Monday’s shock currency and legal tender announcement brought with it a lot of surprises. The end of multicurrency, the return of the Zimbabwean dollar (at least in name) and the apparent liberalization of the exchange rate of the said Zimbabwean dollar. And that was all from the government’s side. Then the reaction from citizens and businesses came in and it is a shocker.
Social media is awash with notice letters and price boards from various businesses and institutions across the nation. The Physicians (specialist doctors) Association now asks for ZWD$1500 for a consultation. Some fast food outlets have updated their prices as well and the common reaction on social media can best be summed as “there’s food at home”. Many have reported lost business or rather lost income because of the collapse of deals that were denominated in US dollars. More still are stuck in the process of finding their feet when it comes to pricing and had momentarily halted trading.
The Zimbabwean currency by whatever name you choose to call it has proven to be a terrible store of value. Until recent measures were put in place it had managed to comfortably shed 60% of its value in both the interbank and parallel markets in just 4 months. In the absence of the ability to outright ask for dollars from customers, retailers have seemingly turned to using a forward rate for pricing. A forward rate is a principle well established in financial markets, it is used when we are certain the rate of something will change but not sure how much. Foreign currency is still a need for citizens and businesses alike as it represents the most accessible store of value.
Yes, the rate in the parallel market has gone down while the interbank market rate has risen significantly and in cases has well surpassed the parallel market rate. It’s worth noting here this doesn’t quite equal convergence because the interbank market is still coy on selling foreign currency but happy to buy it. The pricing we have is indicative of the general expectation that whatever is happening today is temporary and not reflective of the long term reality. If this lower rate was available to all those who wished to buy prices would readjust rapidly but again it is not and therefore not the rate that will be used for pricing.
The major issue of concern will be the size and pervasiveness of the informal economy in Zimbabwe. Setting up an interbank market that offers competitive rates is all fair and fine however these banks seem only willing to offer these rates to their existing customers. Our informal businesses are unbanked and outside of the system. Furthermore, the decline of the exchange represents a discount on precious foreign currency for them. The parallel market, for now at least maintains its allure on the back of its openness.
Zimbabwe has long perpetuated a narrative of false dichotomies. We have speech that talks of businesses versus citizens but we are quick to forget that businesses are run by citizens. The same citizens who have lost out many times at the hands of government policy. The same citizens who were ambushed by the announcement on Monday that brought to an abrupt halt to a system that had been used for over 10 years. It is easy to say businesses are profiteering but these businesses are owned and run by the same people who have just lost big. This should come as no surprise.