Zimbabwe’s markets have been roiled after a tax increase last week triggered panic buying of goods such as gasoline and spurred individuals to turn to equities as a refuge against rising prices.
The value of bond notes—introduced two years ago amid a shortage of hard cash in a country that doesn’t have its own formal currency—has plummeted. The country accepts a range of currencies including the dollar, the euro and the rand, as legal tender.
It now takes 2.8 bond notes to buy one US dollar, which is the weakest exchange rate on record, according to the Zim Bollar Index, a local website. In early September the rate was 1.75. Bond notes represented the value of one greenback when they were first printed.
The stock market is also signalling increased stress in the southern African nation’s financial system. The main equities index rose 8.7 per cent last week to its highest since November, when the military ousted long-serving ruler Robert Mugabe, who oversaw the economy’s collapse.
In Zimbabwe’s skewed markets, rising stock prices are a sign that foreign-currency shortages are worsening. Local traders pile into equities when bond notes depreciate, and they fear inflation will accelerate. It’s a phenomenon that’s forced foreign investors including Franklin Templeton, JPMorgan Chase & Co. and Allan Gray—who can’t repatriate their money because of strict capital controls—to write down the value of their assets.
One way analysts assess how out of sync Zimbabwean equities are is by measuring the difference between the London and Harare stock of Old Mutual Ltd., Africa’s largest insurer. The Harare shares are now 3.2 times the price of those in London, when converted to dollars. That’s the widest the gap’s been since November.
Zimbabweans have stocked up on goods after the authorities increased a tax on money transfers to two cents per dollar transacted, from a flat rate of five cents per transaction, at the beginning of the month. Vehicles formed long lines at fuel stations over the weekend, prompting the head of the national oil company to say there’s enough gasoline to last six months and the hoarding “is uncalled for.”
On Sunday, the central bank said it was drawing down part of a $500 million credit line from the African Development Bank to pay for imports of fuel, electricity and wheat.
The weakening of bond notes “is being caused by some people bent to dupe the public of their hard-earned income,” said John Mangudya, governor of the Reserve Bank of Zimbabwe. “The opportunists are manipulating foreign-currency parallel-market rates to cause unnecessary panic and despondency.”
The pain comes as the new government of President Emmerson Mnangagwa, a long-time ally of Mugabe who won July’s elections, tries to fix the economy and attract foreign investment.