August 9, 2020
HARARE, ZIMBABWE — Businessman Nyasha Mubonesi used to seethe about Zimbabwe’s parallel market for foreign currency. Sometimes, he couldn’t get as much money as he needed. Other times, exchange rates skyrocketed and nosedived – in a single day.
Then the government unveiled a Foreign Exchange Auction Trading System in late June, and Mubonesi thought his currency woes were behind him. Instead, he learned that it was only for businesses that can bid at least $50,000 at auction.
Mubonesi, whose company sells laptops, printers, cartridges and other communications equipment, makes about 900,000 Zimbabwean dollars (ZWL) ($12,476) per month. “It’s nowhere near the minimum required,” he says. “It’s not everyone in business who can use this facility.”
The auction is Zimbabwe’s latest attempt to stem a yearslong foreign currency crisis, which has deepened an overall sense of economic fear and instability.
But Mubonesi echoes other business owners, who say the weekly auction excludes small and medium-sized enterprises, which drive the economy.
“Small and Medium Enterprises (SMEs) in Zimbabwe complement the efforts of large corporations in the production of goods and services,” according to a study published in the International Journal of Economy, Management and Social Sciences in 2017. “They fill the gap that is not covered by large firms. They account for more than 90% of the economy.”
Adjusting the country’s foreign currency policy is nothing new. In 2004, the government tried an auction to combat foreign currency shortages, but it failed because its artificially low exchange rates couldn’t compete with rates on the parallel market.
The parallel market, also called the black market, refers to unofficial exchange rates set by individuals and institutions that buy and sell currency informally.
Five years later, the government adopted a multicurrency system after the Zimbabwean dollar crashed. Then a bond note – said to be equal in worth to the United States dollar – was added to the multicurrency mix in 2016, but it didn’t hold its value.
The government dumped the 1:1 rate in February 2019 and launched the RTGS dollar, which encompassed other local denominations. It also created an exchange rate for banks – known as an interbank rate – to tame currency fluctuations. Officials hoped the latter move would lure Zimbabweans away from the parallel market, which flourished amid the currency chaos.
Finally, in June 2019, the country’s central bank, the Reserve Bank of Zimbabwe, ditched the multicurrency system and set up a new local currency as the only legal tender.
Yet shortages of foreign currency have persisted, an urgent problem in a landlocked country that relies heavily on imports.
Those shortages can be especially dire for small and medium-sized enterprises, which often need foreign currency quickly to buy imports. It’s one reason business owners such as Mubonesi came to lean on the volatile parallel market.
The Reserve Bank of Zimbabwe’s new auction system, however, has a so-called priority list, which includes businesses that offer essential goods and services, such as imported raw materials, fuel, basic foodstuffs, and mining and medical consumables, among others.
Government officials say the new system builds in stability, efficiency and transparency. Critics say the priority list favors large enterprises.
Janet Guta, whose company specializes in personal protective equipment and telecommunications accessories, welcomes the auction – but only if everyone can use it. Her company doesn’t meet the priority-list threshold.
Guta wanted to apply for foreign currency last year, but the bank told her she had to wait at least three months for the money. She didn’t apply.
“You end up losing money in the process of trying to get money using the formal channels, because foreign currency rates on the parallel market will be changing on a daily basis,” she says.
Mubonesi says acquiring foreign currency causes delays in buying imports. He still uses the parallel market two or three times a week.
“If all things were normal, it would take a day for me to pay for my purchases,” he says, “but now it takes me about three days instead, because I have to [look for] the money first.”
He adds that finding money on the parallel market is expensive and it’s one reason he’s failed to expand his enterprise. One day in mid-July, the official exchange rate stood at $1 for 68.80 Zimbabwean dollars, but on the parallel market, the rate was 1:95. The gap would have cost Mubonesi an extra 26.20 Zimbabwean dollars.
Clive Mphambela, spokesperson for the Ministry of Finance and Economic Development, says some small and medium-sized businesses do qualify for the auction. In addition, he says, banks should bid on behalf of clusters of SMEs that are not big enough to take part individually.
“The problem is that the banks are not cooperating in that regard,” says Farai Mutambanengwe, founding director of the Small and Medium Enterprises Association of Zimbabwe. “They are pretty much folding their arms, saying that if you do not have the equivalent of $50,000, we can’t process your bid.”
Ralph Watungwa, president of the Bankers Association of Zimbabwe, says it’s hard to consolidate small players for the auction because each business must still meet all of the priority-list demands.
Mphambela predicts the auction system will wipe out the parallel market.
“[What] we want to achieve is convergence of the exchange rate so that all the foreign currency is traded in the formal market,” he says.
Mutambanengwe, who supports the auction system in principle, is not so sure.
“In the absence of cooperation from banks,” he says, “ultimately people in business will resort to the parallel market.”
Gamuchirai Masiyiwa, GPJ, translated some interviews from Shona to English.