As if last weeks rate shocker and the subsequent stories about how a few individuals had caused the turmoil wasn’t enough, Finance and Economic Development Minister Professor Mthuli published some interesting images and boldly stating that Zimbabwean dollar is massively undervalued. He states the exchange rate should actually be 1:6 using comparative purchasing power with 2011. While many were quick to tell the minister where he could put his projections, let us seek first to understand then be understood.

The minister’s position is a bit complicated to understand. He states that using the exchange rate with the Rand in 2011 we can arrive at a real exchange rate for 2019. There are already a few problems with this assumption. Firstly, South Africa has it’s own economy, secondly the Rand was not the unit of account and perhaps most importantly no Bond, RTGS,  Zimbabwean dollar or whatever you want to call it existed in 2011. So ideally the man who said we cannot compare inflation data from a year ago because the Zimbabwean dollar did not exist says we can compare exchange rate data from 8 years ago when the currency didn’t exist.

Underlying assumptions aside let’s look at the sense. The Professor then goes on to chart a graph that depicts the nominal exchange rate levels. Again questions are brought up as to how the figures were derived. With no form of Zimbabwean currency in existence until 2014 show has the minister arrived at 2011 nominal Zimbabwean Dollar exchange rates? This calculation would be perhaps more palpable had it started in 2016. Also, the choice of 2011 seems rather arbitrary. Why not 2009 or 2012?

So according to the charts he uses he arrives at the idea that our exchange rate for the Zimbabwean dollar to the US dollar should be around 1:6. The Zimbabwean dollar entered the ring officially at 1:2.5 in 2019 but the parallel at the time valued it at 4.05. The argument of the minister is hinged on 6 being the exchange rate that would keep purchasing power the same between 2011 and 2019.

Surely those actually living in Zimbabwe will be quick to inform the minister that purchasing power is not the same between those two years. In fact, the minister himself said just as much in an interview. Chickens in 2011 were sold for around US$6 and now sell for US$4-4.50. Surely the chickens have not changed. Purchasing power has not held stable, the US dollar has found greater strength in Zimbabwe. The underlying cause? The arrival of the bond note and friends simply drove the US dollar out of mainstream circulation and increased the demand for it. The inability of local units to store value has also contributed to this.

2011 is not 2019. No amount of mathematical positioning can make it such. In 2011 we had a treasury that worked on a cash basis and was in control of domestic debt. Consider that in 2013, Zimbabwe’s domestic debt was US$200 million. In 2017 that figure had grown to over US$4 billion and in 2018 it had grown further to over US$9 billion. These are just 2 different Zimbabwes.

Unfortunately,  as Reserve Bank deputy governor Kupukile Mlambo conceded you cannot tell the market what to value something at. More so when you have no capacity to influence the valuation. At the end of the day, prices in open markets (such as the parallel market) have taken into account all the factors that are involved with the commodities involved. The current exchange rate remains a true reflection of what the value is to the sum and total of those operating in the market. And while 6 may be the exchange rate the minister wants 15 is the exchange rate we have (both on the parallel and interbank markets).