Demystifying the burning process

The rates have risen so high that it takes less
than US$1 to pay the whole of the civil service. As evidenced by the
ever winding cash queues at banks, a good number of Zimbabweans are
participating directly or indirectly in the "burning process".

Most of the money in circulation comes from the sale of Old Mutual
Shares and other dually listed counters. People sell the shares, use
the money to buy hard currency and then repurchase shares on the
Johannesburg Stock Exchange (JSE) or the London Stock Exchange (LSE).
This process can earn one more than 1000 per cent return per week on
investment.

For example, on November 11, 2008 the Old Mutual Implied Rate (OMIR)
was at Z$22.39 quadrillion per US dollar, while the Cheque Rate was
Z$500 trillion per US dollar.

This means one US dollar in the hands of a person with an Old Mutual
share was worth 44.78 times more than dealers were paying for a dollar
"burnt" using the Cheque Rate. In Zimbabwe, a cheque takes up to four
days to clear. However, if one has "enough clout" they can request
same-day value and the money clears the same day it is deposited.

Owners of the famed "pots", who sell shares, can get their money on the
same day, allowing them to instantly start writing cheques.

The whole process fuels itself. After someone "burns" money, they get a
lot of quadrillions they can’t use because most people are no longer
accepting cheque payments. They then buy shares.

Most businesses are using money in their banks to buy shares and in
turn, ordinary people are not selling shares because they cannot use
the proceeds in any way. This creates an

artificial Bull-run on the Zimbabwe Stock Exchange.

The whole process creates a very unnatural situation where those
trading in the dually listed shares are benefiting while the rest of
the country is crying foul.

Ordinary people who sell foreign currency are also benefiting. If
someone sold a dollar on November 11, they would have got Z$500
trillion. The cash rate for the same day was Z$350,000.00 for one US
dollar. They only need to go and queue for the Z$500 000 being given by
banks, then use the money to buy 1 US dollar on the flourishing parallel

market.

The whole process is destroying the economy as most of the money in
bank accounts is artificial. There is no-longer any incentive to work,
because people make more from burning. Companies have money in their
accounts that they can no longer use to make payments as the money
cannot compete with proceeds from the burning process. Pricing of goods
is no longer possible in Zimbabwe dollar terms.

Can companies rely on the OMIR when billing their clients or converting
Financial Statements to US dollars? The OMIR is based on the "No
Arbitrage Assumption" that the value of Old Mutual Shares is the same
wherever the share trades, and one cannot make a risk-free-profit by
buying and selling the share in a different currency. We have shown
that this is very possible.

There are a number of possible solutions:

* Dollarising the trade in shares of dually listed companies. If
these shares are traded in hard currency, this does away with the
arbitrage opportunities addressed above.

* Dollarising the whole economy or using a more stable regional currency such as the rand.