Mixed views on rand adoption

By  Gift Phiri

Proposals  for Zimbabwe to adopt the South African rand as the major instrument of trade amid growing United States dollar shortages has attracted mixed views, with some economists firm that it will boost the economy while some warn it could upend the country’s wealth through devaluation.

The comments by leading economists in a wave of recent calls for rand adoption offer the first glimpse of the balancing act fiscal and monetary authorities must perform.

While some economists applaud pro-rand adoption proposals that have now earned the support of top bosses in the Reserve Bank of Zimbabwe (RBZ), some are raising alarm about a policy that may hurt Zimbabwean consumers and perhaps their own balance sheets.

RBZ deputy governor Kuphukile Mlambo has said the central bank was considering a basket of currency reforms, the centrepiece of which is rand adoption, to try to shore up liquidity after the offer to Zimbabwean producers for a 5 percent bonus on the value of what they export in US dollars – funded by the new bond notes introduced last November – have failed to address the cash crisis.

Banks are now disbursing a maximum of $30 dollars a day, sometimes in coins only, down from their usual $100 — while those that had capped the maximum withdrawal limit at $500 a week have pulled this back to $200.

The central bank has also dramatically failed to keep US dollars in circulation at a time imports massively outstrip exports.

The only option is a painful adjustment in wages and prices through adoption of the rand to stem continuous leakage or “externalisation” of the dollar out of the economy, University of Zimbabwe economics lecturer and President Robert Mugabe’s economic advisor Ashok Chakravati said.

He said the US dollar is an international currency in great demand; therefore it was not possible for a developing country like Zimbabwe to maintain a dollarised economy while being surrounded by a non-dollarised region.

He called on the government to adopt the South African rand and ditch the dollar.

“I have said this before, we need a weaker currency. The weaker, the better for us. As South Africa has just been downgraded, this is an opportune time,” he said, referring to South Africa losing its investment-grade credit rating from S&P Global Ratings for the first time in 17 years last week in response to a Cabinet purge by President Jacob Zuma that saw the sacking of Finance minister Pravin Gordhan who was replaced with former Home Affairs minister Malusi Gigaba, a rookie when it comes to finance and business, in a stunning reshuffle that weakened the rand.

Zimbabwe’s largest business lobby group has also called on the government to adopt the rand as its “reference currency” instead of the dollar.

But economist Persistence Gwanyanya warned that switching to the rand was not a short-term solution.

“Any forced conversion at a devalued dollar-rand exchange rate would have enormous repercussions which will lead to litigations,” Gwanyanya warned.

“Savings, pensions, and corporate balance sheets would need to be similarly devalued, though in a less catastrophic way to dollarisation in 2008/ 9.”

Zimbabwe’s government adopted the use of foreign currencies such as the rand and US dollar nearly eight years ago, abandoning the local dollar which had been rendered worthless by years of hyperinflation during a decade of economic decline.

Gwanyanya said unless the rand fell steeply, the country will remain hugely uncompetitive because of deep-seated structural challenges characterised by production constraints that have made it difficult to re-balance the economy.

The Zimbabwe Economics Society member said this economic imbalance — reflected by high levels of consumption and imports against low production and exports levels — has conspired with the country’s inability to attract and retain both local and foreign capital to produce the undesirable state of a faltering economy in stress.

Equally, he said, the poor investment policies and market indiscipline has resulted in undesirable levels of capital flight.

The RBZ reported that in 2015 alone, the country lost about $2 billion through externalisation.

Bankers Association of Zimbabwe president Charity Jinya, who is also MD of MBCA Bank, a subsidiary of South Africa’s Nedbank, has said that the rand had to be urgently adopted.

“It is not sustainable for the US dollar to continue as the major transacting currency, so we recommend that the South African rand be used as the main transacting currency. This would reduce concentration of risk on the US dollar,” said Jinya.

“We also recommend that the US dollar be reserved to make offshore payments and local electronic payments. That will reduce the amount of US dollars likely to leave Zimbabwe through unofficial means.”

Gwanyanya admitted bond notes have been less potent in curtailing externalisation.

“As long as influence-peddlers who have the ability to access the US dollar and cart it across the border loom large on the economy, prospects to significantly cut smuggling will remain dim,” he said, adding no wonder $600 million is reportedly sitting in offshore accounts when the country is in dire need of capital to rebuild.

Since 50 percent to 60 percent of Zimbabwe’s total trade is with South Africa, the most advantageous foreign currency for this country to adopt is the rand, Chakravati insisted, adding it is a non-convertible currency and therefore it will remain mainly in South Africa and in Zimbabwe.

“There is no incentive for economic agents to try and externalise the rand,” he said.

An adequate supply of rand is available from Zimbabwe exports to South Africa, Diaspora remittances from South Africa, and access to the South African banking system with which many of Zimbabwean banks and financial institutions such as MBCA are already connected.

Chakravati said the informal sector will be able to trade easily with South Africa.

“Use of the rand will help prices, costs and wages in Zimbabwe to equilibrate with South Africa, and this will result in the increased competitiveness of our industries, and the economy as a whole,” Chakravati said, adding Zimbabwe’s sources of US dollars were limited to export earnings, foreign direct investment (FDI) and Diaspora remittances which have been dwindling.

Diaspora remittances, which account for 30 percent of the country’s foreign exchange earnings, declined by 17,9 percent from $1,9 billion received in 2015 to $1,5 billion in 2016 of which $779 million are remittances from the Diaspora while remittances from international organisations running local NGOs amount to $795 million, according to the RBZ.

“The fall in remittances is attributed to the poor performance of the global economy, fall in the dollar-denominated value of remittance inflows as a result of continued appreciation of the US dollar against regional currencies as well as increasing use of informal remittance channels,” said a 2017 monetary policy analysis presented in the National Assembly on Thursday.

“This has affected general market liquidity in the economy with adverse effects on aggregate demand and sustained economic recovery.

“Government must continue to offer incentives to the diaspora community to ensure sustainable flow of funds from this community.”

Chakravati said Zimbabwe’s sources of US dollars was “barely enough to cover the foreign exchange requirements of import demands.”

While bond notes have added to liquidity to some extent after the injection of $102 million so far, “they are not a solution to the problem,” the economic advisor to the President and Cabinet said.

“Even if the RBZ today released the total amount of $200 million in bond notes, the liquidity problem would not be solved,” he said.

Chakravati said a good tobacco season being anticipated will ease the situation and provide temporary relief, but it is not a solution to the problem even after newly registered tobacco farmers increased by 56 percent to 13 950 from 8 959 farmers in the previous season under the 2016/17 season, .

Central bank governor John Mangudya has said the opening up of the tobacco auction floors on March 15 will boost the country’s foreign exchange earnings and this is expected to go a long way in ameliorating the liquidity challenges in the market.

The area under tobacco for the 2016/17 season increased to 110 216 hectares, from 102 537 hectares in the previous season.

“This is inclusive of 87 603 ha under contract arrangements, wherein, 19 companies are participating in supporting tobacco farmers,” Finance minister Patrick Chinamasa said in the latest Treasury bulletin.

South Africa is the second largest buyer of Zimbabwe’s tobacco crop.

Tobacco sales to South Africa have increased by more than 50 percent since 2015. And the cash crisis is also hitting tobacco farmers delivering their crop to the auction floors.

Chakravati said the continued US dollar use cannot be a basis for competitiveness and sustained growth irrespective of what administrative measures are taken, “it will continue to be externalised out of the country over time.”

He said ideally, Zimbabwe, like all other developing countries, should have its own national currency in circulation.

“Unfortunately, there are stringent conditions for the re-introduction of a national currency, and since these conditions are not present in the economy today, the introduction of a national currency is not an option open to us today,” he said. Daily News