In 2009 Zimbabwe moved from using the bearer cheques/Zimbabwen Dollars to using multiple foreign currencies (a basket of currencies including the United States Dollar, South African Rand, Euro and Botswana Pula) with the United States Dollar being the unit of account. Effectively Zimbabwe Dollarized but allowed other currencies to be accepted as legal tender. In 2015 and 2017 the bond coins and notes were introduced respectively to add another currency to the basket. Though this currency was introduced as being equivalent to the United States Dollar, over time the value of the bond note has been falling, and a parallel market emerging for the now scarce United States Dollars.
Three Ways of Adopting the Rand
The question as to whether or not Zimbabwe should adopt the Rand is not new and has been proposed since 2009. Adopting the Rand is a term widely used to mean 3 different things:
Using the Rand as the unit of account and transaction
The idea here is to use the Rand as our measuring stick and currency of reference for all things including budget and payments. One of the reasons this appeals to many is because it gives us a measure of purchasing power parity (more on this later) with our largest trading partner. We would however maintain a multicurrency system as we have now.
Using the Rand as the only currency of legal tender in Zimbabwe
Under this method the Rand will become the only currency used in Zimbabwe and any other currency will have to be traded to Rand. It has similar benefits to the previous method but introduces the need for having enough Rands in the system to cover the needs for transacting, a problem we have already met but not solved with the US dollar in the multicurrency system.
Formally joining the Rand Monetary Union
The Rand Monetary Union, which is actually known as the Common Monetary Area or the South African Customs Union which has South Africa, Namibia, Lesotho and Swaziland as members. In this set up countries maintain their own currency and accept the rand as legal tender. Countries are required to hold foreign reserves at least equivalent to the local currency they issue. In Zimbabwe’s case this would mean having a local currency first.
The focus of this article is rather on the effects of using the Rand as the main currency in Zimbabwe and will talk about effects across the three possibilities without particularly leaning towards any of them. So let’s unpack the possible effects and what they mean for us.
Benefits of adopting the Rand
The immediate benefit would be the availability of the currency. Proponents believe that the Rand is much more accessible to Zimbabweans than the US dollar. As South Africa is our largest trade partner, Rand inflows are more prevalent than US dollar inflows. So the belief is that this would fix or at least mitigate our current cash crisis. While this is partially true we must acknowledge that there are other factors behind the cash crisis.
Largest trade partner
As Zimbabwe’s largest trading partner is South Africa, adopting the Rand would also make sense. Denominating in the currency where the bulk of our imports are denominated improves the ease of doing business. VISA can charge as much as 2% for payments made using a VISA card that is denominated in a currency that is the different from the currency of the account. While not all payments to South Africa are made through VISA, it’s not hard to see that 2% of a lot of our money is being charged as fees because of the currency of account. That’s 2% loss of purchasing power.
Rand denomination makes exports attractive compared to US$
The rand is a more attractive currency of account for export purposes because of its value against other major currencies. The Rand’s fluctuations against the dollar is favourable for those exporting. In downward cycles this would make our exports more attractive. Purchasing Power Parity is the theory that an item should cost the same in two different places after adjusting for transport and other charges such as duties. This would lead to adjustment of prices in Zimbabwe to align to similar prices in South Africa. Prices in Zimbabwe are generally higher than the rest of the region and this applies to costs like labour. A downward revision of labour and input costs leads to more attractively priced products for export.
Disadvantages of adopting the Rand
Loss of monetary policy control
One marked disadvantage of adopting the Rand is the loss of monetary policy control. Without control over money supply the government would have little power in exercising expansionary or contractionary monetary policy where needed. The country has already seen the negative effects of this between the years 2013 -2015. Without monetary policy mechanisms, the country experienced deflation over these years which hampered the progress of growth experienced between 2009-2013.
Fiscal policy also hampered due to cash budgeting
The fiscal policy ability of the government also stands to be hampered by the adoption of the rand. Between 2009 and 2013, the government used a cash budgeting system, meaning they could only spend within their revenue means. While this does promote a fiscally responsible government, it does carry the disadvantage of limiting the government’s spending ability. Certain areas may require more spending for example IT, health and agriculture and the only option left to government to finance any budget deficits would be borrowing. As we already have a problem with government debt standing at US$17 billion (as announced in the 2019 budget), we can’t afford to have this position worsen. This is not to encourage fiscal irresponsibility by any means.
Imports become more expensive
While the ‘weaker’ currency would be a great boost for exports it also has the effect of making imports from outside the Rand Monetary Union relatively more expensive. Given that as things stand Zimbabwe is a net importer, our exports from outside the Rand Monetary Union would become more expensive. This combined with our exports being cheaper would put us further on the back foot. We would need further policy intervention to encourage more local production. Lower production costs would be a good stepping stone towards achieving this.
From a micro-economic view, the advantages of adopting the rand in whatever form are abundant. The macroeconomic picture however is not as flattering with many implications for the government. While adopting the rand presents us with many positives and opens up the potential for more, it is not the panacea for our economic woes or our cash crisis. As always we love to hear your thoughts on the issues we discuss in the comments section so please let us know your thoughts.
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