Zimbabwe should adopt rand to avoid economic collapse

By Benjamin Cronin | Business Day Live |

The economic crisis that has gripped Zimbabwe since the early 2000s has been amplified by its government’s election in 2013 to adopt the US dollar as a unit of account. The collapse in local productive capacity escalated rapidly, and is now threatening economic disaster.

This is not Harare’s first existential economic crisis. In 2008, the country experienced unprecedented hyperinflation. Then, as now, the government faced a clear choice: embrace a stable currency, or face collapse.

In early 2009, the government unilaterally expanded legal tender and allowed consumers to trade in US dollars, euros, and rand. One significant catch was that the government’s unit of account remained Zimbabwean dollars, which it used to pay employees and domestic creditors.

Now the Reserve Bank of Zimbabwe, facing a shortage of US dollars, is trying to provide financial liquidity by printing bond notes with a derivative value based on US dollars.

This is a clear misstep. Such a measure is likely to be patently insufficient, given the recent failure of the Zimbabwe dollar, and it is also denominated in the wrong currency, given that the primary market for Zimbabwe is Southern Africa.

The interim solution lies in adopting the rand or a convertible local currency pegged to the rand as a domestic unit of account.

Unless Zimbabwe adopts the rand as a domestic unit of account, the purchasing power of the income remittances of the many Zimbabweans working in SA will continue to erode, and the local productive economy in Zimbabwe will continue to be undercut by South African-sourced goods, as the rand depreciates against the dollar.

The Zimbabwean government appears reluctant to adopt the rand, perhaps understandably given the uncertainty surrounding its economy, and so the South African government, together with regional partners, should pre-emptively make an offer that includes access to both the Common Monetary Area and the Southern African Customs Union.

These measures could ensure equitable distribution of seigniorage — the return derived by the issuer of a currency — as well as a share of tax revenue on the entry of goods into the common market, which accounts for a sizeable portion of Namibia, Lesotho, Swaziland and Botswana’s national budgets.

The Zimbabwean government’s protectionist measures in the form of trade restrictions on South African goods is likely to further escalate its economic crisis. While SA is the top export and import jurisdiction for Zimbabwe, SA has not historically run significant trade surpluses against Zimbabwe.

SA accounts for more than half of Zimbabwe’s total exports (the World Bank estimated it at more than 66% of the total in 2014), but Zimbabwe is not one of SA’s top 10 export markets (accounting for just more than 2.5% of total exports in 2014, says the World Bank). A trade war would probably be far more harmful to Zimbabwe’s economy.

Even if the Zimbabwean government pursues trade restrictions, it is likely that the domestic liquidity crisis will deepen. The Reserve Bank of Zimbabwe’s monetary policy statement in January acknowledged that the country was unable to control the outflow of liquidity with significant illicit financial outflows.

The bank said the selection of the US dollar as a unit of account meant the country had surrendered monetary policy space to the US, and was likely to suffer a continual artificial loss of competitiveness, given the depreciation of the rand and the Zambian kwacha.

Zimbabwe’s productive industry requires a stable currency environment, steady inflation rather than the current deflation, access to the diaspora market and — vitally — time to recover and rebalance trade.

Industry will require time to make the long-term investment decisions necessary to grow, time to “retool” as the Reserve Bank of Zimbabwe put it, and time to build confidence in its economy. Access to the rand market is critical in the short term.

The Reserve Bank of Zimbabwe perhaps inadvertently accepted this with a concession to South African tourists, whom the bank believes could be induced to visit the country with an exemption to transact in rand.

The situation is dire, and the people of Zimbabwe need urgent assistance from SA and other neighbours. While it may have benefited some South African industries and traders in the near term for Zimbabwe to operate a US-dollarised economy, the eagles have come home to roost.

The region now faces the potential of a disastrous economic collapse in a sizeable state. If Zimbabwe’s government collapses in the wake of a complete economic shutdown, no interim solution is likely to be available.

The South African government needs to act now in conjunction with regional bodies, and the answer in the short and long term is surely closer, not more distant, economic relations.

• Cronin is an attorney in Cape Town