Finance Minister Mthuli Ncube who seems to have grabbed the Monetary reins from his struggling counterpart, John Mangudya, has finally revealed his hand. Yesterday in a series of decrees the Minister laid bare his plan to stop the rapidly depreciating Zimbabwean dollar rate.

The plan includes:

  • Banning the fungibility of Old Mutual, PPC and Seed Co shares for 12 months
  • Strict monitoring of Ecocash Wallets to see what is going on there

What is fungibility?

In simple terms, the shares of these three companies are listed on the Zimbabwe Stock Exchange (ZSE), but they are also listed on other foreign exchanges as well. This means a person who buys these shares locally can then sell them in exchange for foreign currency at those exchanges.

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So what’s the big deal? A lot of investors’ earnings are trapped in Zimbabwe because of the foreign currency shortages, even Chinese government contractors have been accused of exchanging their worthless Zimbabwean dollar earnings into foreign currency at the black market resulting in a massive spike in rates.

Will this help make the Zimbabwean dollar stable?

Most probably not, these measures are simply introducing speed bumps on the road to safety for investors. The reason why the Zimbabwean dollar is heavily losing value is that productivity continues to go down while money supply increases.

Zimbabwe’s businesses still desperately need foreign currency. That need is not being met by the official markets, which is heavily regulated and offers subpar rates. There is also the informal market which is constantly neglected by the government which constantly meddles in the allocation of foreign currency.

Foreign investors will also still need to take their earnings out of Zimbabwe. To do so they need to convert those earnings into foreign currency, something that the government cannot seem to do. Those investors outside Zimbabwe will simply avoid it altogether as it becomes an unfavourable destination from which one cannot recover their money.

Also as the broke government looks for money sooner or later it will either participate on the black market itself or ease restrictions or at the very least, print more money.

The burning building analogy

Zimbabwean Law Professor, Alex Magaisa who is based in the UK crafted an apt analogy when explaining the government’s latest bid:

Say of fungibility (that it is) a fire escape door in a smouldering building. The decree gives a couple of days to get out. Effect? A stampede for the fire escape. Some will be trapped inside. Fewer people will venture into a building without a fire escape. Most will stay well away.

It’s a desperate measure to prevent the plunge of the Zimbabwe dollar, rather like a pilot jettisoning fuel after a plane has stalled

Alex Magaisa on Twitter

Government ministers disagreed of course. In the short term, there might be a chilling factor and rates might drop ever so slightly, however, in the long the rate will either go up again, or businesses will wind down due to foreign currency shortages.

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