HomeBusiness DigestA Forced Hand: To Adopt the Rand or the Dollar?

A Forced Hand: To Adopt the Rand or the Dollar?

IT is without doubt that retaining the use of one’s own currency is of paramount importance.

Not only can you play around with it to steer economic policy in a certain direction but it also instils a sense of national pride while providing freedom over what to do with it.

However, as is often the case with the transition from being a teenager to adulthood, with freedom comes with responsibility. Those among us who refuse to act responsibly find themselves having a significant part of their freedom taken away: the most extreme being imprisonment.

Now, through a tacit admission of failure, Zimbabwe has been forced to adopt a currency or rather currencies other than its own. A few months ago, many in the market were screaming for a complete shift to dollarisation.

Nonetheless, for a good number, it was not necessarily a show of support for dollarisation per se but instead a search for an alternative to the clearly unusable Zimbabwean dollar. And so came in a multicurrency platform as part of the solution. This in itself presented a few challenges. For starters, the currencies’ exchange rates are generally not fixed to each other. How then are these movements captured particularly when carrying out transactions?

For example, among the transacting public, the generally accepted US dollar to South African rand is 1:10.

The current rate however sits at about 1:9. Clearly someone is making money here or at least can easily do so. Suppose one is holding on to a 100 rands, instead of using that to purchase US$10 worth of goods in the nearest supermarket one could simply go to the bank, exchange it for US dollars and come out of it with give or take US$11. Simple risk-free arbitrage. Perhaps asking for all of one’s change in ZAR isn’t such a bad idea.

But, for the average Joe, a rate of 1:10 makes far simpler the mathematical manoeuvring.

And this occurs with just the two most commonly used currencies. It is, therefore, not a wonder that none of the others have taken root in the Zimbabwean economy. It is fast becoming evident that Zimbabwe needs to pick one currency to replace the Zimbabwe dollar and make all the others behave much like foreign currency should and does in most parts of the world.

Having said that the next question becomes which one to pick? At this point it is not so much about whether dollarisation is a good idea or not but rather that the country finds itself at this juncture, how as best can it move on from it.

The rand initially does not make for an appealing candidate. It is generally considered more volatile compared to the greenback. Now one is tempted to point out the irony that Zimbabweans are all of a sudden afraid of a little volatility.

In addition, Jacob “Umshini Wami” Zuma is largely expected to take over the reins in South Africa, which hardly adds to confidence in the South African economy. The rand might suffer from a perception that all post-independence African countries go through a period of economic turmoil and perhaps now it is South Africa’s turn.

On the other hand, the US dollar, at least on the surface, has a lot going for it. It is a stronger currency with a greater international appeal and is comparatively more stable. It would seem like an obvious choice for a currency.

Nonetheless, the reality on the ground is that Zimbabwe will benefit a lot more from the use of the South African Rand. Zimbabwe trades significantly more with its southern neighbours than with any other and using the same currency makes this even easier.

Also a weaker currency is ordinarily good for exporters (apart from those destined for South Africa assuming the rand is adopted). Why else would one suppose the Americans make much of a fuss over the Chinese yuan being undervalued? There are advantages to not having a strong currency.

Perhaps the single biggest reality in favour of the rand has a deep seating in the politics of the region.

Given that Zimbabwe can no longer manage its own monetary policy, would it therefore not have a stronger chance of at least exerting some influence on Tito Mboweni, the South African Reserve Bank governor, than on Ben Bernanke, chairman of the American equivalent.

Developments in Zimbabwe would naturally have a larger bearing on South Africa than they would in the US (and vice versa). This implies that some consideration to Zimbabwe’s needs would be taken when crafting policy. So even if Zimbabwe formally adopts the US dollar, it’s fate will nonetheless remain intertwined with occurrences in South Africa.

It has often been said that the Zimbabwe dollar will not bounce back for at least a year. Realistically, it might never come back, at least not in the same form. Much like an ex-convict reformed or not, it is very difficult to be accepted back into society.

It would come as no surprise that the conditions under which this country is taking on the rand or any other currency for that matter are far from optimal.

This country is desperate and needs all the assistance it can get. It is often forgotten that despite the immediate gains Zimbabwe will have from price stability and so forth, South Africa also has something to gain from it.

Greater use of its currency implies an increased regional influence for it. Perhaps now would be the time for Zimbabwe to push for a common monetary area within Sadc. At least then a formal structure on how the policy is crafted can be achieved.


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