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The Return to Gonoeconomics

For any follower of economic events in Zimbabwe, it would appear that the economy is on a “merry-go-round”. Two things have just repeated themselves: (1) a Foreign Exchange Auction System has been re-introduced and (2) trading on the Zimbabwe Stock Exchange (ZSE) has been suspended. This is economic history repeating itself and readers would recall that some of these measures were implemented by former Reserve Bank of Zimbabwe (RBZ) Governor; Gideon Gono. During his term as Governor of the RBZ, he introduced a Foreign Exchange Auction System that failed dismally, suspended the trading of shares on the Zimbabwe Stock Exchange (ZSE) for four months and also notoriously “printed money” to the extent that every person in Zimbabwe became a trillionaire. In fact, there were 100-trillion Zim-dollar denominated bills in circulation whilst electronic balances ran into quadrillions.  While Gideon Gono is now an active farmer in Zimbabwe, we would like to refer to him as The man who broke the Reserve Bank of Zimbabwe’s money printing machines”. What is interesting though is that the “seemingly intelligent” monetary authorities in Zimbabwe have taken a cue from Gideon Gono as they have applied the same template in tackling the country’s currency crisis.

More recently, the Government of Zimbabwe issued a statement indicating that phone-based mobile money transactions and trading on the Zimbabwe Stock Exchange (ZSE) have been suspended to allow investigations into illegal dealings connected with the foreign currency black market. This was however followed by an RBZ statement that indicated that ordinary transactions would not be affected given that the measures were targeted at mobile money agents and merchant transactions that have been used as conduits for illicit financial activities. The rationale is that the black market is being funded and fuelled through the use of the mobile money platforms. According to the statement, vast sums are being transacted on the EcoCash system, with ZWL8 billion held in 501,000 merchant and agent’s accounts.

Piggy has been clear that some of the stringent measures being put in place by monetary authorities are not in any way solving the underlying issue of a lack of confidence in the local currency (ZWL). The introduction of the ZWL was premature given that economic fundamentals in Zimbabwe remain weak. This has also been further exacerbated by high inflation expectations in the broader economy.

Official Inflation Trajectory in Zimbabwe

Source: RBZ

The bottom line is that for money to work it has to be hinged on faith and confidence in the underlying economy. Money is an economic unit that is generally recognised as a medium of exchange for transactional purposes in an economy. For money to be regarded as “money” it should serve the following primary functions: (i) as a medium of exchange, (2) a unit of account (3) a store of value. In this note, we evaluate the ZWL based on the 3 functions of money;

The ZWL as a Medium of Exchange

The ZWL has served as a system used to facilitate the sale, purchase, or trade of goods between parties within the borders of Zimbabwe.  However, a lack of confidence in the ZWL has led to some merchants and traders rejecting the local unit. In most cases, foreign currency (USD or ZAR) is preferred.  Generally, for any system to function as a medium of exchange, it must represent a standard of value and all parties must accept that standard. Another drawback is that the ZWL is not recognised outside the borders of Zimbabwe. In other words, converting to other currencies, particularly outside Zimbabwean borders is impossible. There is therefore a high propensity for the transacting public to hold on to alternative currencies such as the ZAR and USD.

The ZWL as a Unit of Account

The fact that money is used as a medium of exchange means that it is used to assign prices to all kinds of other goods and services and  can be used to keep track of the money gained or lost across multiple transactions. The hyperinflationary environment in Zimbabwe and lack of consensus on relevant exchange rates to apply has created numerous challenges for Accountants in the preparation of financial results. While listed companies in Zimbabwe have been reporting inflation-adjusted financials in ZWL, comparing financial performances across different horizons and industries has proved to be a mammoth task of analysts. It would appear that USD accounting would make sense particularly for the sake of carrying out comparisons.

The ZWL as a Store of Value

The ZWL has proved to be a volatile currency given the ever-changing exchange rates and spiralling inflation.  More recently, the ZWL has depreciated to c$120 against the greenback (USD) on the parallel foreign currency market as demand for the United States dollar intensifies. Piggy notes that the usefulness of any currency as a medium of exchange in transactions is inherently future-oriented. Money should provide a means to store value obtained through current production or trade for use in the future, in the form of other goods and services. This facilitates saving for the future and engaging in transactions over long distances possible. Further, money should also be used to transfer value at different times between people through the tools of credit and debt. The value-destruction associated with hyperinflation makes it difficult for the ZWL to be considered as a store of value. In addition, structuring long-term credit such as mortgage finance is also very difficult.

In conclusion, suspending trading activities on the Zimbabwe Stock Exchange (ZSE) as well as restricting transactional activity on mobile platforms does not solve the fundamental issues that have caused the ZWL to fail. There is need for a “Back to Basics” approach that involves crafting a monetary system that not only works but is hinged on the faith and confidence of all economic actors. Further, the suspension of trading on the ZSE works against any efforts to attract portfolio and foreign direct inflows into Zimbabwe (including the launch of the Victoria Falls Stock Exchange).  All in all, given the fact that risks remain elevated and that the ZWL is unstable, Piggy remains bullish on well-managed exporters and companies with regional exposure such as Simbisa Brands, Ariston, Padenga Holdings, SeedCo International, and SeedCo Zimbabwe Limited.

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