Can the rand save Zim?

IN recent months there has been plenty of debate about currency in Zimbabwe. The debate was sparked by the Reserve Bank of Zimbabwe’s announcement that it will introduce bond notes before year end.

This has seen panic withdrawals across the country as depositors fear that the bond notes mark the return of the Zimbabwe dollar, a despised currency which was pulverised by hyperinflation in the once-prosperous southern African country which has now turned into a basket case. Government blames sanctions, while economists blame investor-hostile policies.

Both the central bank and government are affirming their strong intention to introduce the notes despite the compelling case against the introduction of the surrogate currency. Bond notes are widely viewed by the banking public as money, even though the authorities are denying that this is local currency. The RBZ introduced the bond notes on Monday.

Economic players say the rand could have been a better alternative to the bond notes. The argument is that 70% of the country’s import bill is attributed to South Africa. While it is a valid argument, the question is: can the rand save Zimbabwe from the socalled currency crisis? Why has the rand not saved Zimbabwe from the cash crisis so far despite being part of the basket of currencies?

The assumption by those asking for the country to join the Rand Monetary Area (RMA) is that Zimbabwe is facing a cash crisis. As a matter of fact, it is not. The RBZ governor, John Mangudya, has described adopting the rand as dangerous. Coming from a central bank boss, this description cannot be taken lightly.

We should, however, not underestimate the governor’s resistance with regards the idea of adopting the rand; he is the most informed person regarding the causes of this cash crisis. Perhaps he knows that the rand will not resolve the cash situation the country faces. He may be right. But it is important that he honestly informs the nation why he believes so. Until the bond notes issue crept up, he had earned the confidence of the people.

Notable figures in industry and commerce are now concurring with both the government and monetary authorities that the dollar is being shipped out by those attracted to the greenback. They argue that they cannot do so with the rand as it is nonconvertible. This argument has no economic merit.

The Chinese, Indians and Nigerians are not only in Zimbabwe, they are present in South Africa and Botswana. They are most known for repatriating cash to their homeland. But there is no shortage of cash in South Africa and Botswana. In fact, in these economies there is a balanced use of both plastic money and cash. Further, with a higher concentration of Zimbabweans in South Africa than any other country in the world outside of the borders of Zimbabwe, Zimbabweans continue remitting huge amounts of cash through both formal and informal systems. Neither Botswana nor South Africa is suffering a dent on their cash positions.

If foreign economic players are coming to take away the greenback, what are they leaving Zimbabwe with? It can either be alternative currency or goods. If it is alternative currency, where is it in our system? How come we do not see the naira, if indeed Nigerians are coming to buy the cash? Or the Chinese renminbi if they are coming to do so as well? If it is goods which they are leaving us with, then what has government done to encourage the production of goods so that Zimbabweans restrict dollars on imports? Surely, the sucking of currency due to these reasons can be plugged through exchange controls or through crafting policies which attract foreign capital, encourage exports and preserve jobs. This is missing in the equation.

Interestingly, the country with the highest concentration of dollars in the world is the United States. Why are people choosing to come to Zimbabwe to mop up dollars and not going to the source market?

While it is a fact that the dollar has strengthened against most currencies globally, especially the minor currencies which also include the rand, thereby affecting the competitiveness of goods from Zimbabwe, this is not the only reason why Zimbabwean manufactured goods are less competitive. You cannot blame currency-induced competitiveness when we are a nation where a trader imports inputs from South Africa, paying R10, but goes on to sell those raw materials to a producer for US$10, or when our customs duties are as high as they are to the extent of persuading tax officials and citizens to be corrupt to circumvent the high tariffs. When utility bills, licence fees and government-related services are exorbitant or when government insists on paying bonuses with the money it does not have or when police mount 30 roadblocks along Beitbridge Road or Plumtree Road.

This has nothing to do with currency external value, yet it raises the cost of doing business. The same when industry is operating at 30% capacity of plant and machinery installed during the Rhodesian era or just after or when tax revenues are narrowing yet government continues to run with a cabinet bigger than that of the United States, the largest, wealthiest and most powerful country in the world. Why has there been resistance to Mangudya’s call for internal devaluation?

If the rand could solve the cash puzzle that we find ourselves in, we do not need to adopt it formally. We already have it in our basket of currencies. Why are economic agents not using it? Has anyone gone to the bank and been offered rand and they have refused? Are our banks awash with rand?

South Africa, Lesotho, Swaziland and Namibia are in a currency union. They all use the rand. Originally, Botswana was part of the union, but it pulled out so that it could have flexibility with its own homegrown monetary policy to influence economic activity while Namibia opted to issue its own currency at par with the rand as plan B, just in case there was a need to use it.

Mangudya’s argument that Zimbabwe cannot join the RMA because it does not have its own currency is not valid. Zimbabwe can negotiate its way through, just like Britain is part of the Eurozone yet it uses its own currency or just like Norway is not a member of the European Union yet it has special access to the EU market. The reason why Mangudya and Finance minister Patrick Chinamasa were appointed to those senior posts is so they can, among other responsibilities, negotiate deals favourable to the country.

It is vital to note that a currency union entails at least two countries sharing a common currency. This can be informal, such as a unilateral adoption of a currency like what Zimbabwe has done with many currencies in the basket, including the rand, or formal, in which case an agreement is put in place. Therefore, it stands to reason that Zimbabwe is already in a currency union with South Africa — albeit informally. Zimbabwe is already using the rand, but it is not available in the banks.

To understand the benefits and costs of a currency union, we need to look at the dominant currency union in the world, which is the euro. When the Eurozone was established, it was envisaged that the single currency would help economic agents realise savings associated with common currency use instead of multiple currencies. There is a cost in hedging and converting currencies. In our instance, instead of converting from rand to US dollar upon export receipts, then US dollar to rand when importing, the rand would flow either way with transport or finance costs involved and no more exchange or hedging costs.

Further, the euro was meant to aid price comparability across Europe. The idea behind was to drive down prices through competition. The same concept is valid should Zimbabwe use the rand. Prices will be comparable in at least five countries: South Africa, Namibia, Lesotho, Swaziland and Zimbabwe. This may assist prices to come down in pockets where they are still high in Zimbabwe. While purchasing power parity can be measured and compared even as countries use different currencies, it is easier when they use a common currency. In addition, riskless arbitrage may either be reduced substantially or eliminated.

It is envisaged that, faced with lower prices, Zimbabwean-based producers of goods could devise ways of lowering production costs by improving efficiencies. This also entails that both government and quasi-government entities will have to play a significant role in aligning their pricing of services with the region in order to facilitate lower costing by business.

When the Europeans agreed on a single currency, they desired and envisaged a boost in the liquidity of the European capital markets. There is no doubt that Zimbabwe could benefit from a more liquid capital market induced by the rand. A liquid market helps lower the cost of capital. This raises both investment and efficiencies in capital allocation for investment purposes.

This would, however, be dependent upon the political will of the administrators in our country, especially as it should be borne in mind, that it will be merely a currency union. It will not solve structural inequities between countries. For example, from the beginning Greece failed to meet the criteria to join the Eurozone. To this day it is at the centre of struggle in the Eurozone currency dynamics.

The full adoption of the rand would ease capital movement to and from Zimbabwe and South Africa. This is a milestone as South Africa is a key economy in Africa. It is genuinely the biggest and most advanced economy on the continent. Before capital goes anywhere else, it has a higher propensity for seeking South Africa as a destination. South Africa is to Africa what the United States is to the world.

When Britain resisted the adoption of the euro as its currency, it wanted to retain control over its monetary policy. Denmark and Sweden also considered loss of sovereignty in rejecting the use of the euro. Zimbabwe is in a weaker situation economically; it is in a unique situation wherein it does not have its own currency; so the argument of loss of control over monetary policy would be a non-issue.

Further, many countries in the Eurozone are dissimilar, thus rendering it a non-optimal currency area. This makes monetary policy complex to implement. For example, due to different tax regimes, business cycles, wage structures and other economic pillars, a policy that favours one country could inadvertently and unintentionally hurt another. Southern African countries that use the rand are in this situation as well. At the centre is one economic powerhouse, South Africa, while all the other countries inevitably depend on it.

It is apparent that adoption of the rand could benefit Zimbabwe, assuming Zimbabwe is facing a currency crisis. If, however, the country is facing a crisis of policy, leadership and mismanagement, the full adoption of the rand will not help. The economic problems in Zimbabwe are not sufficient to pull down the South African economy given that South Africa is 30 times larger. The rand is a more volatile currency compared to the dollar. Against this backdrop, the country’s leadership must be prepared to manage the shocks that are brought about by full randisation. South Africa as an economy is going through a transformation never seen before. Zimbabwe must be prepared to trudge along.

There is reasonable evidence that Zimbabwe is suffering a crisis of revenues rather than currency. This crisis cannot be placated by the full adoption of the rand. Other measures are needed to mollify the situation as it pertains. With solid confidence in the economy and healthy government revenues, it does not matter what currency one uses; it will always buy, imports will always be funded through currency and gold reserves.

We have been through this before. Remember “Black Friday”, November 14 1997. This is when the Zimbabwe dollar crashed 72% against the greenback while the stock market suffered a huge southward movement of nearly 50%. This was triggered by the decision to pay war veterans a once-off gratuity of Z$50 000. The country could not afford this payout. The central bank could not afford to defend the currency slide with the reserves available at the time, mere three months’ import cover of nearly US$800 million, could not do the trick.