News / National
US$ shortages give rise to cash discounts
05 Feb 2017 at 07:51hrs | Views
ZIMBABWE's cash-selling practice is evolving with a growth in cash premiums and discounts offered for goods and services as companies struggle to raise foreign currency to import raw materials.
Cash premium is the mark up on top of the amount of cash that is transferred in a transaction through the Real Time Gross Settlement (RTGS) system.
The increase in cash discounts being offered for payments using the United States dollar for goods and services stems from a demand in the use of the currency to pay foreign suppliers.
Both cash premiums and discounts come at a cost, with consumers losing value for their money and companies losing value for their wares.
The practice is being driven by a desperate need to keep cash or make payments to foreign suppliers.
Sectors where cash premiums have been prevalent include the fuel sector and finance sector while cash discounts have grown in the property, retail and wholesale markets.
Property analyst Washington Musiiwa told Standardbusiness last week that liquid property buyers were getting cash discounts of plus or minus 10%.
He said the same applied to tenants looking for accommodation.
"A tenant who boasts of easy access to cash obviously has a huge advantage. For a rental discount of 10%, such tenants are the first choice for landlords," Musiiwa said.
However, these discounts are more pronounced in the retail and wholesale sector.
Some weeks ago, a company run by Chinese businessmen was selling its wares at cash discounts of 10%. It has, however, since stopped the practice. The company, Vorivet Investments, sells plastic household wares.
Within the central business district, different stores are now putting notices on their windows offering cash discounts of between 10 and 20%.
Transerv, one of the country's top vehicle parts and accessories companies, is offering a 10% discount for every $10 spent as cash. Also, at some of Chloride Zimbabwe's retail outlets, for every $100 spent, a person receives a 7% discount or pays $93 in cash.
Confederation of Zimbabwe Retailers president Denford Mutashu acknowledged such practices of cash discounts which were rife in the retail sector.
"I look at it as a normal market phenomenon that certain retail stores are selling at discounted rates for cash in an environment where some suppliers continue to ask for cash payments before releasing stocks," he said.
However, he urged the business community to continue observing best practices in their operations.
Confederation of Zimbabwe Industries president Busisa Moyo said companies needed cash to be able to make foreign payments for raw materials.
"The banking sector is only able to transfer what manufacturers deposit in cash for raw material imports, all other payments, RTGS, swipe and cellular payments mean you have to wait in a long queue for foreign payments. Manufacturers and those who import therefore incentivise cash payments through low prices," he said.
Financial expert Persistence Gwanyanya said the deteriorating cash situation, typified by increasing foreign payment backlogs, had created an opportunity for enterprising citizens or companies looking to make foreign payments to suppliers.
"As the foreign payments backlog continues to mount, there is a growing constituency of dealers and businessmen that is smuggling cash outside the country to fund importation of merchandise, mainly those lower on the foreign payments priority list. This group is also actively involved in the trading of cash," he said
On the cash premiums, Moyo said the United States dollars in nostro and hard cash was not enough.
"This time last year we did not have this issue because there was a perception that there were adequate dollars in the market. Until the tobacco season starts and liquidity eases, we are likely to see continued disparity from time to time and cash payments being incentivised," he said.
Tobacco and gold make up a huge portion of exports — the main source of the country's liquidity.
Economists say premiums on the dollar have led to an overvalued exchange rate by more than 50% when compared to exchange rates in the United States, China, Europe and South Africa.
In October 2016, the central bank identified practices by a number of companies and individuals that were making RTGS or inter-account transactions through transfers of the equivalent amount, plus an agreed premium into a cash vendor's account.
At the time, premiums for the cash were an average of between 10 and 15% mark-up. Currently, these practices are now ranging anywhere between 10 and 20%.
Central bank governor John Mangudya told Standardbusiness the bank called to question just how a person could make a profit for no goods or services sold by putting a premium on cash.
"These practices are not sustainable and productive. I love production. The aim of a currency is about productivity. It [productivity] is an anchor to the currency. Currency by itself will not produce anything. It's not about the money in circulation, it is about productivity. The missing link in Zimbabwe is productivity," he said.
"In Zimbabwe we seem to think the opposite, that once you have money in the pocket it is the same as production. People are busy trying to sell money and they do not sell commodities so we need to change that mindset. The money should not be sold; it should go to production so that the country can expand."
He said if cash was sold today for no goods or services, then the currency would be devalued. In the case of Zimbabwe, the US dollar is being devalued unlike in other countries which experience devaluation of local currencies.
Financial experts said if people sacrificed losing the value for their money or companies lost the value on their goods or services, it meant a reduction in the official value of a currency in relation to other currencies, creating deflation. They argued that though not necessarily bad, this had led to economic stagnation and high levels of unemployment.
"As a central bank, we do not believe in that type of transacting of 'wheeling and dealing'. This is why we are where we are today because Zimbabweans believe in arbitrage opportunities and that is dangerous," Mangudya said.
"If you sell money today, are you producing more goods and services? No, so that behaviour should be discouraged at all costs."
Cash premiums contravenes the Bank Use Promotion Act [Chapter 24:24] which prescribes that companies are allowed to keep a maximum of $5 000 in cash for the purposes of the business at any given time. Section 14(1) of the same legislation states that, "no person other than a financial institution or moneylender shall exchange any negotiable instrument for cash at a premium".
Economists warned that cash shortages would lead to continued premiums and discounts, which could be viewed as representing the depreciation rate of the "new currency" in the form of RTGS balances. The eventuality would be a decline in the value of deposits in real dollar terms.
Cash premium is the mark up on top of the amount of cash that is transferred in a transaction through the Real Time Gross Settlement (RTGS) system.
The increase in cash discounts being offered for payments using the United States dollar for goods and services stems from a demand in the use of the currency to pay foreign suppliers.
Both cash premiums and discounts come at a cost, with consumers losing value for their money and companies losing value for their wares.
The practice is being driven by a desperate need to keep cash or make payments to foreign suppliers.
Sectors where cash premiums have been prevalent include the fuel sector and finance sector while cash discounts have grown in the property, retail and wholesale markets.
Property analyst Washington Musiiwa told Standardbusiness last week that liquid property buyers were getting cash discounts of plus or minus 10%.
He said the same applied to tenants looking for accommodation.
"A tenant who boasts of easy access to cash obviously has a huge advantage. For a rental discount of 10%, such tenants are the first choice for landlords," Musiiwa said.
However, these discounts are more pronounced in the retail and wholesale sector.
Some weeks ago, a company run by Chinese businessmen was selling its wares at cash discounts of 10%. It has, however, since stopped the practice. The company, Vorivet Investments, sells plastic household wares.
Within the central business district, different stores are now putting notices on their windows offering cash discounts of between 10 and 20%.
Transerv, one of the country's top vehicle parts and accessories companies, is offering a 10% discount for every $10 spent as cash. Also, at some of Chloride Zimbabwe's retail outlets, for every $100 spent, a person receives a 7% discount or pays $93 in cash.
Confederation of Zimbabwe Retailers president Denford Mutashu acknowledged such practices of cash discounts which were rife in the retail sector.
"I look at it as a normal market phenomenon that certain retail stores are selling at discounted rates for cash in an environment where some suppliers continue to ask for cash payments before releasing stocks," he said.
However, he urged the business community to continue observing best practices in their operations.
Confederation of Zimbabwe Industries president Busisa Moyo said companies needed cash to be able to make foreign payments for raw materials.
"The banking sector is only able to transfer what manufacturers deposit in cash for raw material imports, all other payments, RTGS, swipe and cellular payments mean you have to wait in a long queue for foreign payments. Manufacturers and those who import therefore incentivise cash payments through low prices," he said.
Financial expert Persistence Gwanyanya said the deteriorating cash situation, typified by increasing foreign payment backlogs, had created an opportunity for enterprising citizens or companies looking to make foreign payments to suppliers.
"As the foreign payments backlog continues to mount, there is a growing constituency of dealers and businessmen that is smuggling cash outside the country to fund importation of merchandise, mainly those lower on the foreign payments priority list. This group is also actively involved in the trading of cash," he said
On the cash premiums, Moyo said the United States dollars in nostro and hard cash was not enough.
"This time last year we did not have this issue because there was a perception that there were adequate dollars in the market. Until the tobacco season starts and liquidity eases, we are likely to see continued disparity from time to time and cash payments being incentivised," he said.
Tobacco and gold make up a huge portion of exports — the main source of the country's liquidity.
Economists say premiums on the dollar have led to an overvalued exchange rate by more than 50% when compared to exchange rates in the United States, China, Europe and South Africa.
In October 2016, the central bank identified practices by a number of companies and individuals that were making RTGS or inter-account transactions through transfers of the equivalent amount, plus an agreed premium into a cash vendor's account.
At the time, premiums for the cash were an average of between 10 and 15% mark-up. Currently, these practices are now ranging anywhere between 10 and 20%.
Central bank governor John Mangudya told Standardbusiness the bank called to question just how a person could make a profit for no goods or services sold by putting a premium on cash.
"These practices are not sustainable and productive. I love production. The aim of a currency is about productivity. It [productivity] is an anchor to the currency. Currency by itself will not produce anything. It's not about the money in circulation, it is about productivity. The missing link in Zimbabwe is productivity," he said.
"In Zimbabwe we seem to think the opposite, that once you have money in the pocket it is the same as production. People are busy trying to sell money and they do not sell commodities so we need to change that mindset. The money should not be sold; it should go to production so that the country can expand."
He said if cash was sold today for no goods or services, then the currency would be devalued. In the case of Zimbabwe, the US dollar is being devalued unlike in other countries which experience devaluation of local currencies.
Financial experts said if people sacrificed losing the value for their money or companies lost the value on their goods or services, it meant a reduction in the official value of a currency in relation to other currencies, creating deflation. They argued that though not necessarily bad, this had led to economic stagnation and high levels of unemployment.
"As a central bank, we do not believe in that type of transacting of 'wheeling and dealing'. This is why we are where we are today because Zimbabweans believe in arbitrage opportunities and that is dangerous," Mangudya said.
"If you sell money today, are you producing more goods and services? No, so that behaviour should be discouraged at all costs."
Cash premiums contravenes the Bank Use Promotion Act [Chapter 24:24] which prescribes that companies are allowed to keep a maximum of $5 000 in cash for the purposes of the business at any given time. Section 14(1) of the same legislation states that, "no person other than a financial institution or moneylender shall exchange any negotiable instrument for cash at a premium".
Economists warned that cash shortages would lead to continued premiums and discounts, which could be viewed as representing the depreciation rate of the "new currency" in the form of RTGS balances. The eventuality would be a decline in the value of deposits in real dollar terms.
Source - the standard
