daniel chigunwe
Martin Kadzere
Zimbabwe’s manufacturing firms are facing increasing pressure from unscrupulous grocery dealers who are reportedly taking advantage of the exchange rate disparity by buying products from formal retailers at the official exchange rate and reselling at even lower prices in United States dollars, Business Weekly can report
The situation is further exacerbated by a growing trend of dealers allegedly purchasing goods from manufacturers under the guise of exporting them to evade Value Added Tax (VAT). However, the goods often end up being offloaded onto the local market also at prices below wholesale, undermining demand.
The practices are eroding the market share of manufacturers, retailers and wholesalers now struggling to compete with artificially low prices.
VAT evasion
This publication has also been reliably informed that some dealers, claiming to be exporters, are reportedly offloading products onto the local market at prices lower than wholesale. This practice has been confirmed by various producers who have implemented measures to curb it. One such measure involves “inflating” the price, factoring in the VAT component.
Dealers can then claim a refund by providing documentation that proves the goods were indeed exported. Some exports are VAT-exempt, meaning the prices of goods purportedly intended for the export market could be 15 percent lower when sold domestically.
“Without proper oversight, exporters can take advantage of this policy to undercut local businesses,” Harare based economist Carlos Tadya, said in an interview. “The Government needs to strengthen its regulatory framework to ensure that goods exported under the VAT exemption are genuinely destined for foreign markets.”
In recent times, there have been numerous instances where locally produced goods are being sold at prices lower than wholesale. This has led some manufacturing companies to limit supplies to formal retailers, resulting in grocery chains either rationing goods targeted by the dealers or facing complete stockouts.
The gap between the official and black-market exchange rates has widened recently, with the official rate trading at about ZiG27 per US dollar, compared to the black-market rate of between ZiG40 and ZiG$45.
This makes products being retailed at the official exchange rate 60 percent cheaper compared to the informal shops.
To put it in context, if US$1 is exchanged at the black-market rate, one would get as much as ZiG$45, which can buy goods equivalent to US$1,60 in a formal retail shop.
The disparity gives dealers the latitude to price their products even at lower prices than the wholesale prices. Some of the products that have been targeted by the dealers include cooking oil, alcoholic and non-alcoholic beverages, milk and cereals.
Schweppes Zimbabwe managing director, Charles Msipa, said the widening gap between the official and parallel exchange rates was causing a major economic challenge for local producers.
It had created a distorted market environment where arbitrage opportunities incentivises the diversion of goods away from formal channels.
“The significant disparity between the official and parallel exchange rates is severely undermining our business operations,” Msipa said.
“Dealers are exploiting this discrepancy by purchasing goods at lower prices from supermarkets and then reselling them on the informal market at prices that undercut our own. This not only erodes our market share but also hinders our ability to maintain stable pricing and supply chains.”
Product arbitrage
Confederation of Zimbabwe Industries chief executive, Sekai Kuvarika, said the significant gap between the exchange rates had become a mechanism for currency trading using fast-moving consumer goods (FMCGs).
The practice, often referred to as “product arbitrage,” involves purchasing goods at the official exchange rate and then reselling them on the parallel market, often denominated in US dollars. By doing so, dealers are effectively converting local currency into US dollars, taking advantage of the exchange rate differential.
Essentially, the products are used as a vehicle to transfer value from the local currency to US dollar, stable currency.
Kuvarika said the artificial suppression of the exchange rate was leading to severe economic distortions.
“The exchange rate is unsustainable and the widening gap between the official and black-market rates is negatively impacting every manufacturer,” Kuvarika said, adding that it’s concerning that arbitrage has become normalised business practice and the situation could degenerate into a serious socio-economic crisis.
Renowned economist, Eddie Cross, described the situation as “devastating,” saying unless the exchange rate on the interbank market is market-determined, the problem of arbitrage opportunities would persist.
The disparity, he argued, was creating a fertile ground for those seeking to profit from the difference in exchange rates.
“It’s a major problem,” Cross said in an interview. “Dealers are making significant profits from the exchange rate disparity. To address this issue, it’s crucial to ensure that the exchange rate on the interbank market accurately reflects market conditions.
Until this happens, we will continue to face these problems, which will continue to harm formal businesses,” added Cross, a former member of the Monetary Policy Committee.”
Research and Investment analyst at a leading financial institution FBC Bank, Enoch Rukarwa, proposes freeing the exchange rate as the best solution to address economic challenges.
However, he acknowledges this could hinder Government operations, given its significant role in the economy. As a compromise, Rukarwa suggests the Government may consider reducing its market operations and then relaxing the exchange rate.
“The best way to arrest such challenges is to free float the exchange rate,” said Rukarwa. It’s unfortunate that Government is one of the biggest players in the economy and a perfectly competitive exchange rate will stifle its operations as it threatens capacity and viability in public goods provision.
However the situation now demands desperate measures for sustainability, the Government may consider reducing its market operations by half through privatisation of certain functions followed by exchange rate relaxation.
He notes informalisation is a reality in the Zimbabwean economy, urging formal retailers to restructure their business models through backward and forward integration to capture the informal value chains.
This includes diversifying into wholesaling thereby supplying the informal sector and creating similar structures like tuck-shops that can compete at a level playing field with these businesses,” adds Rukarwa.
Bongani Ndlovu