The interbank exchange rate has been set as the sole exchange rate to be used in commercial and other transactions and anyone selling goods and services, who uses any other rate faces a minimum civil penalty of $20 million.
The new legislation does allow a 10 percent addition to the interbank rate, which will cover any changes between the customer paying and the seller buying new stock and the margin banks charge. Interbank rates are set within a banking system adjusting the rate to match what willing buyers and willing sellers demand and can supply.
There is no intervention by the Reserve Bank of Zimbabwe or the Government in setting this rate. Interbank rates are what almost every country in the world uses to set its exchange rates.
The present multi-currency regime, which has not been changed, is guaranteed for the life of National Development Strategy 1 (NDS1), so businesses are assured there will be no sudden dedollarisation during the period, a factor that was worrying some and causing a degree of uncertainty and adding to pressure in the black market.
President Mnangagwa used his powers to sign off on the Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations on Monday. They apply for the life of the NDS 1 that came into effect at the beginning of the year and runs until 2025.
The new law was gazetted as Statutory Instrument 118A of 2022. Parliament will need to approve the regulations to make them permanent law but this should not be a problem considering the Government majority.
The legal changes now back the collection of measures explained on Monday by Finance and Economic Development Minister Mthuli Ncube to restore market confidence, stabilise the Zimbabwe dollar, which has come under attack from speculators and arbitrage, rein in resurgent inflation and ensure discipline in the economy.
The huge civil penalties, $20 million in local currency or the equivalent of the value of a breach in foreign currency pricing, whichever is higher, provide the authorities with some serious teeth to end any attempts to use black market exchange rates when setting prices.
Civil penalties are far simpler to impose than criminal fines, since they only require proof on the balance of probabilities rather than proof beyond reasonable doubt and can be imposed by an official, rather than a court.
Many of the provisions are already in existence, as settled policy, but are now officially law.
On the subject of maintaining the existing multi-currency regime that allows buyers to use local or foreign currency, the regulations read: “The provisions of the Schedule, insofar as they express or impliedly permit the settlement of any transaction or payment for goods and services in foreign currency, shall be valid for the period of the National Development Strategy 1 (the national economic plan for the period from January 2021 to December 2025, published on November 16, 2021).”
In terms of the law, corporates and individuals can continue to receive credit denominated in any foreign currency from an authorised dealer or any other banking or financial institution but from now on repayment must be made in the same currency. This prevents what were perceived as risks when repayment could be in a different currency from what was lent.
Prior to the setting of the interbank rate from the beginning of August, local prices were supposed to be set using the prevailing average auction bid. However, many businesses have been pricing their goods and services using black market rates.
However, the interbank market was allowed to expand in May and shortly afterwards the Reserve Bank of Zimbabwe brought the auction rate into alignment with this independent rate by rejecting a lot of bids that were considered too low.
The midrate for the Zimbabwe dollar, the halfway point between what banks bought and sold in foreign currency, was trading at 365,2 per US$1 on the interbank market yesterday.
A “person shall be guilty of a civil infringement if he or she, being a seller of goods or services, offers such goods or services at an exchange rate above 10 percent of the prevailing interbank rate published by the Reserve Bank of Zimbabwe,” an excerpt from the law says.
The regulations make non-compliance with using this interbank rate severe. In the event of non-compliance, “the civil penalty shall provide for a combination of a fixed penalty of 20 million Zimbabwe dollars or an amount equivalent to the value of the foreign currency charged for the goods or services in question (whichever is the greater amount)”.
While the guilty business is looking for this sort of cash, the bill keeps mounting by 5 percent a day for up to 90 days, so those who do not pay quickly could face a bill several times their $20 million.
Prof Ncube said on Monday that continuing the use of multi-currency would help the country stem rising inflation, now at 191,7 percent and restore confidence in the economy.
The annual inflation rate, driven largely by the Zimbabwe dollar’s depreciation against major currencies and also the impact of the war in Ukraine, which has disrupted global supply chains, has threatened to track back after touching a post-dollarisation high of 837,5 percent in 2020 before progressively trending down due to measures policies implemented by the Government.
“The market lacks confidence that the multi-currency system is here to stay for the foreseeable future. To eliminate speculation and arbitrage based on this issue, the Government has decided to embed the multi-currency system and the continued use of the US dollar into law,” Minister Ncube said.
The minister also stressed the point that pricing should now strictly be based on the interbank rate and that while economic agents can price their goods in any of the approved currencies, the equivalents of the prices should be based on the ruling willing-buyer willing-seller interbank rate.
The legislation immediately followed the series of fiscal policy interventions announced by Minister Ncube on Monday to restore market confidence, stabilise the exchange rate and rein in resurgent inflationary pressures, both internal and external.
This also came as businesses had been clamouring for clarity on the Government’s position regarding de-dollarisation, which commenced after the currency switch back to the domestic unit in 2019. Zimbabwe had since 2009 been using a multicurrency regime, dominated by the US dollar.
Authorities indicated, after reintroducing the local unit, that de-dollarisation was going to be a process and not an event, further stressing complete de-dollarisation would only be considered when all the fundamentals are in place and at the right time.
However, the Government’s decision to charge for certain services and statutory obligations, including duties and levies, while preaching the de-dollarisation gospel was misread by some economic agents as reflecting indecision on the exact currency regime authorities wanted to follow.
Zimbabwe National Chamber of Commerce (ZNCC), one of the country’s largest business lobby groups chief executive, Chris Mugaga, said the Government had recently responded commendably by moving to address concerns among businesses for clarity on the de-dollarisation path.
“This was necessary . . . everyone was talking about the de-dollarisation plan, to say can you tell us the story of where we are going in respect of currency given that we are having mixed signals.
“So, after legislating, through the Presidential Powers Act, the story is clear that the Government is sincere in making sure it saves the local currency.
“So, the only debate we can have in terms of economic policies can only support a piece of legislation, which is already in place now. That level of sincerity, we cannot really discount it. It’s vital, we obviously welcome the move.
“What is necessary is to put in place concrete measures to support the legal system, which has been put in place. So, the legal instrument is a very necessary piece of legislation on our route to continue using the multicurrency,” Mr Mugaga said.
He added that it was critically important to support the new legislation with sufficient, credible and quality policies, which would see the Government and private business working together to achieve the desired and mutual outcome.
Economist, Professor Gift Mugano, said the legislation, apart from providing certainty on sincerity of the Government to maintain the multicurrency regime through to 2025, provides the legal basis for transition from the auction rate centred pricing system to the willing-buyer willing-seller pricing linked framework.
“There was Statutory Instrument 127, which was compelling market players to use the auction rate. So the move to then use the interbank rate has put SI 127 to nullity.
“So, I read it that they are now trying to make sure that there is a legal framework to compel people to use the interbank rate, which if it is done, will bring stability to pricing because it’s a predictable rate and is in line with the official rate,” he said.
Prof Mugano said the challenge, however, was coming up with measures that close the gap between the interbank rate and the parallel market exchange rate.
“If the gaps are huge, there is always a tendency of persuading economic agents . . . to use the parallel market rate. Government must pay extra attention to the convergence of these two rates because enforcement is very difficult, Why? Because the larger part of the economy is informal, so Government cannot be comfortable that they have a law at hand now and can enforce it.
“They cannot enforce the law on the informal sector, which is over 70 percent (of the entire economy). There should be moral suasion towards compliance on the basis of the fact that there is no incentive for someone to use the other rate,” he said.
As part of measures to curtail further fuel from breaching the US$2/litre level, in response to supply chain constraints emanating from the conflict between Russia and Ukraine, Minister Ncube said on Monday the Government last week completely removed levy on diesel and significantly reduced it on petrol.
Last week, the Zimbabwe Energy Regulatory Authority reviewed the price of diesel to US$1,78 from US$1,76 per litre while the price of petrol was hiked to US$1,77 from US$1,73 per litre.
To mitigate the increase in prices of wheat, Minister Ncube said the Government would release 20 000 tonnes from the grain reserves to millers, who also intend to import an additional 70 000 tonnes, to be sold at an import price parity of US$680 per tonne converted to local currency at the ruling interbank rate.
Similarly, a total of 7 000 metric tonnes of maize shall be released to the millers, to prevent shortages in the market and maintain price stability on maize meal, while the operators have already paid for 25 000 metric tonnes that await transportation to Zimbabwe. An equivalent tonnage maize will be released from the grain reserve next month, the Treasury chief added, pending the delivery of the maize imports.
Minister Ncube said the measures taken by Government signalled its total commitment to enhancing the country’s foreign currency management system, ensuring price, inflation and exchange rate stability.