Finance minister Mthuli Ncube and reserve bank governor John Mangudya have both registered their disapproval of Zimbabweans consideration of foreign currency as an essential item they need to buy with salaries. While these gentlemen cite the fact that Zimbabweans do not need foreign currency to transact their words lack earnesty. Our currency by whatever name you choose to call it and however far back you choose to look has failed to provide the essential function of being a store of value.
Store of value
Of the primary functions of money, the store of value is arguably the most important function it serves. Alternative units of account and media of exchange can easily be sought, you may recall former Education minister Lazarus Dokoras proposal to allow payment of school fees in rural areas using goats or the generally accepted practice of valuing things through maize in rural areas. The two examples I’ve mentioned work well for the other 2 functions but maize and even the goat have a finite life and costs to keep them. Therefore one would be forced to use it or lose it.
The reality is foreign currency purchases are a need for the Zimbabwean in the current economy and I will illustrate this for those who may not be quick to believe. Our own currency for reasons ranging from overnight policy shocks to lack of confidence from the market has historically left people in the lurch with savings and balances losing value rapidly.
The practice of pegging prices to US dollars continues in Zimbabwe. Many questions why a product that has no import component should be sold in or pegged at foreign currency price. Value. The value of the product is what the seller is concerned with and not it’s imported component. A tomato, imported or domestically grown still has the same value, it is both unfair and unwise to shun it just because it is locally produced as the president is interpreted to have done with our money.
Prices in Zimbabwe have in the long term showed a US dollar deflation trend – yes things are getting cheaper. Of course the majority do not earn in US dollars so this is lost on them. To illustrate how poorly the RTGS dollar stores value let us use a practical example that we can all perhaps relate to.
If you needed to buy a bus ticket for use in April with a pegged price of US$10 in January you would’ve had to part with around $40 bond at the time, using the parallel market rate as is done for pricing purposes. One would not buy and keep a bus ticket for that long so knowing the price then was $40 bond one would buy US$10, in theory of course, and hold on to it until the time the ticket is needed. Today, in April, the pegged bus ticket would have a RTGS dollar price of ZWL$48. Had you held on to the $40 bond you’d be ZWL$8 short. With your US$10 you could theoretically buy ZWL$48 on the parallel market. Of course, many businesses offer outright US dollar pricing but the discrepancy between the interbank market rate and the parallel market rate makes the process complicated as it distorts the calculations.
Since the introduction of the bond note in 2016 it has managed to depreciate from 1:1 to 1:4.8 on the parallel market versus the US Dollar. That’s a decline of a whopping 80% in just 3 years.
The trouble with policy
A consistent feature of government policy is its inability to deal with the root cause of the problem. Here we have a populace that is genuinely concerned that their currency cannot store value due to inflation, exchange rate movement or both. If by some miracle the currency managed to store the value there is still the risk of government policy being introduced that wipes away the value. If something happens once it may happen a second time if it happens a second time it will happen a third time wrote Paulo Coelho. With Finance Minister Mthuli Ncube already talking about a new currency in 12 months it would be unwise to place any faith in the RTGS dollar.
Zimbabweans do not dislike the local currency they simply favour the US dollar because of the past and present experiences with our currency as well as the fear of future experiences. It’s a case of “once bitten, twice shy, the third time foolish”.