THE lopping of zeros from the country’s currency does not signify a transformation of economic fundamentals, says Imara Securities’ investment analyst Fungai Tarirah (FT). Below is an interview he gave to South Africa’s Moneyweb on
MONEYWEB: Fungai, the decision by the Governor of the Reserve Bank of Zimbabwe, Gideon Gono, to lop three zeros from the value of the Zimbabwean currency, and in that way to fight inflation, seems a little strange. You’re on the ground there in Harare. How exactly is it being interpreted by the people?
FT: One of the biggest things is we’ve seen a lot of confusion given the amount of notice that has been given to people on the implementation of this new currency. So I think two things there.
In the ensuing chaos we’ve seen a lot of prices being hiked literally overnight — not only by the retailers but also on the stock market.
We’ve also seen a lot of banks trying to cope with their systems in trying to make sure that they keep abreast with changes coming through. So a bit of chaos has been witnessed, but I think that will quieten down as we go further in the month towards the 21st, which is the deadline for conversion to the new currency base.
MONEYWEB: For those who don’t know what’s going to happen, just take us through the steps.
FT: Basically, what he’s done is; we are still using Zimbabwean dollars. The only difference is we’re taking out three noughts and we’re going to have to round it back to cents. What were billions are now millions and so on and so on. So it’s a paradigm shift for lots of people in terms of the prices that we experience.
I think one of the biggest things is looking at some of the share prices. Something that used to cost $300 now costs 30c. So obviously that makes for a very big difference, and we’ve seen the various markets respond to that.
MONEYWEB: But how is this going to fight inflation?
FT: Inflation will only ever change if the Reserve Bank concomitantly puts in place various policies that fight the growth in government spending; that increase incentives to the various exporters to bring in more foreign currency.
MONEYWEB: No, I understand that. But how is what Gono has done, how is that going to fight inflation, because he maintains that that’s the reason why it’s being done?
FT: Well, it’s psychological. People think prices are cheaper, the cost of goods is cheaper, simply because you’ve lopped three zeros.
But economically nothing has changed. If something cost $85 000, now it costs $85. And I’ve only got $85 instead of $85 000. It doesn’t make much of a difference. And I think a lot of people are cottoning on to that fact quite quickly.
It comes back to the accompanying policies that are implemented. If they are not there, then it’s cosmetic, nothing really changes.
MONEYWEB: That’s exactly it. Fungai, people are not stupid. It sounds like they’re just rearranging the deck chairs on the Zimbabwe Titanic here.
FT: I think that’s one part. The other part is putting in place those policies. So if you listen to the policies they announced, or the (indistinct) they announced, they did highlight a number of policies which, if they do actually implement, will be very helpful in making the change in the zeros actually take effect. If those policies are not implemented, however, we’ll be back to square one and those zeros will come back quicker than you think.
MONEYWEB: Reading the statement of Gono, he blames to a large degree speculation and hoarding of Zimbabwe dollars. Now I don’t understand the logic. If you have a high inflation rate it doesn’t seem to make a whole lot of sense to hoard bank notes. Is this what is happening?
FT: I tend to agree with that. I think the biggest problem as inflation turns to hyper-inflation is that ticket prices for a lot of things become astronomical.
Where I used to need $200 000, I probably now need $200 million or $2 billion. So I need that cash. And obviously people’s outlooks become more and more (indistinct) so they don’t trust the banking system as much as they used to in the past because the banking system takes time to enact payments.
It moves to a cash-based society and I think that is the biggest reason why a lot of people were actually holding on to large amounts of cash — no fault of their own.
I think it’s symptomatic of what’s happening in the economy. The trick, however, is to make sure that they’re not holding inordinate amounts — and I think it’s a very difficult card to call, to say this is inordinate as it is in line with what is happening within the economy. One has to really judge the levels that have been set by the Reserve Bank.
MONEYWEB: Is this a step in the right direction, at least?
FT: I think there has been speculation that has caused problems. It sorts that out. But I don’t think that’s the biggest cause of the problems that we have in the environment.