Why This Price & Exchange Rate Madness?
18 June 2023
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By Dr Masimba Mavaza- Consumers have reacted with shock and total disgust to the unreasonable and fictitious unrealistic exchange rates, pushing the prices of basic goods in local currency to blow the roof at a rocket-like speed. The nation is witnessing a free fall in the currency and a steep rise in pricing, which resembles a dog’s breakfast. This is done by some satanic demon-possessed unscrupulous retail players in Zimbabwe.
It must be mentioned that a lower-valued currency makes a country’s imports more expensive and its exports less expensive in foreign markets. A higher exchange rate can be expected to worsen a country’s balance of trade, while a lower exchange rate can be expected to improve it.
When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down. When the value of a currency increases, it is said to have appreciated. On the other hand, when the value of a currency decreases, it is said to have depreciated. Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country’s relative level of economic health. Exchange rates play a vital role in a country’s level of trade, which is critical to almost every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed, and governmentally manipulated economic measures. But exchange rates matter on a smaller scale as well: they impact the real return of an investor’s portfolio. So there is a very well thought campaign by the opposition and the detractors.
What drives exchange rates? Exchange rates are constantly moving based on supply and demand. Whether one currency is in higher demand than another depends on the perceived value of owning it, either to pay for goods and services or as an investment.
Numerous factors determine exchange rates. Remember, exchange rates are relative and are expressed as a comparison of two countries’ currencies. So in our situation, the Government does not control the exchange rate because it is a rate of two currencies used in the same country. That is the US dollar and the Zimbabwean dollar. The Government puts up its interbank rate, but the captains of businesses deliberately refuse to accept it, thereby causing an upsurge above the government rate.
Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, industry Captains and banks exert influence over both inflation and exchange rates and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates.
One does not need much analyzing to understand the direct relationship between the consecutive collapses in the ZW dollar exchange rate on the one hand, and the hardship the vast majority of Zimbabwe is experiencing on the other.
With the increase in the black market exchange rate to over 10,000 bond for a US dollar, the value of the minimum wage dropped to less than $68, one of the world’s lowest in terms of actual value. Before the crisis, the minimum wage of 675,000 ZW dollars was worth some $450, which means that the Zimbabwean currency lost around 185% of its value in two months.
The minimum salary in government jobs declined from $633 before the crisis to $17 today. In other words, in two months, the Zimbabweans lost what it took them 26 years to gain. A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.

In the worst-case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation. The Government of Zimbabwe is rendered incapable of servicing its deficit through domestic means (selling domestic bonds, increasing the money supply); a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country’s debt rating is a crucial determinant of its exchange rate.
Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk.
The exchange rate of the currency in which a portfolio holds the bulk of its investments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. Moreover, the exchange rate influences other income factors such as interest rates, inflation, and even capital gains from domestic securities. While exchange rates are determined by numerous complex factors that often leave even the most experienced economists flummoxed, investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments.
There’s method to the madness which has been embraced by business people. Which is to embrace the (apparent) chaos! Hoping that It can make them rich in the long term.Trying to explain moves in the stock market can be a thankless task.
The regular booms, busts, and moments of madness we see in Zimbabwean markets are not what most people would imagine an efficient mechanism for determining the value of companies should look like – no more than a dozen drunks going at it on the dodgems recall the Highway Code.
The exchange rate is often said to be the most important price in any economy, for it affects all other prices.
For developing countries, exchange rate policy is both crucially important and daunting. It is crucially important because it affects how the national economy interacts with the rest of the world economy. It is daunting because currency policy involves a series of difficult trade-offs, which force governments to make difficult choices. This can be seen by examining the two principal goals of exchange rate policy.
Regulating the Relationship Between Foreign and Domestic Prices
A country’s exchange rate determines how international prices are translated into local and domestic prices and vice versa. A firm or appreciated currency has a high value relative to foreign currencies. A weak currency makes domestic manufacturers and farmers more competitive in both foreign and domestic markets. But it makes domestic consumers poorer, less able to buy goods. There is no way for a government to avoid this problematic choice:
It is commonplace in macroeconomics that the exchange rate is the most important price in any economy, affecting all other prices. In most countries, policy toward national currency is prominent and controversial. Exchange rates are so central to the world economy that the prevailing exchange rate system often knows economic epochs
The analysis of the political economy of currency policy has focused on two sets of questions. The first is global and has to do with the character of the international monetary system. The second is national and has to do with the policy of particular governments towards their exchange rates. These two interact. National policies, especially of large countries, have an impact on the international monetary system. By the same token, the global monetary regime influences national policy choices. The ‘cost of living crisis’ refers to the fall in ‘real’ disposable incomes (that is, adjusted for inflation and after taxes and benefits)
It is laughable for anyone to say inflation can only be controlled by the Government.
The Government has responded to the crisis with several packages of support.
Inflation is calculated as the average change in the price of typical goods and services purchased by households over 12 months. Exchange rate fluctuations send the wrong message to economic agents, affect the credibility of the Government and result in loss of welfare for the whole society. Therefore, the optimal economic and political scenario revolves around stable equilibrium exchange rates.
It is correct that Zimbabwe is battling its worst economy in four years. The national currency is in freefall, while poverty and unemployment are on the rise.
Consequently, the country has joined the world’s lowest ranks in terms of minimum wage, along with such countries as Afghanistan, Sri Lanka, Angola and Sudan. Zimbabwe’s dependence on imported consumer goods only aggravates the per capita fall in income in comparison to countries that have witnessed a similar crisis in recent years. Due to the decrease in the local production of goods and the dependence on imports, a decrease in the Zin dollar exchange rate will have an immediate effect on market prices and negatively affect people’s purchasing power.
It has become obvious, however, that the Zim dollar cannot continue to subsidize such imports, as its foreign currency reserves are rapidly depleting.

A removal of subsidies essentially means that importers will have to go to the black market for their dollars to be able to import these products, which consequently will greatly increase in price.
The brutal rise in international oil prices (some 70% over the past year) will only severe the crisis’ intensity. A big rise in prices is expected for local derivatives. Based on the price of imported fuel today and the current exchange rate on the black market, the price of a can of gasoline could reach up to 100,000 Zim bond.
OK Zimbabwe retail outlets were using the official rate of 1:1 404.
“We are governed by the Government position, meaning we are using the official bank rate, which also allows us to add the legal 10 percent rate difference,” said a manager at one of the retail giant’s shops in the city.TM Pick n Pay.
Residents have since appealed to the Government to act and bring the situation under control noting that some retailers were clearly on an extortionist overdrive to frustrate efforts to stabilise the economy. Some are on an agenda of regime change.
The situation is now out of control, these shops are clearly fleecing citizens. Something must be done urgently to stop this tide. Government should move in quickly and stop the price hike madness. The law must take its course.
“This is madness at its worst, are we a lawless country? Government must stop this madness,I think it’s now time that we have a one currency system like other countries because as long as we have more than one currency, this madness will always be with us. Government announced that it will be conducting evidence-based research within seven days with the ultimate goal of ensuring that consumers continue to access basic commodities at affordable prices.
The research was carried out by the Ministry of Industry and Commerce in collaboration with the National Competitiveness Commission, Competition and Tariff Commission and the Consumer Protection Commission and other relevant stakeholders.
The Minister of Information, Publicity and Broadcasting Services, Senator Monica Mutsvangwa while presenting her post-Cabinet meeting report said Government noted that consumers are being forced to buy goods that they don’t need in formal retail outlets when they pay using USD so that they may offset the change balance.
This is because the retail outlets, are refusing to mix USD and Z$ transactions.
From the survey undertaken, most basic commodities are generally available both in formal and informal retail shops, although there are artificial shortages observed of some locally produced goods, especially in formal retail shops, prices in the formal retail sector are relatively high in both USD and ZWL terms when compared to the informal retail sector and are thus indicative of speculative and forward pricing.
President Mnangagwa expressed his disappointment at the abuse of the Government’s benevolence to go against internationally set standards of making it mandatory for businesses to remit their foreign currency earnings to the Central Bank.
“Let me remind our business of a few facts, some echoed in all jurisdictions globally. At law and by worldwide practice, all foreign currency earnings should be surrendered to Government through the Central Bank as obtained worldwide,”
President Mnangagwa said worldwide businesses access foreign currency for their needs from Central Bank through cumbersome processes and on the basis of market conditions.
“Here we have waived that position at law and in general practice worldwide, hoping to prop our business sector and for ease of doing business. This act of magnanimity now looks undeserved,” the president said.
Zimbabwe is a multi-currency economy after a deliberate Government decision but the position is now being contradicted by business.
“Any business practice, which suppresses the use of any one currency recognised by our laws is illegal and do undermine this unique and most favourable position, which is found nowhere else in the world. The offence gets worse when these illegal practices seek to outlaw the use of the local currency unit, itself our national currency and currency of wage earnings.
To those who do not see where this madness is coming from. By having multi-currency, the Captains of the industry have the capacity to control foreign currency and thus cause shortages and speculations. It is not far-fetched to say the problems we have now are being caused by the business environment. Businesses are taking advantage of this opportunity to create jobs and companies and use it for their benefit against the nation.
They are biting the very hand which feeds them.