In Zimbabwe’s fast-paced economic environment, policy pronouncements can shift in a matter of hours, creating confusion and uncertainty for businesses and consumers alike. Yesterday, we reported on what appeared to be a significant liberalisation of exchange rate policy, with Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu seemingly giving businesses the green light to use whatever exchange rate they deemed appropriate for converting between USD (United States Dollar) and ZWG (Zimbabwe Gold).

However, a recent terse statement from the RBZ suggests a significant backtracking, leaving businesses in a quandary and casting doubt on the extent of the promised reforms. Is the market truly free, or is it merely a carefully managed illusion? Let us delve into the details and explore the implications of this latest development.

A Recap: The Promise of Exchange Rate Freedom

The initial announcement seemed like a welcome departure from the restrictive policies of the past, dating back to 2017 under former RBZ Governor Dr John Mangudya. Under the old system, businesses were compelled to use the official exchange rate, which often lagged significantly behind the black market rate. This created an arbitrage opportunity, where individuals could exploit the difference between the official and parallel market rates to their advantage, to the detriment of formal businesses.

Here’s an example: Imagine the official rate is US$1 to ZWG$26.80, while the black market rate is US$1 to ZWG$35. If a loaf of bread sells for US$1 (ZWG$26.80 at the official rate), someone could take their US$10 to the black market, exchange it for ZWG$350, and purchase 13 loaves of bread instead of the 10 they could buy with the USD directly.

To mitigate this, many businesses adopted a strategy of pricing primarily in ZWG, using the black market rate to determine their ZWG prices. For example, they would sell bread for ZWG$35 (the market value of US$1), effectively neutralising the arbitrage opportunity for those paying in ZWG.

However, this approach created its own set of problems. When a customer comes in with USD, businesses were still obliged to convert using the official rate, leading to artificially high USD prices. This pushed customers towards informal “tuckshops” that operate outside the regulatory framework, accepting USD and offering more competitive prices, often at black market rates.

The logical solution seemed to be offering cash discounts to USD customers, restoring parity and retaining their business. For instance, a shop could sell bread for ZWG$35 but offer a discount allowing customers to pay US$1 in cash. However, the RBZ and Ministry of Finance frowned upon this practice, viewing it as a tacit acceptance of black market rates.

The problem is deeply rooted in the lack of trust in the banking system, a legacy of currency changeovers and policy inconsistencies. Zimbabweans often prefer to hold their wealth in USD, a more stable and fungible asset, rendering the government a mere bystander in its own economy.

The reintroduction of the local currency was meant to restore monetary authority. However, the government wants its cake and to eat it too. The black market responds quickly to surges in the supply of ZWG when the government pays civil servants or contractors. The interbank rate, often tightly controlled, lags behind, creating a significant gap. The end result is that businesses charging ZWG prices pegged to the black market rate end up increasing prices every time there is a surge in ZWG supply which then erodes the wages of civil servants who then demand salary hikes which in turn leads to a spike in inflation and thus the government gets incensed and bans US$ discounts.

Businesses were then permitted to operate within a plus or minus 5% margin of the interbank rate, which was later scrapped. According to the government, businesses were now permitted to use whatever rate they incurred when getting foreign currency. The government also went on to “free” the foreign currency market and said that foreign currency would now be sold on a willing buyer willing seller basis they also used words like free and floating. We have seen shops using rates slightly above the so called official rate presumably because they obtained their foreign currency at these rates which makes sense. Remember we said that the official rate is often an average also known as the mid-rate. However we have seen them use rates that are consistently above the offer rate of most banks. As of today rates being used by shops were as follows: Sai Mart (Choppies)$32 ZWG per 1 USD, Pick N Pay $31 ZWG per 1 USD and OK $33 ZWG per 1 USD. At one point, Sai Mart, which is linked to a government deputy minister was using a rate of $36 ZWG per 1 USD which so happened to be exactly the black market rate of the day.

Therefore, yesterday’s article was based on this seemingly liberalised environment.

The U-Turn: A “Floating Rate” with Strings Attached?

The RBZ’s latest statement, however, throws a spanner in the works:

PRESS STATEMENT

EXCHANGE RATE DETERMINATION AND PRICING OF GOODS AND SERVICES UNDER THE CURRENT MULTICURRENCY SYSTEM

The Reserve Bank of Zimbabwe has issued a notice on the confusion regarding the exchange rate determination for pricing of goods and services following the pronouncement of the Monetary Policy Statement (MPS) on 6 February 2025.

It is important to clarify that the country is operating under a Floating Exchange Rate system where the exchange rate is determined in the interbank market for foreign exchange under the Willing-Buyer Willing-Seller (WBWS) arrangement. This rate is ultimately determined by the underlying demand and supply of foreign currency between the participating banks (Bankers) based on trades that are executed in the market.

For clarity, “market determined rate” simply means the price at which foreign currency can be purchased based on foreign currency supply and demand. The exchange rate is ultimately influenced by the level of foreign currency liquidity in the market and the need for bidders to obtain foreign currency to import other goods and services in the economy.

The February 2025 Monetary Policy Statement again emphasized clarity that the USD exchange rate must be aligned with the prevailing market determined exchange rate. In addition, the Reserve Bank of Zimbabwe (RBZ) will continue to intervene in the market to ensure stability, as it has previously done through the various mechanisms, including the Foreign Currency Auction System (FCAS), ZIG. Beyond that, the RBZ will continue to monitor the foreign exchange market closely.

Dr. John Mushayavanhu

12 March 2025

While ostensibly reaffirming a “floating exchange rate system” under the Willing-Buyer Willing-Seller (WBWS) arrangement, the statement subtly restricts participation in this market to “participating banks (Bankers)”. This seemingly innocuous clause has profound implications.

The elephant in the room is the informal sector, which accounts for a significant portion of Zimbabwe’s economy (estimated at 70-75% by institutions like the World Bank and IMF). These informal businesses, often dealing primarily in USD, are effectively excluded from the WBWS market, negating the claim of a truly free-floating exchange rate.

Here’s why this matters:

• Distrust of the Banking System: Years of policy inconsistencies, including forced currency conversions and asset freezes, have eroded trust in the formal banking system.
• Transaction Costs: Many prefer to avoid the IMT transaction tax associated with formal banking channels.
• Low Rates: The rates offered by banks in the WBWS market are often artificially low, due to the dominance of exporters forced to surrender a portion of their proceeds at unfavourable rates.

By restricting exchange rate determination to the formal banking system, the government is, in essence, fixing the rate through a small number of players with limited incentives to offer competitive rates. This creates a “legal cartel”, where banks benefit from cheap foreign currency, which they often channel to connected individuals and government entities.

Implications for Businesses and Consumers

Despite the Governor’s initial remarks, businesses must remain cautious about using exchange rates significantly above the official rate. Doing so risks attracting unwanted scrutiny from the authorities, including the RBZ’s Financial Intelligence Unit (FIU). Businesses will find it difficult to justify rates far from the official rate:

• Sourcing Legitimately: Admitting to sourcing foreign currency from the black market is akin to confessing to a crime. While businesses are technically allowed to use the rate they incurred, they must still demonstrate that they obtained that foreign currency through legitimate channels.
• Direct Sales: Foreign currency obtained through direct sales presents another challenge. How should this be converted? Presumably, using the “fair market value,” which, according to the RBZ statement, is the interbank mid-rate.

For the foreseeable future, businesses will likely continue to lose customers to the informal sector, which operates with greater flexibility and lower overheads. The currency crisis, and its associated woes, will continue to plague the Zimbabwean economy. The government’s attempt to “float” the ZWG on a market dominated by its own entities is, ultimately, a clever manipulation.

Conclusion

The RBZ’s apparent U-turn on exchange rate policy underscores the persistent challenges facing the Zimbabwean economy. While the initial announcement offered a glimmer of hope for a more market-driven and stable environment, the subsequent statement reveals a more complex and restrictive reality. Businesses must navigate this landscape with caution, and consumers must remain vigilant in the face of potential price volatility. The path to true economic stability remains a long and arduous one.

FAQs

Q: What does this “U-turn” mean for businesses?

A: It means businesses need to be extremely cautious about using black market rates for pricing. While they are theoretically allowed to use the rate at which they obtained their foreign currency, they need to prove they did so through legitimate means.

Q: Are we back to square one with exchange rate controls?

A: Not quite. The RBZ is attempting to create a controlled float, where the rate is ostensibly market-driven but heavily influenced by the formal banking sector. This means businesses are unlikely to see the true benefits of a fully liberalised exchange rate.

Q: What can consumers do to protect themselves?

A: As always, be vigilant and compare prices across different retailers. Be aware of the prevailing exchange rates, and don’t be afraid to shop around for the best deals.

Q: Is the government serious about economic reform?

A: The recent policy flip-flop casts doubt on the government’s commitment to genuine economic reform. The desire to control the exchange rate, even under the guise of a “floating system”, suggests a reluctance to fully embrace market forces.