HARARE (Bloomberg) – The share price of one of Africa’s oldest insurers is taking center stage in Zimbabwe’s battle to bring order to its chaotic foreign-exchange system.
In the latest in a series of attempts to stabilize its currency, the government wants to eradicate the Old Mutual Implied Rate. The gauge, used by domestic companies to determine the future cost of goods and services, calculates a potential forward rate for the Zimbabwe dollar by measuring the difference between Old Mutual Ltd.’s share prices in Johannesburg, London and Harare.
The indicator is among many “contrived phantom exchange rates” in use that “conspire to defeat fiscal policy,” the government said in a June 26 edict that halted trading on the Zimbabwe Stock Exchange and stopped most mobile-banking transactions.
The OMIR is one of multiple exchange rates Zimbabweans use daily to navigate the nation’s myriad economic challenges, including annual inflation of almost 800%.
A perennial shortage of cash means anyone who has physical banknotes is able to negotiate exchange rates with brokers who pay the funds onto mobile-money platforms. The brokers can then sell the hard cash at an even higher rate.
That’s resulted in a widening gap between the official rate of 63.7 per U.S. dollar, and the amount at which it trades on the streets of Harare, which is now at 100.
“People have relied on making money from buying and selling Zimbabwe dollars, and not from any real production,” said John Robertson, an independent economist based in Harare. “It’s what has created these distortions.”
The OMIR also feeds into the black-market Zimbabwe dollar rate, which the nation’s bourse uses, along with the official rate, to determine the value of stock prices.
Old Mutual, founded in Cape Town in 1845, is not involved in determining the rate. Market participants take the company’s share prices in South Africa, the U.K. and Zimbabwe, convert each of them into the U.S. dollar, which should typically trade near par.
The finance minister, however, in March restricted trading in the shares of Old Mutual and two other companies by making the stocks no longer fungible, or regarded as being equal in value to those traded on other exchanges, in a bid to prevent outflows caused by the dual listings.
Despite the move, investors poured into Old Mutual, using it as a proxy to the U.S. dollar because of its offshore listings, pushing the Zimbabwe-listed stock up 90% since the beginning of May. The shares in Johannesburg and London were little changed, resulting in the implied rate doubling to 122 as the gap between the securities widened.
Zimbabwe’s benchmark industrial index has risen more than sevenfold this year, reaching a record on June 24, and giving the overall bourse a market value of about 229 billion Zimbabwean dollars ($3.6 billion). None of the stocks in the 57-member index have declined this year as Zimbabweans seek a haven from runaway price increases and the weaker currency, which has slumped to 63.7442 per U.S. dollar after a 25:1 peg put in place since March was abandoned.
Suspend Listing
Authorities now want to eliminate the OMIR before allowing any trading to resume on the Zimbabwe Stock Exchange, people familiar with the matter said, asking not to be identified because the talks are private. The OMIR was the focus of various meetings on Monday between members of Zimbabwe’s stockbrokers’ association, the stock exchange, the Securities and Exchange Commission and the Treasury, the people said.
Measures being considered include suspending Old Mutual’s shares from the Harare-based bourse, having the securities traded only in dollars, or moving the listing to the Victoria Falls Stock Exchange, a market that will only trade in foreign currency once it opens later this year, the people said.
Nick Mangwana, the government’s spokesman, referred queries to the finance ministry. Several calls and text messages sent to Finance Minister Mthuli Ncube and central bank Governor John Mangudya seeking comment weren’t answered.
“There has not been any official communication from authorities in Zimbabwe to Old Mutual,” the Johannesburg-based company said in an email “We have asked our local subsidiary to reach out to our stakeholders in Zimbabwe to try and understand the circumstances around ZSE closure and other related matters.”
Discussions over the halting of trade on the stock exchange are ongoing and the outcome is still uncertain, SEC Chief Executive Officer Tafadzawa Chinamo said by phone. Zimbabwe Stock Exchange CEO Justin Bgoni said on Sunday that the bourse would wait for guidance from regulators.
In comments at a briefing after a cabinet meeting on Tuesday, the finance minister said that stockbrokers should assure their clients that their investments in the stock market are safe and that the bourse will reopen once investigations are complete.
Zimbabwe’s security force leaders sidelined the nation’s economic chiefs and forced the government to close the stock exchange and halt most mobile-money transactions, people familiar with the situation said.
The June 26 order that sought to stabilize the nation’s currency came after pressure from the Joint Operations Command and was made without notifying the central bank, which regulates the mobile-money industry through which almost all of Zimbabwe’s commerce takes place, the people said. They asked not to be identified because the role of the JOC hasn’t been disclosed publicly.
The measure is further evidence that senior ruling party and military officials are growing impatient with the administration of President Emmerson Mnangagwa. Inflation has surged to 786%, the currency has crashed and the country is facing shortages of food and fuel.
The JOC includes officials from the military, police and secret service and is the highest body in terms of coordinating state security, though it doesn’t usually pronounce on economic matters. It stepped in after deeming that Finance Minister Mthuli Ncube and central bank Governor John Mangudya failed to take action to address the crisis, one of the people said.
While the military holds power in the country and can exert influence on the government, political analysts aren’t predicting a coup. Military takeovers are rare in the region — an attempt by the army to take power in Lesotho in 1997 was put down by a Southern African Development Community-backed invasion.
Defense Minister Oppah Muchinguri, who chairs the JOC, wasn’t immediately available for comment, said a person who answered her mobile phone when Bloomberg sought comment. The government denied the order came from the JOC.
“The order came from government after taking input from all agencies and departments,” said Nick Mangwana, the government spokesman. “Evidence linking the mobile-money platforms to money laundering as well as illegal foreign-exchange trading and money creation had been uncovered.”
Mobile Money
Central bank officials were unaware of the order when called by mobile money companies on June 26, two of the people said. Mangudya didn’t answer his mobile phone or respond to a message left with his assistant when Bloomberg sought comment on Tuesday.
“It is not correct that the Reserve Bank and the Ministry of Finance were not involved in the decision or were not aware of the developments leading to the suspension,” Secretary for Finance George Guvamatanga said in response to questions sent by mobile phone text message. “This was a further follow up of work that the Financial Intelligence Unit was already working on which led to a court ruling against one of the mobile operators.”
Zimbabwe’s biggest mobile-money platform, with more than 10 million registered users, is Econet Wireless Zimbabwe Ltd. unit Ecocash. The Zimbabwe Stock Exchange is privately owned. It was last suspended in 2008 when inflation surged to 500 billion percent and the Zimbabwe dollar was scrapped the following year.
Econet declined to comment on the government allegations.
Soaring Stocks
The ZSE’s benchmark industrial index has risen sevenfold this year as shares are used as a hedge against inflation. Mobile money was used to buy shares and then that money was moved out of the country, the Information Ministry said in the June 26 statement.
The JOC took action as the Zimbabwe dollar, reintroduced last year after a decade-long hiatus, plunged in value on the black market to below 100 to the U.S. dollar. That compares with an official rate of about 57. As recently as last year, Zimbabwe pegged its currency at parity with the greenback.
Core to the dispute are the various rates that traders use to exchange U.S. dollars into electronic money, which can reduce the value of Zimbabwe’s currency.
The rate can depend on whether the funds are transferred to a mobile platform like Ecocash or into a bank account, while some companies transact business using what is known as the Old Mutual Implied Rate. The OMIR uses the difference between the prices of Old Mutual Ltd.’s shares on the Zimbabwe and London stock exchanges to predict the potential future rate of the Zimbabwean dollar.
As pressure grows on the administration of Mnangagwa, who succeeded longtime ruler Robert Mugabe in 2017 after a military coup, the leader has increasingly blamed the private sector for the nation’s woes.
There is “a relentless attack on our currency and the economy in general through exorbitant pricing models by the private sector,” Mnangagwa said June 10 at a meeting of the ruling party’s politburo. “We are fully cognizant that this is a battle being fueled by our political detractors, elite opportunists and malcontents who are bent on pushing a nefarious agenda which they will never win.”
The International Monetary Fund estimates the economy will contract as much as 10.4% this year.
