Tue, 30 Jan 2018 09:49:21 +0000
By EDWARD MWANGO
A Zambian Cross-border trader recently narrated how his colleagues in South Africa shudder at the mere mention of Katondo Street in Lusaka.
‘My friends in Johannesburg despise Katondo street and swear that they would never do any business or transact with Zambians on this street simply because most of them were previously swindled or cheated after being enticed and offered an exchange dollar rate on the black market,’ laments the cross-border trader who preferred not to be identified.
To a new comer, Katondo Street, located in the centre of the central business district of Lusaka, would be perceived as just like any other normal street.
The street, which branches off Cairo road from the east and joining Cha Cha Cha road to the west, is home to a hoard of bustle mostly crowded with a mixture of Zambian and foreign nationals who have engaged in currency exchange dealings as well as money lending, accessories, second hand vehicles and phones, brand new mobile phones and computers among other merchandises.
It is here where black market currency dealing is first priority as dealers ply their trade, often times attracting the attention of eager clients who have no time to change their foreign currency in many of the Bureau de Change in the city.
It is on this street that many Zambians and foreigners have cried foul after being cheated out of several millions of Kwacha in an exchange in which fake foreign currency are swapped with genuine ones.
After the wind of change in the 1990s which saw the introduction of multi-party politics, it was believed that Katondo Street was a haven for political party cadres whom people thought had the protection from people ‘above’.
It had been widely speculated that there was political influence in Katondo Street with some influential figures employing cadres as their conduits for currency transactions.
However despite this notion, Zambia police have in the past been working tirelessly to rid the notorious street of the black market currency dealers.
In 2005 police rounded up around 150 suspected illegal currency dealers, in an operation aimed at wiping out the black market trade.
Police sealed off a main road in the capital’s city centre where illegal currency dealers were mostly found and arrested the suspects.
The dealers were said to be offering better rates than commercial banks during that time, which gave around 4,700 kwacha (now K470) to the dollar, while black market prices reached 5,000 (now K500) kwacha and above.
The government had introduced new security rules requiring anybody changing money at a bank to produce an identity document and declare the source of the foreign currency — something not required by the illegal traders.
The ugly scene of illegal currency trading also extended to the country’s border posts with various stakeholders calling on relevant authorities to introduce stiff punishment to curb illegal currency trading in Zambia.
This prompted Home Affairs Minister, Stephen Kampyongo in 2016, to direct security personnel at all border entry points to closely monitor the conduct of illegal money changers.
‘We have received complaints that illegal money dealers at border points were harassing tourists visiting Zambia by forcing the visitors to transact,’ complained Mr. Kampyongo.
This problem became more pronounced in 2016 after illegal currency dealers took advantage of increased trading activities at Kasumbalesa border between Zambia and DRC where traders were dealing in the US Dollar.
The business activities attracted some illegitimate undertakings that included a black market for foreign exchange dealers.
All this illegality was being conducted despite the presence of registered financial institutions at the border post.
Since then government has increased manpower at all borders to get rid of illegal activities with all law enforcement agencies on high alert for those who want to break the law with impunity.
According to an Investopedia report, the black market in currencies refers to the illegal or parallel market in foreign exchange in various countries around the world.
The currency black market forms part of the underground economy by virtue of operating outside legal banking channels.
In a currency black market, cash transactions are almost always the norm, since participants would be obviously reluctant to leave any trace of their involvement in such transactions.
The report states that the black market has its consequences: – The unemployment data may be distorted more specifically, the recorded data is likely to overestimate the true unemployment rate.
The reason being that some of the persons who are supposed to be unemployed, as recorded in the economic statistics, could actually be gainfully employed in the underground sector.
The country’s resources spent to provide more jobs to the people could in fact be more productively utilised elsewhere.
The other problem relates to the collection of government tax revenue.
The tax authority may fail to detect the income earned in the black market.
This adversely affects the government’s ability to collect tax revenue to finance its expenditure programs.
The official tax rates may have to increase as a result to compensate for the losses.
Those who are currently taxed may perceive this to be unfair and find ways to evade taxes in subsequent fiscal years.
There is an incentive for them to avoid contributing further to the government’s pocket.
The report further states that the level of tolerance of the black market differs between one country and another.
The black market could provide employment opportunities to the people and thus income to spend. The black market in other words may be essential in some countries to alleviate poverty and financial difficulties.
Those who are able to get jobs in the underground economy do not wish to change the status quo if there are no alternative employment opportunities available for them.
Why Do Currency Black Markets Exist?
Currency black markets typically spring up in countries that have the following characteristics in common:
Weak economic fundamentals, such as a high rate of inflation and limited foreign currency reserves.
Strict currency controls that limit the amount of foreign currency available to residents.
A fixed exchange rate regime where the domestic currency is pegged at an unrealistically high exchange rate to the U.S. dollar or another global currencies.
A lack of confidence among the citizenry in the value of the domestic currency.
As a result, substantial demand for foreign currencies is created in a nation with these attributes, as its citizens seek to hedge the value of their cash holdings.
Where Is It Becoming Prevalent?
Black market currency trading is prevalent in a significant number of countries worldwide. However, some of the larger economies where it is currently proliferating include Egypt, Iran, Argentina and Venezuela, as summarized below.
The currency black market in Egypt has been flourishing since former President Hosni Mubarak was toppled in February 2011. The Egyptian pound lost 13.4% of its value against the U.S. dollar in the subsequent two years, as foreign currency inflows from tourists and investors dried up because of political instability and violent protests. By January 2013, the nation’s foreign exchange reserves had fallen to $13.6 billion, from $36 billion two years earlier. While the Egyptian pound was officially quoted at 6.7 to the USD in February, it was at about 6.9 in the black market, having recovered from a low of 7.5 in late January when street protests sent the currency plunging.
The Middle Eastern nation’s currency, the Iranian rial, has been in free fall since new economic sanctions were imposed on it by the United States and European Union in July 2010. These sanctions have cut Iran’s oil exports by half, severely curtailing foreign currency inflows, thereby devaluing the rial and pushing up inflation. While the official exchange rate is 12,260 rials to the U.S. dollar, the black market value of the rial plunged 60% to 39,000 in a single week between Sept. 24 and Oct. 2, 2012, after the Iranian government said that the official rate would only be available to importers of essential items such as food and medicine. The unofficial rate subsequently improved to 31,000 as the Iranian government cracked down on the currency black market.
The currency black market in Argentina has been operating for more than a decade, ever since the nation defaulted on its external debt in 2002. While Argentina has currency controls in place to conserve precious foreign exchange reserves and prevent capital flight, these restrictions have only served to stimulate black market currency trading in a nation where inflation is approaching 25%. In the black market, 6.7 Argentine pesos are required to purchase a U.S. dollar, a premium of about 35% to the official rate of 5 pesos per USD.
In this South American nation, dwindling foreign exchange reserves and an annual inflation rate of 28% have led to unprecedented demand for U.S. dollars. The Venezuelan bolivar has resultantly fallen to a value of 9.25 versus the USD in the black market, less than half the official rate of 4.3 bolivars per USD.
Since black market could be described as an underground illegality or clandestine transaction that has some aspect of illegality or is characterized by some form of noncompliant behaviour, why then has it been allowed to flourish with impunity in Zambia?
Lusaka Province Police Commanding Officer, Nelson Phiri admits in an interview with the Daily Nation that the trade in foreign currency in Katondo Street is illegal.
‘That is purely black market which is illegal in Zambia. We shall inform you as soon as we are ready to conduct an operation,’ said the Lusaka Province Police Chief without elaborating further.
But how this illegality has managed to continue going unabated remains unanswered.