INSIGHT | How Zimbabwe’s big businesses are losing the fight for dollars

Market stalls dominate Zimbabwe’s retail space (Photographer: Cynthia R Matonhodze/Bloomberg)
Market stalls dominate Zimbabwe’s retail space (Photographer: Cynthia R Matonhodze/Bloomberg)

By Ray Ndlovu

From the tiny space he rents in the central business district of Bulawayo, Zimbabwe’s second-largest city, Brian Tinotenda can look across the street and see the supermarket where he used to work.

Along with nearly two dozen other informal traders, Tinotenda pays roughly US$200 a month for the small space from which he sells toiletries and foodstuff such as rice, cooking oil and cornmeal – the same products he sold at Spar before starting his own business in 2021. While there are many differences between his new job and his last, one of the big ones is that now all of his wares are priced in US dollars. 

The government is hoping to change that. Earlier this month, it introduced a new currency, the ZiG, short for Zimbabwe Gold. The ZiG is backed by 2.5 tons of gold and about US$100 million in foreign currency reserves held by the central bank, and a single ZiG is worth about 7 US cents, the price of a milligram of gold.

The move is an effort to stabilise the volatile exchange rate that has roiled the country’s retail sector and given an upper hand to informal traders like Tinotenda. For more than a decade, Zimbabwe has been struggling with a currency crisis sparked by the government’s decision to keep printing money. That has fueled hyperinflation, which in 2008 reached the official rate of 500 billion percent. To get things under control, the country adopted greenbacks for more than a decade, before switching back to Zimbabwean dollars in 2019.

The trouble is that, while businesses have been forced to use Zimbabwean dollars at an official exchange rate set by the central bank – which is widely seen as overvalued – traders have stuck with the more stable American dollar. This has meant that retailers have been obliged to sell items at prices that are often significantly more expensive in US dollar terms than those same items for sale on the street.

The policy has been a boon to informal traders, as 80% of all commerce is conducted in US dollars. It’s also been a serious liability for major retailers such as Pick n Pay Stores and rival OK Zimbabwe, which has operated in the country for 82 years. With inflation soaring — it hit 55% in March — and the local currency prone to wild swings, exchange-rate losses have eroded the value of earnings.

The exchange rate restrictions created a “huge disadvantage” for “compliant businesses who grapple with taxes, licensing, labour costs and rentals,” said Denford Mutashu, president of the Confederation for Zimbabwe Retailers. The IMF has cautioned that they “promote informality, which erodes the tax base and undermines longer-term growth.”

Retailers have been even more blunt. OK Zimbabwe, which makes only 20% of its revenue in US dollars, said the policy puts businesses at risk of “forced death.”

Businesses have been forced to use Zimbabwean dollars at an overvalued official exchange rate (Photographer: Cynthia R Matonhodze/Bloomberg)
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The ZiG is an “effectively revalued” Zimbabwe dollar, said Tony Hawkins, a Harare-based economist and a former economics professor at the University of Zimbabwe. To support the new currency and spur growth curtailed by high borrowing costs, the central bank reset interest rates from 130%, a world record, to 20%. And so far, the ZiG is off to a promising start — after more than a week of trading it has gained 1.5% against the US dollar.

That’s a significant change from the Zimbabwean dollar it’s replacing. When the dollar was handed its death sentence on April 5, it was one the world’s worst performing currencies, trailing behind only the Lebanese pound. It lost value every single trading day of this year.

Another factor that authorities hope will help the ZiG succeed is that businesses will no longer be forced to stick to a fixed exchange rate. Assuming the currency stays stable, said John Mushayavanhu, Governor of the Reserve Bank of Zimbabwe, retailers now run the risk of driving themselves “out of the market” if they raise prices too much.

While businesses rush to adapt to the ZiG, one of the biggest concerns is whether it will create a parallel currency market — which could threaten its exchange rate stability. If the ZiG’s value were to rise or fall in the informal sector, for instance, that could have an effect on the the prices of goods and services, which could then be reflected in the official exchange rate. According to brokerage firm IHS Securities, it’s just a matter of time before this takes place. It’s likely that “some form of parallel market will emerge as a significant portion of the population remains unbanked,” it said in an April 8 note to clients. “It is yet to be seen what level the parallel rate will settle at.”

A street market price of 16 ZiG per dollar was being quoted Tuesday by ZimPriceCheck.Com, a website that tracks official and parallel exchange rates.

(pic: Cynthia R Matonhodze/Bloomberg)

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The majority of Zimbabwe’s 6.3 million working people are informally employed, according to the country’s national statistics agency. Wholesale and retail trading of goods such as soft drinks, perfumes and even diapers is common, and many traders work out of “tuck-shops” — tiny spaces in densely packed buildings. Those who want to avoid overhead costs might sell from the trunk of a car or by the side of the road. 

The Reserve Bank of Zimbabwe estimates that the informal sector generates US$14 billion in annual revenue. The World Bank has called Zimbabwe’s black economy — which operates on a strictly cash basis — the world’s second-largest after Bolivia. Impromptu markets and tuck shops are so popular that some major retailers have linked them to a decline in foot traffic. 

In downtown Bulawayo’s central business district, informal traders sit along a row of sky-blue make-shift tents hawking bales of second-hand clothes and electronics. Known as “mabhero,” the bales come from neighbouring countries such as Mozambique and Zambia, where traders buy goods in US dollars to bring back to Zimbabwe. Clothes are laid out in piles on the ground for pedestrians to stop and pick through.

These mabhero sellers are eating into the margins of larger clothing competitors such as Edgars and Truworths. Sales have declined due to “cheap and fake imports selling at below local and international manufacturing costs,” said Truworths in a March financial results release, adding that it “cannot viably compete.”

Such cross-border imports aren’t limited to clothes: On social media, some sellers even offer contraband Starlink terminals. These Space X-made kits, which aren’t yet legal in Zimbabwe, sell for between $1,000 and $1,250 US.

As retailers continue to lose ground to informal sellers, many are hoping the ZiG will offer relief. Because it isn’t pegged to a fixed exchange rate, Maxen Karombo, chief executive officer of OK Zimbabwe, said he’s optimistic about it. “This should bode well for all in retail,” Karombo wrote in response to questions, “as we now compete on the basis of value.”

Mike Kamungeremu, president of the Zimbabwe National Chamber of Commerce, said the plan is to “give ZiG a chance” and to review the new currency’s effectiveness and impact by June.

Still, as Imara Asset Management, the country’s biggest independent brokerage, observed in a recent quarterly note, breaking up with the US dollar will be a challenge. As the informal market has grown, some big manufacturers now prefer to operate in it. 

Among the businesses that straddle both sectors are Zimbabwe’s two largest bread manufacturers, who supply tuck shops and roadside traders with bread every morning. The wholesale price for a loaf of bread is 80 US cents, Tinotenda explained, and most informal traders price them at US$1.

“But walk into the supermarket, there they sell the same bread for $1.20,” he said. “No one buys it.”

Bloomberg