(Last Updated on May 31, 2021 by zimdaily)
HARARE – The recently gazetted Statutory Instrument (SI) 127 of 2021 has been met with fierce criticism from various quarters and it has resulted in a sudden hike in USD prices of goods and services.
University of Kent law lecturer Alex Magaisa said the law will lead to the expansion of the foreign currency black market. Magaisa posted on his Facebook page:
SI 127 of 2021: Rule by the hammer – it doesn’t work
- One general rule that I have learnt purely by experience as a Zimbabwean is that there is a positive correlation between more decrees to control the foreign currency (forex) market and the expansion of the parallel (black) market in forex, goods and services.
- In other words, the more the government tries to command & control the formal market by decree, the more the informal/parallel market grows. This is partly because economic actors seek to avoid the debilitating & punitive impact of the formal market decrees. And when they do the parallel market expands.
- It also grows because formal market controls create opportunities for arbitrage. This happens because the formal market, access of which is restricted to a few, offers cheap forex which can be sold at higher rates either directly on the forex parallel market or as goods for sale.
- It’s usually the case that beneficiaries of these cheap schemes are PEPs (Politically Exposed Persons) or enablers to use the BSR nomenclature. They simply buy forex from the government & sell it on the parallel market. It’s a trick that’s been used for decades. The Willowgate Scandal in 1988 was based on the same principles.
- PEPs bought imported vehicles at cheap rates from a government company & sold them on the parallel market for huge profits. It’s been happening at a great scale since 2000, leading to record hyperinflation in 2007-08. The government thinks more controls will solve it. This is wishful thinking.
- If the government were a doctor, its diagnosis would be awfully bad. The issue lies in the old laws of supply & demand. There’s more demand for forex which can’t be met by supply. If there were adequate forex supplies, there would be no need for these stringent decrees. We do earn forex but there’s too much corruption and leakages. Few individuals benefit but the economy and the general public suffer.
- As long as the government allocates itself the role of supplying forex at artificially low rates, there’s always an opportunity for arbitrage because there’s someone out there who needs forex or goods & is prepared to pay a higher rate for them. The government, therefore, is the supplier to the parallel market that it is purportedly trying to control.
- Government is now trying to direct the market using SI 127 but as always happens, the market will devise ways to dodge these rules. The principal dodge agents are the PEPs. One prediction is that because SI 127 is a device for price controls, we will end up with a shortage of certain goods in formal shops, but an abundance of them on the street but sold at parallel market rates. Just go back to 2007/8 and remember what happened.
- Those who can afford it will hoard goods at controlled rates and sell them on at parallel market rates on the street. The formal shops might even direct goods to the parallel market. “The street” is both literal & metaphorical. Since the controlled rate is rigged, government has effectively imposed price controls. It never ends well. It always ends in tears.