HARARE- HOW the mighty have fallen? Two weeks ago, Vincent Chidatsi was one of Zimbabwe’s entrepreneurs raking billions of dollars, thanks to the country’s economic decline that was rewarding “cutting corners” instead of real production.
Chidatsi operated his “office” at Roadport, a terminus for cross border buses. His daily chores were to buy and sell foreign currency. He would buy foreign currency from desperate Zimbabweans in need of cash then resell it at a premium to his Asian Godfather. The Godfather supplied him with the cash from his supermarmarket in down town Harare.
On a good day, Chidatsi would make a profit of Z$10 billion, a large amount higher than monthly salaries for civil servants.
On Wednesday, Chidatsi looked dejected as he pondered the next move. The reason: new forex rules introduced on 30 April had all but killed his business.
Announcing his quarterly monetary policy two weeks ago, Central Bank governor, Gideon Gono, introduced a willing-buyer, willing-seller arrangement whereby holders of foreign currency sell their forex through formal banking channels at the ruling interbank rates.
Gono said because of the centrality of foreign exchange in the economy, “its pricing has to take into account the need to incentivise all its generators to remain viable, whilst at the same time minimizing the unintended adverse consequences on the vulnerable segments of society”.
The new measures have seen rates breaching the Z$200 million mark per US dollar, a development that has buried the parallel market.
“I cannot compete with the banks as they are offering a higher rate,” Chidatsi said.
Chidatsi, who has now ventured into selling cellphone airtime cards, is hoping that the new measures will be discarded boldly declaring: “I will bounce back sooner than later.”
Although rates on the parallel market had firmed up to Z$180 million per US dollar, from as low as Z$98 million, parallel market dealers have run out of cash to compete with banks and money transfer agencies.
The liberalisation of the exchange rate has seen inflows back to the formal system. There were longer queues of foreign currency holders at most banks than those willing to withdraw their money.
Analysts note that the success of the new measures depend on the cooperation of all stakeholders as well as policy consistencies. In the past, the Central Bank had withdrawn policies before their results were realised.
The Bankers Association of Zimbabwe said the forex rules “will have a positive impact on the management of foreign exchange inflows”.
But the new measures have had an unintended consequence: prices of goods and services have risen in the past week.
“It was expected and it will stabilize in some few days,” said Callisto Jokonya, president of the Confederation of Zimbabwe’s Industries.
Analysts are wary the ghost of the past might return to haunt the noble initiative.
In 2004, Zimbabwe introduced a controlled auction system that almost killed the parallel market. But before the country could enjoy the benefits, the system was discarded.
“I just hope that this time around, the forex rules are here to stay,” said an analyst with a stockbroking firm.
Witness Chinyama, a group economist at Kingdom Financial Holdings, believes the authorities need to tighten the monetary and fiscal policies in addition to removal of all distortions like price controls if the currency is to be stabilized.
“In the case of monetary policies, measures that increase liquidity on the money market, such as the concessionary finance facility, should be significantly reduced,” he wrote in a Kingdom market report.
He said the resultant tightening of the money market should see interest rates rising, thereby reducing speculative activities and credit creation.
“Long term solutions to stabilize the currency are located in non-price policies to increase the foreign currency generation capacity of the economy, such as encouraging foreign direct investment and capital flows,” Chinyama said.