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Money Problems – PiggyBank

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Most readers might be aware of “Mo Money Mo Problems“, a song by American rapper; The Notorious B.I.G. which impacted on US mainstream radio stations in the late 90s. Based on airplay and chart success, the song is considered one of the most popular singles in hip hop history. However, the question is how does more money lead to any problems? The logic here is that more money tends to lead people to acquire more things and do certain extra activities which one might not have been doing. With time, the new things and activities will develop into problems. Of course, some will always differ with this line of thinking given that money is also viewed as a solution to problems affecting individuals and households. For example, teachers in Zimbabwe have been on several strikes, demanding a review of their salaries. It has been cited that salary levels adopted in January 2022 were inadequate to support basic living and transport needs. According to our research, the average salary in Zimbabwe is about USD165.  Comparatively, in South Africa, the average salary paid to employees in the formal sector was R23,526 (USD1,568.40) in May 2021. In Zambia, the national average salary is K4,393 (USD258).

The plight of teachers and other formal employees in Zimbabwe also gives some perspectives into the demand for money theories. In general, the demand for money refers to how much assets individuals wish to hold in the form of money. It is sometimes referred to as liquidity preference. In fact, the term liquidity preference was first used by Keynes who identified three motives for holding money in every economy. These include (i) the transactions motive for holding money; (ii) the precautionary motive; and (iii) the speculative demand. Put plainly, the demand for money arises from the two important functions of money of acting as a medium of exchange and as a store of value. Thus, individuals such as teachers wish to hold money for the purposes of exchanging it for goods and services (transactions motive) as well as saving for the future (precautionary motive). That said, there are indeed other interesting theories such as the “money in the utility functions” concept.  We recall that last year there was an outcry on various forums regarding a lavish 50th birthday that was arranged by a prominent government official. The party featured private performances by popular South African artists, Makhadzi and Mafikizolo. Party videos that caused a stir on social media included one in which the government official promised to multiply by five the payment promised to one of the South Africa artists.

In economics, utility represents the satisfaction or pleasure that consumers receive for consuming a good or service. Therefore, the “money in the utility function” concept states that individuals demand money given that they consider it as a form of good that they prefer to have. Clearly, certain individuals prefer to be regarded as “money spenders” and derive satisfaction from having fat bank balances. Overall, while economic agents may have different motives for holding money, one common problem about money is inflation. Money can bring about instability in the value of money. For example, excess supply of money reduces its value. When the value of money falls, it means the general price level of the economy increases (inflation). When inflation increases, money is less effective to perform its function as a store of value. Investment also falls because inflation distorts the price level. Inflation also causes direct and immediate damage to creditors and consumers.

An analysis of economic trends in Zimbabwe reveals that inflation decelerated from Q1 2021 to October 2021 on the back of a tight monetary policy and fiscal consolidation efforts. While the inflation figure has come down remarkedly, another problem has emerged which relates to the lack of trust in national statistics.

Inflation Trend (Y-o-Y)

Source: RBZ

The government, through the statistics office, publishes the consumer price index (CPI) each month and purports to show the level of prices and how they change. Steve Hanke also uses his own method based on high frequency data. While there will always be disagreements on the methodology, other schools of thought such as the Austrians point out that there is no such thing as the price level. The reasoning is that there are millions of specific prices, all fluctuating one against the other. So, what is really going on is that millions of individualsare making choices – whether to buy or sell, whether to spend or save a pay rise, whether to invest in a new machine, whether to hire an extra employee, and all the rest. Their choices will depend on their views and their circumstances, and other people might decide quite differently. Therefore, economic aggregates simply conceal all that great variety under a single statistical number. The view here is that economic science should be about understanding human choices as opposed to coming up with statistical figures.

All in all, whether you happen to be a teacher working in Zimbabwe or a government official with a fat bank balance, it appears that your ZWL balances will be exposed to price level risks in 2022. While we note some positive macro developments such as (i) an improved Foreign Currency Account (FCA) balances position of cUSD1.7 billion, (ii) the cUSD1.0 billion SDR allocation from IMF, (iii) increased foreign exchange receipts to USD9.7 billion in 2021 (y-o-y growth of 53.5%) and (iv) an improvement in remittances to USD1.4 billion in 2021, politics will likely take centre stage in 2022 as there is scope for unplanned government expenditures.  Another important observation is that global inflation has been on a rise since January 2021 as shown by increases in United States of America (USA), European Union (EU), England and South Africa. This signals foreign inflation spill overs from other countries to nations with high import requirements such as Zimbabwe. The international prices of oil and most agriculture products rose by more than 20% since January 2021. In addition, the recent sharp increase in international food prices has already slowly started to feed into domestic consumer prices in some regions as retailers, unable to absorb the rising costs, are passing on the increases to consumers. Looking at the markets, stock picking will be of paramount importance in 2022. Piggy thinks the financial services sector remains attractive as there is scope for potential upswings and corrections. Investors should seek exposure in FBC Holdings, First Capital Bank, NMBZ Holdings and Old Mutual Zimbabwe Limited.

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