Zimbabwe Forex Black Market: How Gvt Can End It
The Government of Zimbabwe’s fight against the forex black market is akin to straightening the shadow of a bent tree and not the bent tree itself. Government’s approach to dealing with the forex black market rings true to the statement ‘government solution to a problem is usually as bad as the problem’. If the Government does the following it can put an end to the foreign currency black market once and for all.
There’s need to establish an independent Reserve Bank of Zimbabwe devoid of political interference. This is necessary to prevent the likelihood of plummeting into hyperinflation. An independent central bank will be able to bring to book those propelling the forex black market who are believed by the public to be politically connected.
There are numerous instances where the central bank has been unable to thwart black market activity as a result of political interference. In September 2019, the central bank froze the accounts of Sakunda Energy, a company owned by President Emmerson Mnangagwaʼs ally Kuda Tagwirei. The accounts were purportedly frozen on allegations Sakunda was flooding the streets with the Zimbabwean dollar to purchase forex thereby increasing the parallel market rate. At the time, the RBZ was supposedly freezing his accounts, Tagwirei was part of President Mnangagwa’s entourage to Russia. Despite a decrease in rates which would have served as an indication the RBZ had finally hit the nail in the black market’s coffin, the freezing of accounts was reversed on the grounds that no “substantial evidence was found”. This raises questions on the independence of the apex bank to make its own decisions.
The central bank isn’t the only institution in need of reform. Law enforcement agents should be independent in carrying out their duties without government interference. An example is that of four police officers who got into hot water after raiding offices belonging to Neville who is the son of information minister Monica Mutsvangwa and former presidential advisor Chris Mutsvangwa. In May 2019, police raided Neville’s offices and found United States dollars to the tune of two hundred thousand. In a comical turn of events, the police officers who made the raid were arrested for under-declaring the money seized.
Deal with the real culprits
Government is aware of the people behind the black market. In 2018, RBZ governor, John Mangudya confirmed, influential people with access to huge sums of cash are behind the black market. At the time Mangudya, also confirmed the Financial Intelligence Unit (FIU) was sleeping on the job which enabled an unnamed individual to move 48 million in foreign currency onto the black market. A survey by the Anti-Corruption Trust of Southern Africa confirmed, inaction by law enforcement agents is to blame for the existence of the Zimbabwe forex black market.
The central bank must stop window dressing and deal with the real culprits. Recently, the FIU ordered banks to freeze, with immediate effect, all Ecocash and OneMoney agents suspected of involvement in money laundering. The directive did not have any impact on lowering black market rates or curbing its activities. In fact, the directive was catalytic in making money changers switch to OneMoney, a mobile money platform owned by the parastatal NetOne. The rate on OneMoney has been on the increase since the government order which resulted in stagnation on the Ecocash rate. One might be justified in arguing that the order to freeze the majority of Ecocash agent lines was meant to make OneMoney the mobile platform of choice. This is not the first time the central bank has given such a directive to freeze Ecocash agent lines.
Judging from the central bank’s practices it seems no one from the institution has come across a quote often attributed to Einstein: “Insanity is doing the same thing over and over again and expecting different results.”
Allocate foreign currency to corporates
The central bank must allocate more foreign currency to producers who import raw materials that add value to the economy. This will, in turn, save Zimbabwe millions of dollars worth of imports in finished products.
If one of the 50 corporates which control over ZW$10 billion in bank balances on the local market decides to invade the black market for foreign currency to meet operational needs, rates will soar. It’s advantageous if the corporates’ foreign currency needs are met through the interbank as opposed to the black market.
The government can simply accept the local currency or currencies have failed. In a book that’s lauded as a classic, Hayek argues the pressure for more and cheaper money leads governments to monopolize the issuance of money which results in inflation. He suggests governments should let people choose freely what money they want to use. In simple terms, the Government can simply re-dollarise. Civil servants have been calling for their salaries to be paid in US dollars after their salaries which are paid in local currency have been eroded by inflation. However, without production salaries in United States dollars will just raise prices and make things tougher for everyone.
When Zimbabwe adopted the United States dollar in 2009, the foreign currency black market was nonexistent. A study highlighted inflation turned negative between January and May 2009. This was in part because of the stability of the United States dollar. There was no need for the black market since the United States was flooding the market.
The government can liberalize the exchange rate. Government has failed to control the USD to ZWL rate and seems to have accepted that this. I say ‘seems to’ because Government has been known to shift policies at a rate that would make the weather envious. There’s a need for the Government to have policy consistency as this inspires public confidence.
Any solution outside reforming the whole financial system will have limited success. It’s difficult to implement any policy that can sort the black market issue when corruption is being ignored and if there’s no confidence in the government. Sound policies won’t work when the public don’t trust the policymakers, consequently, they won’t comply and will keep finding ways to bypass the formal process and the corruption gives them avenues to do this.
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