Over the past weeks, the local currency, the ZiG, has been under pressure, with all indications pointing to a surge in demand for USD, resulting in a spike in both parallel market and official rates. At Zimpricecheck, we conduct price checks each Monday in various supermarkets, informal businesses, pharmacies, and other establishments that we believe people are interested in. The purpose of these checks is to gauge the state of prices and try to determine the trajectory things are likely to take in the current week. Soon, we will be introducing a video series called “Insightful Mondays” where we examine some of these issues in a series of short videos. Today, 23 September 2023, we conducted our survey as usual. We noted a general increase in both ZiG and USD prices. We strongly believe this increase in prices is linked to the increase in exchange rates.

Understanding the Context: A Brief History

To comprehend the current situation, we need to revisit the bond notes/coin era. When the government introduced bond notes, it was at a rate of 1:1 with the US dollar. The logic was simple: these bond notes were said to be backed by a US$200 million loan which the government had secured from the Afrexim Bank. The Reserve Bank of Zimbabwe (RBZ) swore that they would never make more than US$200 million of these notes. Nobody stopped to ask why the government was not just obtaining USD cash using this loan and distributing it to us instead. We were told bond notes were fungible and could be exchanged for US dollars.

As time progressed, the government broke that promise. More bond notes and coins were printed, resulting in a surge in supply. The same thing happened with electronic “bond notes” or RTGS as it was called. For a long time, the government wanted to convince everyone that the real valid rate was still 1:1 until August 2018 when they finally acknowledged that the official rate of 1:1 was not a true reflection of reality anymore.

What followed is a familiar story. Each time the parallel rate would increase, the government would stubbornly hang on to their lower “official rate”. This rate is often much lower than the parallel market rate. However, most people and informal businesses (who dominate the economy) cannot access foreign currency at this rate.

The Pricing Dilemma

Supermarkets often charge ridiculous USD prices due to SI 127 of 2021

Some businesses started charging two prices: a higher local currency price computed using the black market rate, and a USD price calculated using the official lower rate, often with a discount offered. This practice led to the introduction of Statutory Instrument 127 of 2021, which aimed to prevent such dual pricing strategies. The law banned USD-only discounts and compelled shops to use the official rate when doing conversions.

This legislation created a significant challenge for supermarkets. If they charged sensible USD prices, there was a risk of running a loss. Most manufacturers demand payment in foreign currency, arguing that their raw materials are imported, they pay for fuel in USD, and their workers demand USD wages. If a supermarket charged US$1 for a loaf of bread, there was a risk that they would sell it for an equivalent of just US$0.50 in ZiG when converting at the black market rate.

The solution many supermarkets adopted was to charge very high ZiG prices to absorb part of the black market premium. Let’s examine a real-world example: a popular Zimbabwean supermarket sells a 1.25 L bottle of Chibuku, a local sorghum beer, for around $26.63 ZiG. Using their exchange rate of US$14.80, this equates to approximately US$1.80. In contrast, the same product sells for US$0.90-US$1 in USD-only shops. This price discrepancy illustrates how formal businesses are attempting to navigate the complex regulatory environment while remaining competitive.

The Rise of Informal Currency Trading

Supermarkets now often rely on informal currency traders who mill around their doors. When a USD customer walks in, these traders offer their cards so the customer can swipe, essentially selling the USD customer ZiG at rates comparable to black market rates. This allows the USD customer to purchase goods at prices more in line with those found in informal markets.

This situation is reminiscent of the scenario we discussed in our article about Pick n Pay offering a 50% discount for USD payments. While on the surface it appeared to be a significant discount, in reality, it was simply a way for the supermarket to sell at black market rates like everyone else.

The Impact on Consumers

The current pricing strategies employed by supermarkets have a significant impact on consumers. Those with access to USD can often secure better deals, while those relying on ZiG face higher prices. This disparity further reinforces the dollarisation of the economy, despite government efforts to promote the use of local currency.

Frequently Asked Questions

Why are supermarket prices in ZiG so much higher than in USD?
Supermarkets often set high ZiG prices to protect themselves against currency fluctuations and to absorb the black market premium when converting to USD.
Is it legal for businesses to offer discounts for USD payments?
According to SI 127 of 2021, it is not legal to offer discounts specifically for USD payments. However, enforcement of this regulation has been inconsistent.
Why don’t all businesses just use the official exchange rate?
Many businesses cannot access foreign currency at the official rate, forcing them to rely on the parallel market for their forex needs.
How does this pricing strategy affect inflation?
The high ZiG prices contribute to inflationary pressures in the local currency economy, while USD prices remain relatively stable.
What can consumers do to get the best prices?
Consumers with access to USD often find better deals, but it’s always worth comparing prices across different retailers and considering both ZiG and USD options where available.

Conclusion

The current pricing strategies employed by Zimbabwean supermarkets reflect the complex economic environment they operate in. Caught between regulatory requirements, currency shortages, and the need to remain competitive, these businesses have adopted practices that often result in significantly higher ZiG prices compared to USD equivalents. As we continue our weekly price checks, we’ll keep monitoring these trends and their impact on consumers and the broader economy. Stay tuned to Zimpricecheck for more insights and analysis on Zimbabwe’s ever-evolving economic landscape.