Batanai Matsika 
Sometime back in April 2019, we had a heated debate that was aired on national television with a prominent politician on the reasons why the parallel market exchange was moving northwards. The politician maintained that the Old Mutual Implied Rate (OMIR) was being used by market participants as a benchmark to determine parallel market rates.
The Reserve Bank of Zimbabwe
His reasoning was somewhat misplaced given that foreign exchange, like any other market, follows the forces of supply and demand in the determination of an equilibrium price.
Our stance was that the movement in the Old Mutual Limited (OML) share price was being driven by demand from foreign investors that were using the share to exit the market. In addition, the fact that Old Mutual Limited is fungible means that it also serves as a currency-hedge which makes it attractive even for the local investor.
Soon after our debate, the Reserve Bank of Zimbabwe (RBZ) moved swiftly and issued a directive introducing a 90-day lock-in period on OML shares. What this means is that an investor who buys OML shares would have to wait for a period of 90 days before selling.
This effectively reduced the supply or liquidity of the OML share. The basic principle is that if supply is reduced or when demand exceeds supply, price will increase.
The graph illustrates how coercion has never been a practical way to help the economy — regulations and taxes rarely make us better off. In fact, coercion tends to destroy value and not create it. The good economist realises that if you want the baker to bake a bigger pie, you do not beat him up and steal his flour.
Instead, you cooperate with him and create a climate of freedom for each individual human being to peacefully pursue his own self-interest without fear of punishment. The major set back is that regulations are top-down commands and not efforts to find common agreement. As an example, the RBZ action of introducing a 90-day lock-in period on OML shares was not followed up with any effort to generate feedback regarding whether or not the directive generated any net value. Government actions often destroy value because they create winners and losers. Regulations hinder personal choices and impose one-size-fits-all rules. In our view, free economies work better than economies based on central authority.
This is because decision-making in free markets is a reality-based system guided by individual preferences and sound economic decisions.
On the other hand, bad government decisions are not punished, and failed policies are not weeded out because the funding (taxes) is not contingent on performance.
Low-value programmes can be implemented and go for years while blocking the reallocation of resources to better uses. Most government programmes often fail to generate value because the taxes to support them create “deadweight losses” or economic damage. Taxes and regulations are compulsory and so they induce people to avoid them by changing their working, investing and consumption activities. This also reduces overall output and incomes.
The government should desist from using coercion and controlling the markets. Regarding the issue of the exchange rate, we are concerned that the RBZ continues to maintain a grip on a fictitious interbank exchange rate of 17 against the USD. The fact is that foreign currency shortages continue to loom and there is a high-propensity to import among economic agents (including government) in Zimbabwe.
We expect this huge appetite or demand to push the parallel market exchange rate to between ZWL70 and ZWL100 for USD1 and this will have a pass-through effect on pricing and inflation. Given the high inflation expectations and a deteriorating exchange rate, we see risks of value-destruction, particularly on ZWL balances.
We have consistently insisted investors to park ZWL balances in stocks that generate foreign currency as well as those with ex-Zim exposure. We like regional plays, well-managed net exporters or companies with significant export potential as they provide value preservation opportunities to investors with a long-term perspective.
Some of the preferred names include Ariston, SeedCo, SeedCo International, Padenga Holdings and Simbisa Brands.
Matsika is the head of research at Morgan & Co, a local investment banking group in Zimbabwe. He writes in his personal capacity.
