The recently enacted SI 127 of 2021 has sparked widespread chatter as its effects have already started taking root. The SI has implications that are broadly two-pronged namely, for the formal sector and the informal sector. It is important to critically look at the effects of this SI. In this article, I shall be discussing some of the implications of SI 12 of 2021. There is no question about how hard-hitting this SI is given that barely just a few days in, it is already disrupting the status quo. Let us explore this subject in the simplest of terms.
A Surge In US Dollar Prices
Given the fact that the official exchange rate is more or less around ZWL$84 to the US dollar, it means businesses will likely increase US dollar prices. It will happen by default really. Let us suppose something was going for ZWL$6000. Before the SI it could have been going for US$50; implying an exchange rate of 120:1.
The new SI now mandates the business to use the official rate. That would mean that item would now have to go for about US$71, assuming the official rate used is 84:1. This will most likely be the case with local goods – in the formal sector. (Interestingly, the informal sector will become more preferable because lower prices will be found there).
Ultimately this is going to make it less preferable for people to buy stuff in the formal sector using US dollars. Already we have started to see the trend taking root. Formal sector businesses will realize much lower US dollar sales than before. That is going to seriously impede businesses in the formal sector as they typically need US dollars for procurements and the like.
Businesses Will Hike ZWL$ Prices
The reason why is quite straightforward. Businesses usually buy foreign currency from the parallel market. As it stands now you are being forced to adopt the official exchange rate. Picture this: official exchange is ZWL$84:US$1 yet on the parallel market it is ZWL$120:US$1. What is the most probable way to buffer your business given the fact that you have to buy foreign currency from the parallel market? Well, you simply hike your ZWL$ prices and that is going to happen. It is going to happen so drastically (since the ZWL$ is mercurial) that hyperinflation might set in sooner or later. That will heavily weigh down on the many Zimbabweans who get incomes in ZWL$.
A Spike In Demand For Imports – They Are Cheaper
So it is a given that prices will most likely spike – for both US dollars and ZWL$. When that happens there is an alternative that Zimbabweans will dash for i.e. cheaper imports. The same products here will be much cheaper in neighbouring countries such as SA, Botswana, and Zambia, amongst others. Overall, this will culminate in more foreign currency being spent on imports (as opposed to that realized through exports). This means the demand for foreign currency will surge.
Demand For Foreign Currency Amongst Businesses Likely To Rise
US dollar sales will decrease for formal businesses creating a greater need for foreign currency. There are two places where such businesses can get that foreign currency. We are looking at either the central bank foreign currency auction or the parallel market. Already it is not that easy to access foreign currency from the auction. Yet the demand will rise which will make it increasingly harder and might lead to delays in accessing it due to pressure.
On the other hand, most business will just turn to the parallel market. Yet on the parallel market demand will also be spiking; what does that mean? Well, it means exchange rates will surge because of increased demand for foreign currency. In essence, this SI might just have breathed back vitality into parallel market activities and we all know what that leads to – inflation. The ZWL$ will gradually get weaker and weaker; another major fall of the local currency could be imminent. Ever heard of stagflation? This is a scenario where there is slow economic growth, high inflation, and high unemployment.
A Sharp Trade Deficit Surge Likely
A shift towards cheaper imports will drive imports upwards; that means more foreign currency will be used for imports. This will be in sharp contrast to the low levels of production in Zimbabwe which spell low exports. An ever-widening trade deficit is never a good thing for any economy. A higher affinity for more government borrowing will be inevitable. Civil servants have always made outcries about their salaries. Now with SI 127 of 2021, their salaries’ value will be further eroded. That will be one of the many problems that government will grapple with.
The culmination of all this will greatly inconvenience the ordinary Zimbabwean. In light of the local currency, it will increasingly become weaker. In essence given its mercurial nature hyperinflation might set in again. Already most Zimbabweans, most of which are civil servants, get their incomes in ZWL$. This means things will become extremely expensive for them. It will be a Catch 22 situation because it will not be favourable to buy foreign currency to use for making purchases. Another heavy fall of the ZWL$ seems quite imminent.
Given all the red flags why is SI 127 of 2021 being rolled out though? Here there is definitely a catch somewhere. What do you think it really is? I want to hear your thoughts on this; let us discuss it in the comments below. Yesterday I went into town and bought something at a big formal business. I asked for its US dollar price (they said US$4); for the local currency, they said ZWL$480 – the exchange rate clearly higher than the official one. Do you really think all businesses will comply? I doubt that because the enforcement mechanisms of SIs in Zimbabwe are poor. After all, there are always sacred cows that do whatever they want despite any laws or regulations.