How Chitty Chitty Bang Bang is slowly losing on his game…


One of the kindergarten songs that keeps playing in Piggy’s mind whenever he looks at the currency situation in Zimbabwe is “Chitty Chitty Bang Bang sitting on a wall”. This is a play school rhythm that speaks of a cheat who tries to “make a dollar out of fifteen cents”. While we cannot label economic agents that take advantage of arbitrage opportunities in Zimbabwe as cheats, the point is that Chitty Chitty  Bang Bang has not only tried but has  been successfully  coming up with the dollar from every fifteen cents that has been presented to him. We are talking about the forex dealers that operate at the Harare International Roadport and around major hotels such as Meikles in the CBD. In fact, foreign currency parallel market trading activities in Zimbabwe also reminds us of the greatest speculative mania of all time; Kuwait’s Souk al-Manakh stock market bubble in the early 1980s.

The Souk Al-Manakh was an over-the-counter (OTC) exchange that emerged parallel to the official stock market. It was an informal exchange where the securities of 45 companies registered in Gulf countries outside Kuwait were traded. The market was established a few months after the official stock exchange was founded in Kuwait in 1977. The Al-Manakh market was housed in an air-conditioned parking garage that had formerly been a camel trading venue, and specialized in highly speculative and unregulated non-Kuwaiti companies. At its peak, its market capitalization was the third highest in the world, behind only the USA and Japan.

The Souk Almanakh Entrance 

Source: piggybankadvisor.com

Bear-ish Trends on FX Parallel Markets

 Source: piggybankadvisor.com

A look at history and the causes of the crisis reveals that in the Arab states those days, only sheiks could grant corporate charters and only corporations could become publicly traded companies. In addition, the royal family of Kuwait did not freely grant corporate charters for companies and there was basically a shortage of stocks to trade. This shortage and the new unparalleled wealth (from oil) that was looking for vehicles of speculation gave rise to an over the counter market where shares in companies domiciled elsewhere in the Gulf (Bahrain and UAE) were traded.  The speculation on the Souk Al-Manakh was excessive as it was largely driven by greed and not fundamentals. The value of certain shares rose by over 300%.   However, rather than paying cash for the shares, many investors used post-dated cheques, hoping that the value of purchased shares would rise before the cheques fell due.  The crash of this unofficial stock market finally came in August 1982, when a dealer presented a post-dated cheque from a young passport office employee for payment and it bounced. Kuwait’s financial sector was shaken by the crash, as was the entire economy.

Now, more like the Kuwait situation, a parallel foreign exchange market had emerged in Zimbabwe largely on the back of FX shortages.  There is and has been a stampede for foreign currency from every corner of the economy given the heavy reliance on imports.   As a result, arbitrage opportunities have been presented to the so-called “money changers” or “forex dealers”. However, the tables have turned given that the Reserve Bank of Zimbabwe (RBZ) has moved away from the artificial 1:1 exchange rate and introduced a “new Zimbabwe dollar” in the form of an RTGS dollar that is floated against the USD and other international currencies.  This means the music has stopped and it has now been formalised that the money in your bank account is not USD – it is RTGS dollars. The ball game has completely shifted and the RTGS dollar is now the new unit of account and exchange. The crux of the matter is that sooner or later, money changing will no longer be a viable business opportunity or full-time job. The RBZ is taking steps to kill or reduce parallel market trading by encouraging foreign exchange transactions to be executed in the formal banking channels. While critics have pointed out that the interbank foreign exchange system will not work because of limited forex flows, they have overlooked an important point; RTGS is becoming scarce! The government has been mopping excess liquidity through taxes (2.0% money transfer tax and fuel). Guess what? You should be thinking of ways of getting access to more RTGS at this point in time. Well, the options are not much but you could also consider growing your RTGS balances by investing in shares. So what are you waiting for now?  Join a piggybankadvisor.com social trading group today, stay updated on developments and start trading shares using the C-Trade platform.

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