Eight companies appeared in court yesterday, the 27th, for illegally dealing in foreign currency. The companies allegedly bought foreign currency on the streets using EcoCash agents, illegally.
The unlucky eight are:
- Titanium Capital (Pvt) Ltd
- Dream High Investments (Pvt) Ltd
- Access Finance (Pvt) Ltd
- Tererati (Pvt) Ltd
- Vision Credit Score (Pvt) Ltd
- Capital Profit Financial Services
- Raymond Mudonhi Investment (Pvt) Ltd
- Justice Mahuni, Kudzai Mudonhi, and Juso Global Limited
Each of these companies is alleged to have used EcoCash bulk payer lines to trade in hundreds of millions of ZWD (hundreds of thousands in USD). Their accounts show that they received millions from various individuals and companies which they then transferred to agents using the EcoCash bulk payer lines. The agents are said to have purchased forex from the streets on their behalf.
This episode is the one that ultimately put the target on EcoCash’s back. The mobile money solution was in the crosshairs even before this activity. The regulators resolved to break EcoCash after this.
To be fair to the government, it feels like EcoCash should have noticed the unusually high amounts that were being moved on the platform. Especially how cash in/ cash out transactions seemed to be wildly popular when on the ground, everyone knew no cash was exchanging hands in those transactions.
Some began wondering if EcoCash themselves might have been involved in the illegal activity. There was no substantial evidence for this but they left themselves in that position by not clamping down on the activity. Even the regulators should have investigated how cash in/ cash out transitions were still popular in a more or less cashless economy.
The root cause of the madness
What these companies allegedly did is illegal but truth be told, almost every other company was and is up to similar mischief. This behaviour and reckless disregard for the law does not stem from teenage-like rebellion but rather from astute business instincts. It is a matter of life and death for their businesses. Of course, once survival is secured, super profits are pursued as human nature dictates.
Earlier this year, supermarkets were in the hot seat for pricing their goods using parallel market rates instead of the RBZ auction rate. As consumers we were incensed, as rational human beings we understood why they had to do that. They were and are not getting all their foreign currency at the same official rate. As my colleague put it:
That is because the so-called official rate is an average mean. Each business bids in the RBZ Auction and gets foreign currency at a different rate.
To make matters worse, most businesses have to supplement the auction acquired forex with street-sourced forex for it to meet their actual needs. When we consider that the auction system sometimes take over 10 weeks to reach process payments, is it any wonder they turn to to the black market.
The government, through its various arms, has continuously warned companies against using arbitrage for profiteering. It was only a few months ago that the RBZ named and shamed abusers of the auction system. This month the RBZ governor was urging companies to stop exploiting the gap between the black market rate and official currency prices. I found that rather silly.
It’s like locking dogs in a butchery and screaming, ‘please don’t eat the meat.’ Dogs will be dogs, boys will be boys and human nature will prevail. Rather than prosecuting the dogs for eating the pork chops, why not ensure they don’t end up locked up in the butchery. Why are companies engaging in these illegal activities?
Low production in the economy
Zimbabwe was once the breadbasket of Africa. The tides changed and the empty breadbasket ended up importing onions from South Africa and maize from Zambia. That paints the picture of how little we produce now.
The government is responsible for most of the policies that got us to this position. Politicking has always been the undoing of our economy. The land reform programme saw some unmotivated party loyalists get farms where, unsurprisingly, output tanked. The fiscal and monetary policies have also made business hard to conduct in the country. The inevitable result was reduced production.
The problem is low production = low exports. That remains the biggest factor in our foreign currency shortage issues. There is low demand for our currency because the other countries are buying less from us. We get less foreign currency because we are selling less than we are buying. This is simple to understand but hard to fix.
Depreciating local currency and inflation
It was only a few years ago when the ZWD was officially trading at 1:1 with the USD. Now the official rate is around 86:1 with the parallel market rate fast approaching 200:1. That means it is unwise to hold any amount of money in ZWD, let alone the large amounts that businesses accumulate.
The instability of the local currency means the prudent thing to do is convert your ZWD into USD at the earliest possible time. Otherwise you might find that you can’t restock owing to the loss in value of your takings. Individuals are engaging in this activity as well. The only problem is that there is insufficient foreign currency through the official channels for everyone to do this. Hence the parallel market activity.
The exchange rate gap
There are a few certainties in this life; death, taxes and the Zim government pegging an ailing currency at a fixed rate against the USD. It has never worked and it never will in the long run.
What it does is create arbitrage opportunities for those able to access both markets – the official market where the ZWD is pegged arbitrarily favourably against the greenback and the parallel market exclusively influenced by market forces. The opportunity to buy at $86 and sell at $170 is just too difficult to pass up.
The auction rate is somewhere between a pure market-force driven rate and a prescribed one. It has elements of market forces but is mostly prescribed to remain artificially low.
The motivation for the ‘criminals’ therefore comes from the tough economic conditions, the inflation and depreciating local currency. The exchange rate gap then stares them in the face and they are ‘forced’ to take advantage of the arbitrage opportunity.
The unintended consequence
The problem with immoral/inhumane/ill-advised laws is that people will break them. As they continually break them, respect for the rule of law diminishes. Most Zimbabweans continually break the law that prohibits them from buying foreign currency on the streets.
That becomes like the gateway crime and the longer we engage in it, the easier it is for us to break other laws.
So while it is deplorable behaviour that these companies engaged in, it is at the same time completely relatable and understandable. This means, ultimately, the government should shoulder most of the blame.