Dual Pricing in Zimbabwe
Dual Pricing in Zimbabwe is when goods and services are charged in both the local currency and the United States dollar. Government authorised dual pricing on 24 July 2020 through Statutory Instrument (SI) 185 of 2020.[1]
Background
Government authorised the pricing of goods and services in both the local currency and the United States dollar on 27 July 2020, barely a year after ditching the multi-currency regime. In June 2019, authorities made a surprise return to the inflation prone Zimdollar after a 10-year dalliance with the multicurrency system.
In July 2020 the Reserve Bank of Zimbabwe (RBZ) said pursuant to its statement of June 17, 2020 directing providers of goods and services to display, quote or offer prices for such goods and services in Zimbabwe dollar and foreign currency at the ruling market exchange rate as determined by the Foreign Exchange Auction System, a significant number of business entities had taken heed.
Calls by the Confederation of Zimbabwe Retailers
Retailers and wholesalers must support the Reserve Bank of Zimbabwe (RBZ)’s Foreign Exchange Auction System]] through compliance and responsible pricing, says the Confederation of Zimbabwe Retailers (CZR).
This followed observations of pricing distortions by retailers and wholesalers, some of whom continue setting prices using exchange rates above the prevailing auction rate. The newly-introduced foreign currency exchange rate system requires that prices be given in both local and foreign currency with boards showing the exchange rate used displayed in each store for the benefit of customers.[2]
RBZ not happy with pricing
On 21 December 2020, the Reserve Bank of Zimbabwe (RBZ) said it would request the Financial Intelligence Unit (FIU) to close bank accounts of business entities that are pricing using exchange rates not linked to the ruling auction rate. The central bank said it was aware of errant businesses in the habit of using exchange rates far removed from the ruling exchange rate despite obtaining US dollars from the auction system. This comes amid fears that the delinquency by some businesses will lead to a raft of price increases that could send inflation, which appear to have stabilised, on a rampage once again.
Since the introduction of the auction on June 23, 2020, approved businesses have been buying foreign currency on the RBZ auction at the ruling weekly rate, now perched circa US$1/$81,70. But upon receiving the money, several unscrupulous business entities charge prices using rates that reflect margins between $15 and $30 over the prevailing official market exchange rate.
“Businesses want to sell at $91, $95, but every day they come to the auction (for USD at $81,3) and when you go and buy in their shops they charge $95, $110, they think only of making money.
“The $14 or $15 is exchange gains; this is arbitrage, we see it happening but we cannot police everyone, we need self-policing, this is lack of compliance, the FIU will come and close your accounts,” he said.
Dr John Mangudya said the best way to rein in the errant businesses involved in the mentioned arbitrage activities using funds obtained from the auction market was to freeze their accounts.[3]
Ruling weekly rate and Pricing
Pricing products or services in international marketing is not an easy decision. Price is, in part, a function of cost, and the foreign exchange rate is an important determinant of a company's cost of production. The cost of capital has to be included in the price as well as the possible effect of changes in exchange rates if the capital is raised internationally.
When conducting business across international boundaries, and dealing with foreign exchange, the risks rise enormously, especially the impact on financial resources and decisions, and particularly on pricing strategy. Foreign exchange is the way business can be conducted across national boundaries. Customers buy value, reflected in the price and intangible attributes of the product. Price is a function of cost in part, and foreign exchange affects the cost position. Foreign exchange rates, therefore, directly impact on the production quality and effectiveness of a company's marketing effort.[4]
The Reserve Bank of Zimbabwe governor is on the wrong saying that businesses should charge their prices in line with the prevailing auction rate. Businesses incur other overheads outside the cost of buying forex from the foreign auction system. The cost of buying forex on the auction system plus other overheads give total cost, then add mark up to that. The other thing that the central bank is forgetting is the fact that some businesses buy at the highest bid rate and some at the lowest bid rate hence these cannot be expected to charge using the same rate which is the prevailing average rate.
