Throwing out the baby with the bathwater

In February, Treasury permanent secretary, George Guvamatanga, said indiscipline was in the market warning businesses to put their house in order or the government would be forced to intervene.

The intervention came last week with Statutory Instrument 127 of 2021 gazetted under the Presidential Powers (Temporary Measures) (Financial Law Amendment) Regulations. The legislation will impose penalties in the event of defaulting in complying with Exchange Control regulations that govern the use of funds obtained from the auction system.

The legislation will penalise natural and legal persons guilty of being a seller of goods and services not authorised by law to charge for them exclusively in foreign currency.

This includes businesses and individuals that refuse to allow any buyer to tender payment for them in Zimbabwe dollars at the ruling exchange rate.

These interventions are meant to tame indiscipline that has been prevalent in the market whereby some retailers were only charging in foreign currency.

The government argues that some companies that are accessing foreign currency at a rate of 1:85 on the auction system are charging using the parallel market rate of 1:135.

The regulations will punish companies that do not bank surplus cash within a stipulated time frame.

The government’s intentions are noble. Indiscipline in the market place should be decisively dealt with.

If moral suasion does not work, the government will be compelled to intervene. In economics, the government intervenes to correct market failures, achieve a more equitable distribution of income and wealth, and to improve the performance of the economy.

But in this case, the culprits are known and the government was supposed to target the perpetrators. The recent price increases experienced in the past few days show that business does not trust the government’s intentions.

The decline in annual inflation over the past months was attributed to stability in prices.

There are now fears that Zimbabwe will experience increased US$ domestic inflation as Zimnat Asset Management warned this week.

Their argument is that formal businesses, such as pharmacies, may be forced to increase their US dollar prices to align them with the parallel rate pegged ZWL$ prices.Another challenge with the decree is that it targets formal businesses at a time the economy has been informalised.

What mechanisms are in place to ensure compliance in the informal sector since over half of the economy has been informalised? Will this not enrich those inspectors who would be moving around to enforce compliance?

This is a tall order for the government. The economy has enjoyed some modicum of stability arising from the auction system, although the gap between the official and the parallel market rate has been widening. It has widened further after the latest decree. Businesses argue that they had put a discount on US$ sales to generate the foreign currency required for their operations since the auction system cannot accommodate their requests.

That avenue has now been closed and they have to stampede to the auction which has been allotting an average of US$38m per week.

In an industry response to the decree, the Confederation of Zimbabwe Industries (CZI) said companies have been relying on local US dollar sales to generate the bulk of foreign currency used to sustain operations.

“Use of the auction rate would result in consumers converting their US dollars to ZWL on the parallel market prior to purchasing, a practice already rampant outside the major retail chains such as Pick n Pay, OK and Bon Marche. This will deprive companies of what has become their main source of foreign currency,” CZI said.

There are fears the latest decree is akin to the government throwing out the baby with the bathwater.

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