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Mission Impossible

Piggy has been consistent on the view that the introduction of a new Zimbabwean dollar (ZWL) at a time when the economy is contracting was not just a bad idea – it was nuts! There is clear evidence on the ground that the ZWL has failed as traders and merchants continue to charge in United States Dollars (USD) despite the effect of Statutory Instrument 142. This trend is not only evident in urban areas but has become the norm in rural parts of Zimbabwe. Shops owners and individuals prefer trading in the South African Rand (ZAR) or the United States dollar (USD). While government remains adamant on the use of the local currency, confidence in the ZWL is low and economic agents are largely concerned about the need to preserve value.

Piggy believes that the Government of Zimbabwe should undo Statutory Instrument 142. This policy has not helped businesses in any way as it does not solve the fundamental problem which is the lack of forex. The timing of a return of an unbacked Zim-dollar was premature given the lack of confidence in the monetary system.  A more practical way to boost confidence in the Zim-dollar, while the new administration works on economic reforms would be joining the Rand Monetary Union (RMU). Namibia, Swaziland and Lesotho all use the South African rand alongside their own currencies. This model has worked and has restored confidence in currencies such as the Namibian Dollar (NAD). However, joining the RMU will mean that the RBZ would have to give up its power to govern monetary policy to the union. This phenomenon is best explained by the Mundell-Fleming Trilemma Model or Impossible Trinity.

Mundell-Fleming Trilemma Model

The Impossible Trinity  is a concept in economics which states that it is impossible to have all three of the following at the same time; (i) a fixed foreign exchange rate, (ii) free capital movement (absence of capital controls) and (iii) an independent monetary policy. Unlike a dilemma, which has two solutions, a trilemma offers three equal solutions to a complex problem. According to the Impossible Trinity, a Central Bank can only pursue two of the above-mentioned three policies simultaneously.

Option (A): A stable exchange rate and free capital flows (but not an independent monetary policy because setting a domestic interest rate that is different from the world interest rate would undermine a stable exchange rate due to appreciation or depreciation pressure on the domestic currency);

Option (B): An independent monetary policy and free capital flows (but not a stable exchange rate). The country can choose to have a free flow of capital among all foreign nations and also have an autonomous monetary policy. Fixed exchange rates among all nations and the free flow of capital are mutually exclusive. As a result, only one can be chosen at a time. So, if there is a free flow of capital among all nations, there cannot be fixed exchange rates; and

Option (C): A stable exchange rate and independent monetary policy (but no free capital flows, which would require the use of capital controls). If a country chooses fixed exchange rates and independent monetary policy, it cannot have a free flow of capital. Again, in this instance, fixed exchange rates and the free flow of capital are mutually exclusive.

Generally, most countries prefer Option B of the triangle as they can enjoy the freedom of independent monetary policy and allow the policy to help guide the flow of capital management.  In the case of Zimbabwe, joining the RMU implies choosing Option A. This means that the ZWL will be pegged against the ZAR while it will also allow free capital flows. However, the RBZ will have to give up monetary policy control.

In conclusion, policy making will be critical in terms of turning around the economic fortunes of Zimbabwe in 2020 and beyond. Given the elevated risks and the foreign currency constraints in the broader economy, Piggy’s call in 2020 on the stock market is that investors should stick to export-oriented companies and those with regional exposure. Piggy likes Ariston, Simbisa Brands, SeedCo, SeedCo International and Padenga Holdings.

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