Arbitrage practises emerge in Zimbabwe (Part1)

Arbitrage practises emerge in Zimbabwe (Part1)
Reserve Bank of Zimbabwe John Mangudya

Reserve Bank of Zimbabwe governor John Mangudya

By Carter Mavhiza

TOWARDS the end of 2016 the Reserve Bank of Zimbabwe under the oversight of governor John Mangudya adopted a raft of measures to tackle the liquidity problems that were bedevilling the banking sector.
The measures include limiting cash withdrawals, forcing the immediate conversion of United States dollar deposit balances into rand and euro for exporters, restricting international settlements to the currency of the destination country, limiting the amount of cash passing through the country’s exit ports and imposing a priority list on foreign currency uses by vetting at the central bank among others.
New arbitrage tendencies in the economy have emerged and informal currency dealers are stopping at nothing in their rent-seeking endeavours. Arbitrage in this case is exploiting market imperfection in order to make a gain.
The City of Harare has been besieged by two forms of arbitrage that are now rampant as a result of the shortage of the United States dollar notes and the introduction of the $2 and $5 bond notes.
The central bank in its bid to curb smuggling of the United States dollar notes, particularly the bigger denominations of the country resorted to importing smaller denominations of US$5, US$10 and US$20 notes.
These now form the bulk of the now scarce United States currency circulating in the once sunshine streets of the capital city of Zimbabwe.
A surging demand for US$100 and US$50 notes has emerged mainly from the cross border traders plying their trade in South Africa and the Asian markets such as Hong Kong and Dubai coupled with other forms of demand by other travellers.
A premium as high as US$1 to US$1,25 for every US$100 note is being charged in the streets of Harare and mainly at the Roadport Terminal where cross border coaches to Johannesburg and Lusaka pick and drop their passengers. Simba Wezhira (not his real name) a seasoned money changer from the 2008-2009 Zimbabwe Dollar era said: “Opportunities in this Zimbabwean economy will always abound. We are guaranteed of a good festive season this year.”
For every US$1 000 in smaller denominations of US$5, US$10 and US$20 notes a prospective traveller brings to Roadport, a minimum US$100 is paid to get hold of the bigger denominations of the US dollar notes.
At this rate of arbitrage premium, all individuals and corporates who are dealing in cash on a daily basis are heavily tempted not to bank their daily takings but divert them onto the black market where overnight rich pickings can be reaped against a background of little to insignificant bank interests to account holders and stringent withdrawal limits that were set by the central bank and tightened by the imprudent banking sector players.
In a month, if the black market currency trader deals with US$10 000, they are bent to earn income equal to or above US$1 000, which is way above 70 percent of the civil servants monthly salary.
The currency racket now stretches from the cash retail outlets, fuel service stations, mobile money transfer agencies and bank tellers who oil the Roadport traders with the bigger notes (US$100 and US$50).
With the US dollar notes being held by the banks dwindling with each banking day, the arbitrage machine on the black market in the streets of Harare is being oiled and its participants growing at an increasing rate.
Weng Ta Hui, a Chinese trader who deals in clothing apparel, importing his products from Hong Kong, bemoaned the new currency arbitrage regime has now increased his cost of doing business.
He says: “There is no option to evade the black market for the bigger notes. It is the only route to access the notes and we are left with no option but to pass the cost to the consumers.”
This means that the prices of most commodities will continue to surge upwards depending on the prevailing premiums on the black market for the bigger notes.
The monetary authorities are either caught napping at this recent development or they are busy mopping these bigger notes using the $2 and $5 bond notes that are printed at a location that only the monetary authorities know.
No wonder the question “Who monitors the monitor?” continues to be a pertinent topic in banking lectures and among researchers.
This currency arbitrage tendency that is spreading quickly from the Roadport terminal to other corners of the country is only a tip of the iceberg; there are other arbitrage activities that are now characterising the informal trading markets in the economy of Zimbabwe.
With unemployment among graduates always hovering above 75 percent, the end of these rent seeking tendencies emerging in the nation of Zimbabwe sees no end in sight.
Carter Mavhiza writes in his personal capacity and is reachable on vhizworks@gmail.com

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  • FB2017

    For me these may not be arbitrage opportunities, per se, because I do not see the correction; it is effectively the emergence of two currencies, the bond (B$)and the US$ & what you are calling arbitrage profit is just a spread in the bid and ask price of those two currencies. So an equilibrium will emerge where every dealer sells the $100 note for the same price. In contrast arbitrage would be where a dealer can buy $100 for B$101 and subsequently sell it for B$102 up until the market auto-corrects as more people take the arbitrage opportunity leading to an equilibrium price.

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