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Piggy recently came across a Bloomberg News article that positions that Reserve Bank of Zimbabwe Governor, John Mangudya, is reluctant to narrow the widening gap between the national currency’s official and black market rates. While the Zimbabwe dollar (ZWL) has been allowed to gradually weaken from parity with the greenback in February 2019, there is still a significant gap between the official and black-market exchange rates. Business leaders have blamed the disparity on a lack of foreign currency supply while Mangudya says it is because many businesses in Zimbabwe are accepting payment in US dollars at the unofficial or parallel market rate. Piggy thinks that the issue of an unrealistic official exchange rate is driven largely by political and socio-economic concerns. Also, the lack of confidence in the ZWL is the number one culprit. The net effect is that the disparity causes distortions and presents room for arbitrage in the broader economy.
The Zimbabwean situation also demonstrates some of the defects of money. Professor Coulbourn defines money as a means of valuation and of payment in terms of the unit of account and exchange. Sir John Hides (1967) says that money is defined by its functions, implying in simple terms, that money is what money does. Money is indeed a vital instrument in macroeconomic management given that it is crucial for growth and development. However, some of the economic defects of money that are evident in the Zimbabwean context include the following;
- Instability in the Value of Money
The value of money certainly does not remain stable over time. When the value of money falls, it implies a rise in price levels or inflation. On the contrary, a rise in the value of money means a fall in the price levels or deflation. These changes are brought about by an increase or decrease in the supply of money. Inflation or a fall in the value of money causes direct and immediate damage to creditors and consumers whilst deflation brings down the level of output, employment, and income; and
Money being the store of value lures people to hoard it. When people evade taxes and conceal their income and hoard it, it is black money. This leads to a “parallel” economy within the country which encourages conspicuous consumption and speculation.
Clearly, there is a tendency within the general population to keep wealth in a relatively stable foreign currency. Amounts of local currency (ZWL) held are immediately converted so as to maintain purchasing power. Piggy believes that the triple-digit inflation levels in Zimbabwe led to deteriorating confidence in the local currency (ZWL). This is also evidenced by the stampede for foreign currency from every corner of the Zimbabwe economy given the need to preserve value. Foreign currency (particularly US dollars) is still considered a better store of value. Other alternatives include real assets such as property (stands and housing developments).
Another important dynamic is that Zimbabwe has largely adopted a dual-pricing regime where most products and services are priced in United States Dollars. The local currency prices (ZWL) are in most cases pegged against a parallel market rate. Formal businesses such as Simbisa Brands and Delta Corporation have also resorted to USD pricing in a move that is meant to assist the companies to meet foreign obligations and cover import bills. All in all, an important fact is that the Zimbabwean economy is largely informal. There has been a proliferation of informal businesses, especially after the Covid-19 related lockdown measures. Given the limited formal employment opportunities (especially for youth), there has been an escalation of self-employment with some citizens moving into vending and small businesses. These informal businesses also charge in foreign currency and operate without a fixed premise (roadsides or in open spaces). This suggests a trend that signals a rapid rate of formalization of the local economy. It is also very difficult for monetary authorities to police the exchange rate through statutory instruments.
Informal Sector Businesses in Zimbabwe
Source: piggybankadvisor.com
Overall, as the scramble for US dollars and the tumbling of the ZWL continues, it would make sense for individuals and households to come up with concrete value-preservation strategies through bankable investment plans. Piggy thinks the stock market remains an interesting avenue to create and preserve wealth. Learn more about investing in the stock market by downloading a copy of the Investor 101 Handbook.
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