Will rates fall & the black market die now that Bureaux de Change can now sell forex to individuals?

The latest reincarnation of Zimbabwe’s foreign currency black market has been around for about four to five years now. The government has thrown everything it has to try and suffocate it out of existence including surprise policy swings such as banning the US dollar, reintroducing it and even letting the rate go by creating a (pseudo) floating rate.

All the bureaux de change firms where you can buy USD at the Auction Rate

The biggest flaw in all the measures the government introduced was the fact that individuals could not legally walk into a bank and buy foreign currency over the counter. Also in other countries making foreign payments using, for example, a Visa Card is not hard, all you need to do is enter your card number during the checkout process and when you click the buy or pay button an equivalent amount of foreign currency is deducted from your account.

In our tea-pot shaped country, things stopped being that simple when the government introduced a liquidity crisis by printing electronic versions of the US dollar called RTGS and fuelling an acute foreign currency crisis. From that point, banks started demanding that you would have to preload your card if you wanted to make a payment. Wire Transfers became heavily restricted and suddenly there was talk from the government and people linked to it that those who did not export anything were not entitled to foreign currency.

Such stupid pronouncements hardly work in real life. There are plenty of people and businesses that need foreign currency even when they do not export anything. Import substitution activities are often carried out by businesses that do not export anything and helping these businesses actually reduces demand for foreign currency.

Again the fact that individuals and informal businesses have been denied easy access to foreign currency is the biggest reason why the government has failed to stomp the foreign currency black market out of existence. Those people and businesses when denied simply go to the alternative market to quench their forex needs.

Will their latest attempt do it?

As I have mentioned already the government has tried almost everything to snuff the black market but like some vampire out of a horror movie it keeps coming back, stronger and as resilient as ever. Now the government has fired another shot, yesterday they announced that from now onwards Bureau de Changes can now sell to individuals and SMEs. So how will the latest measure affect the black market?

As with all things the devil is in the details and so far most of those details are missing. All we have is a terse little note from our beloved governor promising us rainbows and sunshine. In an ideal world that would be enough. However, experience has taught us to ask questions and there are a lot of questions that are yet to be answered here.

It’s all about that rate

The biggest question is about the rate. One could go as far as saying it’s the only pertinent question here. What rate will be used in this market and how will it be determined? The RBZ notice is pretty vague on these points. It refers to “terms of engagement” which probably means that exchanges will be expected to offer foreign currency at rates that stay within a certain range of the official rate.

So why is that a problem? It’s not really a problem as long as there is ample supply to meet demand. We wouldn’t be controlling foreign currency this way if we had ample supply to begin with, so demand is bound to outstrip supply. In order to restore the balance, the rate would have to rise above the official rate until demand and supply are matched.

The government has shown it’s aversion for such a scenario countless times in the past. They are afraid if they let the rate be it will just gallop away. Its the reason why the RBZ’s hand weighs heavily upon the official auction which is set up in such as way as to discourage the rate from rising too rapidly. Examples of limits on the official market include:

• The Dutch Auction system is designed to allocate rather than find a middle price between sellers and buyers
• Buyers have to state the intended purpose of foreign currency in advance
• Disqualifying bids that don’t meet criteria such as intended use of foreign currency
• Allocation of foreign currency based on a prioritisation ratio rather than what the buyers are seeking etc

So we have to take it as a given that the Bureaux de Change will offer foreign currency at a depressed rate and that will introduce two problems:

• Limited supply because there is still a wide gap between the official rate and the prevailing rates on the alternative market. Most people will continue to opt to sell on the alternative market depriving the bureaux de change of much-needed supply. The RBZ will thus be the only source of foreign currency to these exchanges and that is unlikely to meet demand in the long term.
• Arbitrage opportunities will lead to those connected buying at discounted official rates in bureaux de change and disposing at unofficial rates.

These two factors will lead to the ultimate demise of this latest measure and prevent it from killing the black market. It seems counter-intuitive to our fearful central bank but letting be is the biggest solution to the black market.