Zimbabwe’s currency crisis, price instability and economic instability foes of economic recovery

Price stability contributes to achieving high level of economic activity and employment. Price is a key function in making investment and consumption decisions. Zimbabwe needs a monetary policy which addresses the key issues of price stability to enable economic recovery and growth. The economic solution lies in addressing the currency crisis. A change of monetary system such as implementing dollarization is a possible option to deal with macroeconomic instability and uncertainty.  The stability of inflation and interest rates result from the success of the monetary policy in maintaining price stability. Prices differ across countries mainly due to the differences in the cost of doing business. Zimbabwe has high cost of doing business which significantly influences the level of prices and makes the country’s exports uncompetitive. The country is importing most products therefore any movement in exchange rates such as the strengthening of the South African Rand influence the level of prices.

There are other factors such as the differences in taxes and import duties across countries affect prices. Fuel prices differ across countries because of differences in fuel taxes and subsidies. Taxes within an economy such as Value Added Tax (VAT) also makes a difference. Prices are not always determined only by cost of production but also by the perceived value of a commodity in one country. Production costs, business start-up costs and labour costs differ from one country to another. Zimbabwe’s economy is notorious for not following economic laws and logic especially the pricing systems and models. Many have often attributed this behaviour to the hangover of hyperinflation, the Zimbabwean dollar mentality or simply profiteering. It is possible to find products imported from South Africa selling at more than double or even treble the South African prices. Mark ups and margin charged by local businesses are often above the rates charged in other countries. Could there be economic reasons why we have such pricing systems and models?  The business sector has often been called names such as saboteurs, terms which are only familiar to Zimbabwe.

The rise of prices has been phenomenal with the new dispensation after the change of administration in November 2017. The current president believes the government does not need to make legislation to address the pricing issue. President Mnangagwa warned businesses to stop hiking prices and urged that prices should come down to normal levels. Government has often intervened in the markets through price controls and the outcome has always been disastrous. Recently the ruling party appointed an ad-hoc committee led by the Vice President Costantino Chiwenga to deal with price increases. The pricing crisis emanates from the currency crisis, mainly that bond notes trade against United States dollars and often Ecocash, Real Time Gross Settlement (RTGS) in one way or the other act as different currencies as well as the severe foreign currency shortages. There are many arbitrage opportunities amongst the currencies and the three-tier pricing system. There are various exchange rates whilst we also have businesses entities which also treat the bond notes, RTGS and Ecocash as equivalent to the US dollar. Firms which treat bond notes, RTGS and cash US dollars as equal tend to increase prices to cater for the need to convert bond currency and RTGS to foreign currency often at parallel markets rates. The market is distorted, uncertainty of exchange rate movements all make planning in the business environment very difficult. The high currency risk currently obtaining because of the current monetary system makes future cash flows uncertain and businesses must incorporate this risk in their pricing.

The presence of arbitrage is a sign of market inefficiencies and specifically a poor monetary system which is distorted. The monetary system promotes speculative tendencies, the principle negative economic effect of speculation is to divert resources away from production into speculation. The financial crisis has deepened as shortages in foreign currency persist whilst traders aim to profit from current distortions. The sole purpose and reason for pricing is survival in business. The present economic environment has high risk and uncertainty, the prices charged are targeted to cover any potential losses from changes in exchange rates and the potential rise in restocking costs. We have a scenario where US$1000 cash is equivalent to 1200 bond notes for instance and over $1500 for a bank transfer, therefore people with foreign currency trade it first and make an extra $200 bond notes cash before spending their money. Large retail outlets and other businesses treat the currencies as equivalent. These arbitrage opportunities create money from nowhere, increase demand and push prices up because there is no corresponding increase in supply. The problem with arbitrage and speculation is that less energy is directed towards production.  People profit from discrepancies in exchange rates, promotes price manipulation as one gets income without adding value or producing a product.

The financial system has exerted inflationary pressures which have adversely affected consumers as businesses has the power pass costs. Businesses raise prices to overcome the adverse effects of inflation and increased costs. If the government fails to address the current currency crisis the revival of the economy will be a very difficult proposition. The country’s administration is courting foreign direct investment through publicising that the country is open for business. Foreign direct investment (FDI) is associated with stable exchange rates whilst high level of exchange rate volatility is associated with negative FDI. If the currency crisis is addressed it will result in increased foreign capital inflows. The disaster with the current monetary system  is that it has lot of uncertainties, instability and fuels speculation and arbitrage. If Zimbabwe is open for business the first step should be addressing the monetary and currency crisis. There are high risks associated with exchange rate risks within the country.