So for the past two weeks, all everyone has been talking about is the rate. We have heard from angry government officials who claim that the business community is sabotaging the economy by wantonly causing the rate to spike. To counter this the government has insisted that businesses use the official rate when making conversions between ZWL and USD. In addition, businesses have are also being required to accept both USD and ZWL This will probably have the opposite effect of what the government is hoping for.
At any given time businesses have a preferred currency. One that allows them to achieve their objectives. Before SI 127 of 2021 that currency was the US dollar. Businesses would charge very high prices in ZWL and then offer USD discounts to induce customers to pay directly in USD. SI 127 outlaws that practice by insisting that businesses ought not to offer discounts or incentives meant to encourage shoppers to pay in USD.
This has forced businesses to fall back to the ZWL. In order to avoid breaking the law and making losses businesses are now:
- Doing their costing in USD and arriving at USD prices for their goods and services internally. This figure is never communicated to the outside world. Let us say it is determined that a product’s ideal price is US$1
- They then use a black market rate say of $200 ZWL to reach a price. That means the price for our hypothetical US$1 will be $200 ZWL
- The item is then sold at this price of $200 ZWL. Those who want to pay in shops using USD are told that the product costs US$2.20 using the official rate of $90 ZWL. Naturally that discourages most people from paying in USD as its cheaper for people to convert their USD on the black market instead where rates are higher and pay in ZWL.
- This means businesses in essence no longer have any foreign currency reservers as they are not receiving any direct foreign currency payments as before.
- This means more of them will try and seek foreign currency at the formal auction driving up demand. The foreign currency auction is already failing to meet current demand. If demand spikes it will mean even more shortages and longer settling periods
- This is made worse by the fact that in the past two quarters about half of sales were now in USD. This meant the government through taxes like VAT to ZIMRA was also getting more foreign currency via taxes. With businesses reverting back to ZWL you can expect a fall in direct foreign currency tax payments to the government.
All this serves to illustrate that the government is actually shooting itself in the foot when it comes to its foreign currency policy.
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