It is a new week but on the currency front it’s the same old stories. The Zimbabwean dollar lost yet more ground against the US dollar and other currencies (yawn) what a surprise. In another bit of news, the Reserve Bank of Zimbabwe’s emboldened Financial Intelligence Unit says it will start cracking the whip on black market foreign currency sellers who dare to advertise on social media. Their notice also seems to suggest that admins of such groups and those who partake in such groups will also face the wrath of the law.

What the horse said

ACTION AGAINST ILLEGAL FOREIGN CURRENCY TRADING ADVERTS

1. The Financial Intelligence Unit (FIU) has been monitoring social media platforms where foreign currency dealers have been advertising and promoting their illegal trade. The FIU is aware of WhatsApp groups that have mushroomed in the country for the specific purpose of promoting and facilitating illegal foreign currency trade.
2. The FIU, in collaboration with the police, banks, mobile money / mobile phone service providers and relevant regulatory agencies, has embarked on an exercise to identify and take action against individuals who create, advertise on or participate (actively or passively) in WhatsApp groups or other platforms for illegal foreign currency trading.
3. The FIU and relevant institutions will take the following immediate actions:
• The mobile phone numbers used to join or advertise on the illegal groups will be shared with mobile phone operators and POTRAZ for barring;
• Other mobile phone numbers registered in the names of such persons will also be identified and barred;
• Any mobile money wallets registered in the names of such persons will be frozen and the persons barred from accessing mobile money services with any operator;
• Bank accounts owned by a person so identified will be frozen and the person will be blacklisted and barred from accessing banking services with any bank; and
• Identified persons will be investigated and prosecuted for illegally trading in or advertising illegal trading in foreign currency.
4. Members of the public are requested to report to the FIU any person, mobile phone number or bank account that continue to be used to engage in or advertise illegal foreign currency activities, using the following contact details:
FIU mobile and WhatsApp number: 0714039897
Financial Intelligence Unit 15 June 2020
The text of the FIU notice

What will be the possible effects of this new notice and action?

Fewer people will be willing to accept your electronic Zimbabwean dollars when you want to buy something
More people will be desperate to get their hands on foreign currency in order to conduct transactions- even the basic ones
The black market is probably going to become more cloistered and exclusive
The spread is going to increase
There will be disparities between the rate used in calculating prices and the rate people get when they sell their USD
Some businesses will have to scale down operations or even shutdown
An increase in peer to peer foreign currency trades

Let us explain

Right now fewer and fewer transactions can be easily conducted in the local electronic currency. While the informal market and vendors used to grudgingly accept electronic money (RTGS) forms such as Ecocash and ZIPIT, restrictions imposed by the Financial Intelligence Unit on what you can do has seen the currency become an anathema. Even suggesting something like this in tuckshops and to vendors invites a glaring look, curses and much swearing upon your person. You will be shooed away like a pesky housefly trying to land on choice meat.

For people who have foreign currency the only reason to change their money is when:

To top up electricity i.e. to buy electricity tokens/units from ZESA (ZETDC)
To pay internet service providers
To pay water and council bills
To pay for vehicle insurance
To pay for other utility bills
To settle some government bill e.g. hospital bill
To take advantage of momentary arbitrage opportunities, for example, the rate changes on the black market before supermarkets factor in the change
If you have time, to stand in line for the good part of a day while waiting for subsidised mealie-meal
To do normal shopping in a supermarket (if you are not particularly bright when it comes to Maths or are a saint)

For anything else you want to do you will be best served if you stick with US dollars. For example, if you want refined mealie-meal it goes for $5 on the black market but sells for more than $400 in supermarkets. The rate is around $70, so unless you are an idiot your choice here would be simple. If you want to buy medicine in a pharmacy you will have to change your money to USD because the RTGS prices are much much higher than you would pay to get USD we will explain why shortly. Rentals for 95% of the people are in USD. So yes demand for the USD is going to go up as more businesses start shirking away from electronic money which is under the tight control of the FIU.

Paranoia and going under

As soon as news broke some suspected large foreign currency dealers started exiting large casual groups that they had joined. There was talk among some that they needed to “vet” everyone in order to prove that they are a legitimate client or fellow black market dealer. As a result, the prolific offenders are likely to go underground and form new exclusive groups that will be covert and hard to infiltrate. The black market existed before social media was a thing. It just means the big dealers (murungu or poto as they are colloquially known) are simply going to limit their risk exposure by only dealing with their runners and big clients.

This will mean there will be more rungs between the ordinary seller and the final business client who buys in bulk. Each of these agents will take his cut. This means that there will be a bigger spread. In fact we have already seen this start to happen over the past few weeks as transaction limits came into effect. Big clients were willing to pay $92 ZWL (yesterday) to those big dealers selling say$10 000 USD and above. In return, these big dealers will patiently wait for an RTGS transfer to come through. The large premium shields them against interim movements in the rate as well as ensure they will get a profit from the sale.

On the other hand, clients selling small amounts will receive less from their sale since the runner will have to wait until they have a significant amount that will allow them to make a profit and ask for a bigger rate. Street rates over the past week were around 65-75 depending on the amount being sold by the dealer. This means that the spread will be between $92-$70, for example, i.e., in this case, it will be $22 ZWL. Traditionally the spread has been always small and around $10. In fact, in the early days, it could be as low as zero as business clients sometimes bought directly using their agent lines.

The price disparity

Because business clients will be buying at a higher rate of say $92 or even more they will have to factor in the cost of acquiring that foreign currency in their products. Again we have already started seeing this. While in early days the rates used to calculate prices in shops were close to or equal to those obtainable on the street when one trades in USD nowadays there is a world of difference. If you do the math or ask for both USD and Zimbabwean dollar prices you will see businesses using rates as high as $110 ZWL.

Two things are happening here:

Businesses are trying to stay ahead of the curve by future-proofing themselves against future adverse movements in the rate i.e. in case the rate goes up and they are too slow to move in and counter that rise in rates
Because there are more and more middle-men between the original foreign currency seller and the business itself, businesses are paying a higher rate when buying foreign currency in exchange for the privilege of buying that foreign currency in fewer transactions and from a trusted source that will less likely rate them out. The premium rate of say $110, includes the cost of disguising transactions so they will not be flagged and other such services.

Some will slow down and some will die

Even the central bank itself has admitted several times that apart from people such as farmers who have no choice, no one is willing to part with their foreign currency at a rate of $25 ZWL per 1 USD. Not when prices are where they are right now. People would rather use their foreign currency to buy directly and often do, as we pointed above there are very few transactions that make sense when you pay using USD at the official rate of $25. A loaf of bread officially costs $2.04 USD according to the RBZ’s rate. You would have to be the most foolish person in the world to pay using USD cash in such a setup.

With a comatose formal foreign currency market where only those deemed critical by the authorities can buy foreign currency, some businesses will be forced to slow and scale down their operations as they run out of critical foreign currency. Some businesses will also close as they might be deemed not critical. The governor, for example, has sneered at entities such as DSTV in the past yet these are critical businesses that offer value, employment, inspiration and are of importance to some. DSTV has already lost over 100 000 of its customers due to the current crisis they will suffer more. Them and other businesses that need foreign currency but are not “essential”.

Trade among peers

Remember our point about paranoia? Well, only those trusted and known to foreign currency dealers will be able to sell to them. The rest of the people will have to find a connected peer to sell to. Also as trade in the US dollar becomes prevalent chances are those selling will not even need to reach out to a dealer. Their friends and neighbours will be willing to trade. They will get less from the sale dissuading even more people from selling or buying RTGS and decreasing supply of foreign currency even further. But remember this money will end up in the hands of some business which probably will have to pay handsomely for it. So the rate on the streets will be low and prices will still go up. Persuading even more people that they need to earn in USD and dissuading them from adopting the Zimbabwean dollar more widely.

The short of it all

Instead of enticing the people from using the Zimbabwean dollar more widely the bank is tossing in roadblocks that make it hard to accept for an ordinary man or woman. People just want to earn, save and spend and right now the Zimbabwean dollar makes those things incredibly hard. In their fight with foreign currency dealers, the FIU seems oblivious to the plight of the common man who just wants to buy medicine or buy food for his family or save a little money for a rainy day.

Instead the RBZ should establish the market formal market they have been promising and then close in on the debilitating black market. When people have a formal market, a legal and safe alternative they will probably be less inclined to brave the seedy alleyways of the foreign currency black market. Why would they?