Can the interbank FX market end the black market?

The recent monitory policy statement announcement by the Reserve Bank of Zimbabwe (RBZ) paved way for the re-introduction of the Interbank Foreign Exchange market as recommended by industry captains who had been advocating for an open market system to buy and sell foreign currency. The central bank also introduced Bureau De-Change houses that will be permitted to purchase foreign currency without limits, but will be limited to sell hard currency for small transactions up to a maximum daily limit of US$10 000 per institution. The policies are widely expected to end the black market activities that have a direct relationship with prices for goods and services. On the black market, one US Dollar has been fetching between RTGS$3.5-$4.0 for months now while RBZ kick started the interbank rate at US $1 to RTGS $2.5 with the hope that the rate will fall as foreign currency supply improves. Earlier in November 2018, the government had amended the Exchange Control, Money Laundering and Proceeds of Crime Act to impose jail terms of up to 10 years for illegal foreign currency traders. Despite these moves, the black market remained strong and sprouting in all towns across the country.

The forex black market had disappeared between 2009 and 2015 when cash shortages had vanished under the multi-currency regime. As money supply started to grow with the issuing of Treasury Bills (TBs) and RTGS credits in local banks towards end of 2015, the black market started to creep back to life and was unleashed when the Bond Notes were introduced in November 2016. It is imperative to understand the following conditions that promote the thriving of the forex black market in Zimbabwe.

Foreign Currency Shortage (Market Disequilibrium)  

Zimbabwe has a sustained current account deficit that averages $3 billion in the last 10 years. In 2018 the deficit eclipsed $2 billion before smuggled and under declared merchandise from neighboring countries are factored in, which means the country is a perennial net importer of various commodities. Therefore the demand for foreign currency to import raw materials, fuel, foodstuffs, merchandise and energy far outweighs its supply from export receipts, investments and remittances. The country is not producing enough to meet local demand and to generate sufficient foreign currency to oil the local financial market. Forex shortages drive rates up and redirect the little generated foreign currency to the black market for maximum commissions.

Lack of confidence

Confidence is the backbone of fiat currencies and economic growth world over. A fiat currency is money that a government has declared to be legal tender such as the Zimbabwean case of the RTGS Dollar, but it is not backed by any physical commodity in the form of Gold or Silver. Because the RTGS currency is not linked to any commodity reserve or foreign currency reserves, it risks becoming worthless due to hyperinflation on any day. It will always be a toll order for any local currency (no matter its name) to hold its value if confidence in the banking sector (including the central bank) and the government is very low.  Zimbabwe's month on month inflation has breached 57% and is set to increase due to cost push pressures. Local consumers and the business community are rational economic players, therefore they will save in a stronger currency such as the US Dollar and trade the stronger currency for the RTGS Dollar at the highest possible rate and at the least possible cost. Lack of confidence in any market drives the black market as consumers rarely want to hold on to a weaker currency or sell their hard currency at low rates that prevail in the formal market (banks or Bureau De Change houses).

Massive arbitrage opportunity

The availability of a weaker local currency in RTGS dollars (notes, coins and other forms of electronic money) and their uncontrolled supply on the local market created massive risk-free arbitrage opportunities for the black market traders. Trading on the black market has limited transactional and compliance costs. Black market traders make an average commission of RTGS 20 per every US $100 and by doing 5 such deals in a day, they pocket RTGS 100 in one day. By repeating such unregulated transactions over a period of 30 days and factoring in trading of other currencies such as Pula and Rand, black market traders pocket a healthy amount of income which far outweighs entry to management level salaries on the local market. As long as the weaker local currency is in the equation, there will always be an incentive for the black market.

Corruption and High unemployment levels

Unemployment is very high in Zimbabwe and this fuels corruption in the economy. Foreign currency has become a hot commodity in the local market with massive rent seeking opportunities at every level. The foreign currency value chain involves hundreds of foot soldiers who trade forex at street corners to the public, back office bankers, business importers and exporters, law enforcement agents, politicians, cash rich business moguls and the shadowy dealers who act as runners to connect all the value chain actors. All these actors play their part for an agreed commission for the risk involved at their level. Foreign currency trading provides extra income streams for various actors in the chain and employment opportunities for unemployed youths who act as foot soldiers. The foot soldiers are merely agents in a complex chain worth millions of dollars and this is the sole reason why enacting laws will not arrest black market trading where collusion and corruption reign supreme.

The market disequilibrium, lack of confidence and high unemployment levels can be addressed by the government in the short to medium term. Corruption in forex trading is however a result of other complex dynamics that are at play in the Zimbabwean economy, key among them weak institutions. The black market players may suffer temporary losses due to exchange rate fluctuations or change their modus operandi but may not be eliminated because the existence of a weaker local currency (RTGS Dollars) necessitates their existence. Overall, it will be very difficult to kill the forex black market by playing the interbank market because the foreign currency to oil the interbank market is simply not available. Those in the formal market also see the incentives of diverting the little foreign currency into the lucrative and convenient black market as long as the control measures are weak.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.