdollar will likely devalue aggressively on the parallel market, while pressure for an official devaluation will rise as the parallel rate premiums increase.

“Therefore, whilst the government has done well in improving the policy environment (prior to SI 127 of 2021), only time can build the confidence in the local currency, and unfortunately there are no short-cuts, as confidence cannot be legislated or gazetted,” Zimnat said.

“We also encourage the policymakers in government to consult widely within government and with the private sector before implementing any significant policy measures, as the success of any economic policy is always hinged on the buy-in of key economic stakeholders. We therefore believe that SI 127 of 2021 needs further refinement with the input of wider stakeholder consultations.”

The new forex measures spell doom for workers who are already struggling to make ends meet, according to Zimbabwe Congress of Trade Unions secretary-general Japhet Moyo.

“The promulgation of SI 127 is going to increase the cost of products and services because businesses are not prepared to lose out on the exchange gains they have been enjoying. Someone has to pay for that and that is the worker,” Moyo said.

He warned that the new forex measures will result in a shortage of basic commodities, forcing workers to buy goods at inflated prices outside the formal channels.

“As government looks to solve a problem it creates another problem,” Moyo said.

He said the currency measures are further evidence that President Emmerson Mnangagwa’s government was now implementing “command economics”.

“If you look at the last two years the country has been ruled by statutory instruments. It is command agriculture, command this and command that,” Moyo said.

The Zimbabwe Coalition on Debt and Development (Zimcodd) warned that the new currency measures will further imperil the livelihoods of vulnerable members of society.

“The new regulations will further disadvantage the vulnerable and marginalised informal players, who do not have access to cheap foreign currency, yet they need to restock their shops or purchase raw materials,” Zimcodd said in a statement.

“To a greater extent, the move will negatively affect the informal economy which employs the majority of Zimbabweans.”

The promulgation of SI 127 comes two years after the government, through Statutory Instrument 142 of 2019, abolished the use of foreign currency in local transactions in a bid to contain the thriving parallel market. The local dollar became the only legal tender, nearly a decade after it was decimated by hyperinflation.

This resulted in the collapse of the local currency, with inflation skyrocketing to more than 800% in July last year. It also resulted in the decimation of incomes and pensions amid skyrocketing prices of goods and services, triggering strikes by civil servants, particularly health workers and teachers.

The government, as a result, was forced to continuously review civil servants’ salaries, indexed in worthless local currency in a futile attempt to curb the catastrophic effects of currency volatility, sparked by the ill-fated ban of the multi-currency regime, and the subsequent return of the local unit.

The government was forced to make an embarrassing climbdown, bringing back the multi-currency regime initially under the guise of ameliorating the impact of the Covid-19 pandemic.

The new currency measures are ample testimony that the government should not interfere with market forces, particularly when it comes to pricing, according to economist Prosper Chitambara.

“I think that the government should have consulted. There was no need for that instrument,” Chitambara said.

“Government must adopt a hands-off approach, especially when it comes to pricing. It has the potential to undo all the gains that had been achieved. The economy is still in a sensitive state. Government is reacting to symptoms and not the root cause.”

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