The Zimbabwean Forex Market
July 5th, 2005
Sokwanele’s latest article explains how the Forex (foreign currency) market operates in Zimbabwe. This was mailed out to our list of subscribers today. If you’d like to receive our mailings, please visit our website here.
The Zimbabwean Forex Market:
A layman’s guide to how it works, and why it does what it does
Like any other commodity – sugar, soap, mealie meal – the price of forex will go up and down, driven by the forces of supply and demand, provided there are no restrictions placed on that market. People who want US Dollars or Rand will pay what they have to pay to get it; if the currency is scarce, the price will go up, if it is plentiful, the price will go down or at least stabilize. This is a
simplified way of explaining why the rates for forex move up and down.
Just as price controls on sugar, say, drive the sale of sugar underground or to the informal sector, so price controls on forex have driven it to the streets – the parallel market and the black market. The regime, in the guise of the Reserve Bank of Zimbabwe (RBZ), has put price controls on forex, saying that 1 US Dollar will only cost Z$9 200, or whatever. People can’t buy enough forex through the official channels to satisfy their needs, so they resort to buying from those who will sell, at whatever price they demand. This is how the parallel and black markets have occurred.
The distinction between the parallel and the black markets is drawn along several related lines: how much is being sold, who is buying and who is selling, and where the transaction is taking place. So the parallel market usually deals in large sums – many millions of dollars; it is often between businessmen and companies and, in the past, had bankers as its middlemen; and it takes place in offices and sometimes homes. Black market transactions happen on the streets, in the flea markets, and in back-rooms; sometimes for small sums of money like 20 US Dollars; and the deals often take place between individuals.
In an effort to curb the trade in forex, the RBZ cracked down at the beginning of 2004, threatening bankers, businessmen and others. Many fled in order to preserve their freedom. This crackdown was totally inequitable as probably 90% (a very conservative estimate) or more of all businesses and businessmen were trading on the parallel market out of necessity; this was the only way to keep their businesses going and their staff employed….read the rest of the article here.
