The SI 127 of 2021 saga continues to unfold. It comes as no surprise because you often get to see a SI disrupting the flow of things in just a couple of days. Recently I did an article citing 5 of some of the implications of this statutory instrument. On the 31st of May, the Confederation of Zimbabwe Industries (CZI) issued a 7-page industry policy response. It is also not often that you see CZI going to the extent of doing something like this. In this article, I shall highlight some of the interesting aspects the CZI pointed out.
Intended Outcomes And Subsequent Methodology Are Not In Synch
The CZI pointed out that it seems the underlying intentions of the government in enacting SI 127 of 2021 are valid. For instance, they wish to deal with inflation, the parallel market, foreign currency abuse and wish to bring overall economic stability. However, CZI strongly feels that this SI actually does the opposite of what we probably think they wish to do. (No wonder in my other article I pointed out that it is strange how they would enact this SI when it is apparent it has negative implications).
SI 127 of 2021 actually has a considerable list of grim outcomes. The first and obvious one is that it drastically reduces foreign currency through the formal monetary system. It also gives rise to inflation for both the US dollar and the ZWL dollar. More businesses will resort to the foreign currency auction. This will result in the auction system being overshadowed by the parallel market. The auction system will lose its efficacy as a price determination engine. The government will realize reduced US dollar revenues. Farmers will be some of the hardest hit.
SI 127 Of 2021 Will Erode The Gains Of The Past 12 Months
For almost a year now there has been a relative semblance of economic stability. Month on month inflation has been steadily and consistently declining. Year on year inflation has also remarkably fallen – 834.1 per cent in July 2020 to 161 per cent in May this year. (All things being year on year inflation was being projected to fall to around 33 per cent in December this year. Month on the month was being projected to fall to 0.02 per cent in December this year). Capacity utilization of local industries has been on an upward trajectory. There has been a considerable spike in the number of goods manufactured in Zimbabwe. Banks have also seen a great improvement in US dollar deposits. Domestic demand and revenues growth have steadily grown too. Business volumes have also been growing and we have also been witnessing increased export activity. CZI is concerned because this SI can annihilate (and has already started) all these gains in no time.
Some Of Government’s Huge Concerns
The CZI concurs with some of the concerns that government has. For instance, there have been growing concerns about the abuse of foreign currency accessed through the auction system. It is has been apparent that many businesses or companies who access foreign currency through the auction still price goods and services using parallel market rates. It has also been evident that we have been moving more towards dollarization when the opposite is actually the intended outcome. Many businesses have been “mis-invoicing” e.g. invoicing in ZWL$ when payments are being received in US dollars. We are all aware that many businesses have been using exchange rates other than the official one. Businesses have mainly been using exchange rates meant to discourage the use of ZWL$. The CZI is not on the same page with the government on the strategies to curb these vices.
Business Already Hiking Foreign Currency Prices
As expected, this has already started happening. LP gas was one of the first basic commodities to have its foreign currency go up. The price has since shot up to as much as US$2 per kilogram in some circles. Zuva for instance is selling at US$1.70 per kilogram. It has also come to light that some Zuva branches no longer accept Swipe or EcoCash. LP gas is just one example but businesses are already doing whatever it takes to stay afloat.
The CZI recommends that government immediately suspend SI 127 of 2021. This must then be followed by urgent and widespread stakeholder consultations. Government must engage the business community and map a way forward. (Come to think of it most SIs are enacted without relevant prior stakeholder consultations). CZI pointed out that some of the issues that need to be discussed are SI drafting that ensures there is no policy misperceptions, a clearly defined de-dollarization path, ironing out sticky issues regarding the auction system, ensuring there is only one exchange rate in the entire economy, and addressing the supply side of the foreign currency auction system.
That is an overview of what the CZI recently put out. There is really nothing to contest there as everything they said is spot on. Something needs to be done urgently lest the economy retrogresses to a place of hyperinflation.