The Sunday Mail
George Manyere
Since 2012, the South African rand has been depreciating against the US dollar – dipping to new four-year lows against the greenback. The Rand faced a tough 2013, opening on the lows brought about by the stalled platinum industry in late 2012, and remained exposed to the struggling European economy.
In the same year, it later dipped to a new low, breaking through the R10 to the US dollar. From 2013 and 2014, the rand depreciated by nearly 12,5 percent. In March 2015, the currency slumped to a 13-year low of R12,38 to the US dollar.
While the devaluation of the rand is internationally recognised, a peculiar scenario is observed in Zimbabwe where two USD/ZAR exchange rate regimes prevail: for the coin and for the note.
Notwithstanding the foreign currency dynamics, the R1 coin remains pegged at the rate of the US$0,10 while rand notes are converted at the prevailing USD to ZAR exchange rate.
Interesting to note is that these two pricing regimes, without prompting and regulation, have been accepted in both the formal and informal sectors. In the formal sectors, particularly in retail outlets such as Pick n’ Pay, OK Zimbabwe and Spar, one carrier bag costs R1 or US$0,10.
In the informal setup such as the passenger transport sector, in most cases a one-way trip from Harare City Centre to local townships remains at R5 and at the same time the same trip costs 50 cents either in the American currency or local bond coins.
Had the USD/ZAR coin fixed pricing regime been unique to the informal sector only, the quick argument would have been the lack of appreciation or the lag in the implementation of the foreign exchange movements.
However, even players in the formal sector, who should know better by their application of the official rate on Rand notes, have chosen this fixed pricing mechanism for Rand coins.
To have better understanding of such a scenario, we will explore more the definition of money.
Money is a medium of exchange, it is used to intermediate the exchange of goods and services;
Money is a measure of value. A unit of account is a standard numerical monetary unit of measurement of the market value of goods. To function as a “unit of account”, whatever is being used as money must be divisible into smaller units without loss of value, typically when precious metals can be coined from bars or melted down into bars again; and it must be fungible – that is one unit or piece must be perceived as equivalent to any other. This is the reason why works of art or real estate are not suitable as money.
Money is a store of value. To act as a store of value, money must be able to be reliably saved, stored and retrieved – and be predictably usable as a medium of exchange when it is retrieved.
In laymen terms, money is that which society recognises as value as per these definitions.
The concept is best illustrated in our cultural mombe yehumai/inkomo yonhlanga concept (sacred cow to appease the mother of the bride). The value of this cow is neither in its age, weight nor its breed; but, instead, its value is in its representation as a token of appreciation in a marriage ceremony.
This is to say the “mind” of the society has created, recognised and justified the value of the cow, in whatever form, as a medium of exchange/symbol of value.
In the context of USD/ZAR use, the traffic between South Africa and Zimbabwe facilitates the widespread rand coin convenience – through its availability and ease of change for the cashier.
To understand the perception around Rand coins, we will look at the statistics of people involved and appreciating the fixed pricing mechanism.
Estimates are that there are over 10 000 registered commuter omnibuses each making a minimum of six trips a day. Official statistics could, however, not be obtained from the Urban Commuter Omnibus Operators’ Association at the time of going to print.
Holding other variables constant, this translates to a daily minimum of one million passenger payments or transactions in the public transport sector.
Taking into account transactions in retail outlets and market places, the number of transactions using fixed USD/ZAR exchange rate is well over two million each day.
Important to note, these transactions are at arm’s length and on a willing-buyer willing-seller basis. It is fair to assume that there is coincidence of wants in these daily transactions because the transactions are initiated and settled amicably without any complaints.
Therefore, the way society has decided to recognise and measure the value of the rand coins is less as a currency and more as a token/medium of exchange. Society values rand coins based more on transacting convenience as opposed to the foreign exchange dynamics involved.
It’s understandable why society would converge to an acceptable measure of value, especially coming from a hyperinflationary environment, characterised by multiple currency redenominations and where prices were constantly changing.
Society was somehow looking for a “constant” and convenient medium of exchange. Exchange rate misalignment, as is the current case with the rand coins, will definitely create foreign exchange losses, especially when using the fixed exchange rate mechanism.
However, in the context of rand coins, because the size of each rand coin transaction (typically ranging between R1 to R5) is small, the losses made are also small.
The losses are recouped or gained back during the course of the transaction cycle, which is typically a day. When the losses can no longer be absorbed in a typical transaction cycle, the market has always adjusted the rate accordingly. Such was the case when kombi fares for a one-way trip from the City Centre to local townships rose from R4 to R5.
Some would argue that the misalignment in the USD/ZAR coin exchange rate will be solved by phasing out the use of rand coins.
This approach will, however, be impractical to achieve because of the volume of traffic between South Africa and Zimbabwe, and the fact that the market has accepted this dual rating system. In our view, the gradual correction in the “misalignment” will be corrected through the use of bond coins overtime. The economics of the bond coins is that they are being introduced to buttress the multi-currency system through the provision of change, especially for the US$1 notes, which are the smallest denomination of US currency in circulation in Zimbabwe.
So, is the rand overvalued? No, its not.
Our society has just come to recognise and accept rand coins less as a currency and more as a token/medium of exchange.
◆ George Manyere is managing director, chief investment officer and founder of Brainworks Capital Management. He is an investment banker with much international experience, including at the International Finance Corporation – an arm of the World Bank.
