Zimbabwe is stocking up on Rands
… for mass use, tall order for Zimbabwe
WITH the South African rand set to make somewhat of a second debut in Zimbabwe, following directives by the Ministry of Finance for government departments to start accepting the rand by June 30 and for banks to issue them by July 1, the new challenge for Zimbabwe is how to ensure there is enough of them to make impact.
Though there are advantages and plausible justification for Zimbabweans using the rand more, given the scale of trade between South Africa and Zimbabwe, economists warn that replacing the United States dollar with the rand as the dominant currency in the country’s multi-currency regime is not an easy thing. Industrialists agree that it could be a steep ride.
Following dwindling supplies of the US dollar which the country had adopted as the dominant legal tender among a basket of at least 10 currencies, calls among the business community and general populace for increased use of the rand are gaining traction in the country as it faces an unprecedented liquidity crunch.
Zimbabwe’s basket of currencies includes the US dollar, South African rand, Botswana pula, Euro, Chinese yuan, British pound, Australian dollar, Indian rupee and Japanese yen.
Although banks have been directed to also issue out other currencies in the basket, most people will opt for the rand out of the bunch.
Although President Robert Mugabe insists on the Reserve Bank of Zimbabwe (RBZ) coming up with bond notes of its own to be added into the basket of currencies and to offer respite to the nationwide liquidity crunch, business and ordinary people are agitating for reliance on the rand instead.
Since the abandonment of the Zimbabwean dollar in 2009 following loss of confidence in it, scepticism continues in the country around any attempts to introduce a domestic currency.
According to RBZ statistics, at the introduction of the multi-currency basket in 2009, there was a 49 percent usage each of the rand and US dollar and two percent total for the other currencies combined.
But currently, due to the rand’s own volatility, which worsened over the past year and a preference for the more international US dollar, use of the latter has recorded 95 percent of transactions in Zimbabwe, with the rand accounting for the majority of the other transactions.
Increasing use of the rand from below five percent to the 80 or 85 percent which, Busisa Moyo, president of the Confederation of Zimbabwe Industries, reckons is desirable, presents challenges of supply.
“We should incentivise and make the rand more accessible in proportion to others. The question is how do we move to 85 percent rand?” asked Moyo.
“We need a soft currency to cushion costs and become more competitive. We should devalue when we convert. Government can start accepting all its payments in rand.”
But for as long as Zimbabwe is not producing and exporting its own products, currency injection challenges will always plague the southern African nation.
Given that foreign currency has become domestic currency, to boost its supply requires Zimbabwe to export significantly.
Remittances from the Diaspora can also contribute, however, with remittances being subject to other factors, and not necessarily within the control of government, the only plausible means of acquiring the foreign currency, in the absence of foreign direct investment, and at the required levels for the country is through exports.
This requires substantial broad-based reform which should include major policy overhauls, among a cocktail of other strategic measures.
Short of that, amassing foreign currencies, the rand included, are at worst a tall order and at best a patch work effort.
Without long term economic reform to enable manufacturing, production and exports, the rand will only work as the primary legal tender in Zimbabwe for a limited space of time before illiquidity conditions face the troubled country again, economist Mac Mzumara warns.
“As long as we continue to import more than we export illiquidity will always be a challenge,” said Mzumaras.
“No use of external currency is going to be sustainable unless Zimbabwe exports. With the balance of trade between South Africa and Zimbabwe, the latter will have to work wonders and fast to tilt the balance of trade in its favour and if and only if it continues in that favourable trend can use of the rand as the main currency be sustainable.”
South Africa is Zimbabwe’s biggest trading partner. Trade estimated at between US$2,5 billion to US$3 billion is recorded annually, most of it as exports to Zimbabwe from South Africa.
But a sustainable rand supply is not the only bottleneck Zimbabwe faces, said economist John Robertson.
“Zimbabwe will need the permission of South Africa if it is to attempt relying on the rand as the main currency of use in the country and that presents a problem,” Robertson said. “I don’t see South Africa granting that permission unless we give up control of the Reserve Bank of Zimbabwe.
“And with our leaders’ ego, giving up their sovereignty is not likely. We should have formally joined the Rand Union something which countries like Swaziland did, and not expect to use the rand from the backdoor. But even though formally adopting the rand regime, will reduce Zimbabwe to a province of South Africa.”
According to Robertson, adopting the US currency as the dominant legal tender did not require express permission from the US.
“This was because the US dollars is an international reserve currency, which the rand is not.
“The reserves of central banks of all the countries in the world are in US dollars; and prices of commodities globally are quoted in the US dollars so Zimbabwe could get away with it. But not this time.”
Since introducing its multiple currency basket in 2009, Zimbabwe has been able to use the rand without necessarily getting permission for it, and this, Robertson explained, “is because we did not pretend that we were depending on it, but now we want to depend on the rand.”
Mzumara agreed that the central bank of South Africa would have to be engaged in some amicable arrangement.
“If Zimbabwe talks to South Africa favourably, the South African Reserve Bank governor could consider including Zimbabwe in its monetary policy, but this might require the RBZ to play a subservient role as some sort of an apprentice to the South African Reserve Bank.”
“And let’s face it,” added Mzumara, “since 2009 Zimbabwe has not been administering a currency of their own and this could have made the monetary authorities out of touch with trends.
“But whatever the case is, whether or not RBZ becomes an apprentice or the Zimbabwe becomes, like an SA province or not, the sustainable use of the rand will require Zimbabwe to officially engage the South African government and not come from the backdoor.”
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That nothwithstanding there is a compelling case for Zimbabwe to lean more towards the rand than the greenback.
“It would certainly be cheaper for Zimbabwe to use the rand more because while its companies invoice in the US dollar a relatively more expensive currency, South Africa invoices in rands and this advantage could make Zimbabwe that much more competitive,” Mzumara said.
All things being equal, assuming the liquidity crunch eases and Zimbabwe continues with its multi-currency regime, Moyo thinks the country should get to a point where use is spread out among the currencies in the basket.
“We should not have a peripheral currency,” he said
The rand continues to be weighed down by lethargic economic growth in South Africa.
Mining and manufacturing, among other sectors remain hesitant. Despite recovering slightly from the previous 1:16 to the US dollar to 1:14 in recent weeks, the currency volatility continues.
South African deputy minister in the department of Trade and Industry, Mzwandile Masina, is on record saying that his government had come up with the six Is response plan which is Industrialisation, Infrastructure, Investment, Innovation, Inclusion and Integration as a strategy to stabilise the economy and resultantly the Rand.
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