The Zimbabwe government has issued an order under which all importers operating in the country would have to provide details of the sources of their foreign currency holdings. Failure to show that their holdings are sourced from the banking system will lead to their confiscation by the government.
Announcing the step Deputy Finance Minister Clemence Chiduwa, said,
“In the event that you are not able to declare the official source of foreign currency, you forfeit whatever you have to the state. So this will deal with black market operations.”
Zimbabwe had followed a policy of dollarization for over a decade where the government allowed transactions in the US dollars along with the national currency. It was done to escape the effects of hyperinflation that the country experienced due to an economic crisis. Thus, US dollars began to be widely used by traders and businesses in the country.
It led to shortages in foreign currency holdings as Zimbabwe has also failed to attract foreign investments. It currently owes more than $9 billion to foreign lenders and does not meet the criteria for more funding.
In June this year, the government ended the policy of dollarization and mandated that only the national currency would be allowed in the country. Traders who had for long been trading in dollars had to arrive at a value for converting their dollar holdings into the Zimbabwe dollar. The large conversion ratio of the US dollar to Zimbabwe dollar has raised inflation, which rose to 440% in October.
The large discrepancy between the value of the US dollar and Zimbabwe dollar has led to the emergence of a black market where Zimbabwe dollars are exchanged for US dollars. Thus, no matter how the government prints many Zimbabwe dollars, the proportion of US dollars will not change as the newly printed Zimbabwe dollars will be exchanged in the black market for US dollars.
The only way to stop this cycle is for the Zimbabwe government to launch a crackdown on unaccounted foreign currency holdings.