The unofficial three-tier forex pricing system now prevalent in the Zimbabwean market space, comprising of the USD/Bond Note pricing, the USD/RTGS deposit pricing and the Bond Note/RTGS pricing, has in real terms, made Zimbabwe fuel prices the cheapest in the region. This has led to the current massive spike in the demand for all fuel grades imported into the country. According to official figures, in the six months to June 2018, the country consumed 752.4 million litres of fuel, representing a 24% jump from the same period last year.
The country now needs about USD80 million a month to pay for fuel imports and the
demand for fuel continues to increase leading to frequent shortages and the resurfacing of
the dreaded fuel queues.
The IMF recently adjusted Zimbabwe’s projected economic growth rate to 2.4% for 2018,
yet real demand for fuel has short up by 24%. The increase in demand for fuel is a result of
the fact that Zimbabwe now has the cheapest fuel in the region if one makes use of the
three-tier forex pricing system to trade fuel in the country. A real-life example works as
follows; a trucking company plying the Johannesburg-DRC route, will ensure that drivers
carry US Dollars in cash. Upon arrival in Zimbabwe where diesel prices are officially pegged
around USD1.40, the driver sells his Dollar notes at USD1 to 2 Bond Notes. The driver then
uses the Bond Notes proceeds to pay for diesel at a Zimbabwean service at the marked price of USD1.40. In real terms the cost of fuel in Zimbabwe then is US$0.70 or 70c, since the truck driver obtained his Bond Notes at a rate of 1 to 2 for his precious USD notes. The price of fuel can even be way cheaper than 70c where RTGS is used for payment after trading USD notes at the higher discounted RTGS rate.
In comparison diesel prices per litre in South Africa are currently pegged at about USD1.15, in Zambia at USD1.41, the DRC at USD1.21, in Botswana at USD0.84 and Mozambique at USD1.07.
The Reserve Bank of Zimbabwe is allocating real USD cash to import fuel and yet the country only receives half or less of the real USD price paid to acquire the fuel. In real terms, Zimbabwe is now subsidising the price of fuel and this explains the spike in demand for fuel and the concomitant increased pressure on scarce USD monthly allocations towards fuel imports, to the detriment of other key national imports such as raw materials for
manufacturing companies, medicines and other critical payments.
The situation will continue getting worse, as South Africa records the highest increase of
more R1 in fuel pump prices in October, Zimbabwean fuel will become more attractive, with
more pressure for monthly forex allocation by the Reserve Bank and fuel stock-outs and
queues becoming more frequent.
Other Arbitrage Opportunities and Practices
1. Export of fuel and scarce local products to neighbouring countries at a discount
The same three-tier forex pricing system creates arbitrage opportunities for traders to
buy fuel using either Bond Notes or RTGS transfers and sell the fuel in US Dollars in
neighbouring countries and trade the US Dollars for Bond Notes or RTGS at double the
double the official rate, and immediately more than doubling their profits.
Traders can also export scarce locally produced products like cooking oil, cement,
beverages, etc even at a discount into neighbouring countries. If they receive payment in
US Dollars, they will trade the Dollars for Bond Notes and RTGS at more than 100%
margin hence making huge profits from arbitrage. This could explain some of the recent
spikes in real volume sales of beverage companies, cooking oil companies and cement
companies leading to supply shortages in the domestic market and an increased demand
for forex allocation to import more raw materials.
2. School fees payments and international medical treatment
A Zimbabwean who lives in Johannesburg can buy US$5 000 Dollars in a South African
bank, crosses the border into Zimbabwe, trades the Dollars for an RTGS deposit of
USD10,000. He then presents an application to the Reserve bank to pay real US$10,000
for school fees for his kids studying outside Zimbabwe. If the Reserve approves and
allocates the forex payment for school fees, in real terms, the Johannesburg based
parent has been gifted or subsidised to the tune of US$5,000 for his kid’s educational
The same could apply to international medical costs and any other costs which are
deemed critical on the forex approval list of the Reserve Bank.
The economic ramifications
The distortions in forex pricing is now causing massive inflationary pressures in the economy bringing fears of the recurrence of the previous dreadful hyper-inflationary environment of the 2000–2009 decade. Both demand pull, and cost push inflation are now at play as a result of the forex pricing distortions. Demand pull inflation is at play because of the massive demand for domestic products which in real terms, are cheaper in the international markets because of distorted forex pricing. Cost push inflation is being fuelled by importers who resort to sourcing forex on the parallel markets to import products as the Reserve Bank fails to provide forex allocation for their needs.
No amount of further forex injections into the system will improve the situation, instead the
arbitrageurs will continue to make more profits and the forex deficit will continue growing
to massive proportions, adversely affecting real production and inflaming further
inflationary pressures into the economy.
The immediate economic policy solutions required
The three-tier forex pricing system needs to be addressed urgently if the forex haemorrhage is to be addressed and allow the country to focus on real production, value creation and real economic growth which create formal jobs. The arbitrage opportunities created by the three-tier pricing system is creating distortions to real productive activities by rewarding arbitrageurs at the expense of the real producers.
The newly appointed cabinet should immediately implement the following key and bold
economic policy measures to arrest the situation for once and all:
I. The immediate demonetization of the Bond Notes
There is currently about USD400 million worth of Bond Notes printed and in circulation.
The government and the Finance Ministry should use the USD500 million of recently
arranged funding facilities to demonetize the Bond Notes. This is the only sure way of
arresting the current pricing distortions in the market. Injecting this funding into the
market under current market distortions will just add fuel to the arbitrage practices and
is akin to throwing the money into a bottomless pit. Demontizing the Bond note will
force people storing US Dollars for trading purposes and store of value, to start using
them for transactional purposes and hence increase the supply of US Dollar notes.
II. Opening of Customer Forex Currency (CFC) accounts and removal of Central Bank forex
The Finance Ministry must legislate for the opening of CFC accounts with banks that are
liquid at all times, with customers accessing their cash on demand. Exporters can trade
their export receipts with importers at market determined rates. The market pricing and
allocation of foreign currency will remove the need for parallel markets and allocate the
scarce forex to those that really need it for productive purposes and eliminate all the
opportunities for arbitrage.
III. Allow for multiple pricing for US Dollar and RTGS
The government should in the interim allow multiple pricing of goods and services in
RTGS value and real USD value, and values between RTGS and real USD dictated to by
the markets. This is mere acknowledgement that the market does not equate same
value to the USD notes and the RTGS electronic bank balances. In the longer term, the
government must gradually eliminate the RTGS balances and substitute them with real
forex currency or the new domestic currency under an independent Central Bank.
IV. Close the Government overdraft facility with the Reserve
To help reign the government’s insatiable appetite for funding for fiscal expenditure, the
new Minister of Finance must immediately put a stop to the unprecedented and harmful
practice of government’s direct borrowing from the Reserve Bank via a Central Bank
overdraft. This practice creates a carte blanche for the government’s fiscal expenditure
V. Craft legislation for an independent Central Bank.
The new Minister of Finance must immediately initiate new legislation for an
independent Central Bank with the main sole mandate to maintain the value of the local
currency and the stability of prices in the domestic market. Hopefully with a new Central
bank governor at the helm, the newly legislated independent Central bank can start
crafting plans for a new stable Zimbabwean currency. This is will put an end to the repeated macro-economic balance destabilization caused by a subservient central bank
promoting uncontrolled fiscal expenditure through uncontrolled money supply activities.
Anything short of eliminating the current economic distortions caused by the three-tier
currency pricing system will not bring about any relief to the current macro-economic
disequilibrium. Pricing and supply stability of goods and services can only be restored after
eliminating the market distortions caused by arbitrage opportunities currently prevailing in
the market space. Arbitrage opportunities destroy real production as real economic benefits
are transferred from real producers to the arbitrageurs and rent seekers. Real economic
growth which creates formal employment can only be achieved by a real increase in
production of goods and services in a stable macro-economic environment.