Eric Bloch: Zim’s Currency Conundrum

DURING 2007 and 2008, inflation in Zimbabwe soared. So great was Zimbabwean inflation that it became impossible for the Central Statistical Office to measure it authoritatively.

Prices escalated continuously, as did all other elements of cost of living, stimulating hyperinflation of such magnitude that it was higher than ever before sustained anywhere in the world. The monolithic inflation was so great that in November 2008 Professor Steve Hanke of Johns Hopkins University in the US estimated the annual inflation rate to equate to 65 followed by 105 zeros!

With prices continuously rising, many increasing daily and, in numerous instances, increasingly hourly, the Zimbabwean currency became meaningless. No one wished to have the currency, for its value was declining continuously. Zimbabwean currency received on one day would, at very best, buy half the quantity of goods on the following day as could be purchased on the day of receipt, and the buying power would decline to at least the same extent on each following day.
Everyone had total contempt for the Zimbabwean currency, which was credibly perceived to be virtually devoid of substance.  (So horrendously worthless was the Zimbabwean dollar that increasingly the populace was resorting to barter trade, preferring to resort to exchanges of goods and services than of meaningless, near valueless bank notes, and coins had fallen into total disuse.
In fact, many suggested that the then currency should be demonetised, and a new currency introduced. It was suggested that one Zimbabwean dollar be replaced with one Zimbabwean Azeko, and that 100 Azekos would Peleli!).
Because Zimbabwean currency had lost all credibility and substance, and was viewed with contemptuous disdain by almost everyone, it fell into near total disuse. Instead, although it was Zimbabwe’s then only legal currency, increasingly all sectors of the economy transacted in foreign currencies, especially in US dollars and the South African rand. Doing so was in flagrant breach of law, but was perceived as the only way of preserving value or minimising loss of value, save for recourse to barter, and hence a disregard for the law developed.
Ultimately, government and the Reserve Bank recognised the need to legitimise this circumstance. On January 29, in belatedly tabling Zimbabwe’s 2009 Budget to Parliament, the then Acting Minister of Finance, Patrick Chinamasa, announced that a basket of currencies would constitute
lawful Zimbabwean tender, that basket comprising the US dollar, South African rand, Botswana pula, British pound and the euro, in addition to the Zimbabwean dollar, and that in the Monetary Policy Review four days
later, the Reserve Bank would issue the operational modalities of the new currency basket.
That occurred, and forthwith the Zimbabwean dollar became almost totally moribund.  The US dollar became the new currency base, being used nationwide and by government as an accounting and reporting base, but the other currencies also being widely used as mediums of trade. In Matabeleland, the most predominantly used currency was the South African rand, undoubtedly because of the proximity to South Africa, and hence a continuous inflow of that currency from the millions of Zimbabweans resident there.
In Mashonaland, the currency in greatest use was the US dollar, but throughout any of the five specified currencies was readily acceptable legal tender. Usage of the Zimbabwean dollar was not unlawful, but none were willing to accept that currency perceived, with much justification, to be virtually worthless.
Initially the populace in general, and commerce and industry in particular, welcomed the existence of a basket of a multiplicity of currencies, but recently there has been a slow, but increasing, call for the Zimbabwean economy to be tied specifically to the South African rand. That call has been reinforced by a publicly-declared suggestion by the Minister of Finance that Zimbabwe should join the Rand Monetary Union, whereby the rand would then be the lawful currency of Zimbabwe  (widely known as “Randerisation”).
Although such view was not widely promoted a few months ago, it is now gaining intensifying support throughout much of Zimbabwe, and especially so from the “man on the street”, for the rand has gained massively in strength over the last few months. In February the rand: US dollar exchange rate approximated R10: US$1, whereas it now approximates R8: US$1. Regrettably, many (but fortunately not all) traders are immorally exploiting this strengthening of the rand by preserving a 10 to 1 exchange rate, to the considerable prejudice of their customers, and this motivating the intensifying public call for “Randerisation”.
In the prevailing environment, that call is readily understandable, and yet it would be unwise in the extreme for government to heed it. If Zimbabwe were to be totally tied to the rand, it would inevitably be almost wholly subject to South Africa’s monetary policies. Those policies could be wholly suited to the South African economic needs, and yet totally unsuited to those of Zimbabwe, for the economic and other circumstances of the two countries are not necessarily so identical, and therefore divergent monetary policies may be necessary to address the needs of South Africa and Zimbabwe.
This is particularly so at the present time when Zimbabwe’s economy is slowly commencing a very long overdue recovery, whereas there are very real possibilities that the presently very strong South African economy may be on the threshold of decline.  
The May 2009 World Economic Survey of the University of Munich’s Centre for Economic Studies, the Ifo Institute for Economic Research, foreshadows a “looming recession in South Africa”. It records that: “The economic climate indicator remained in the negative territory in South Africa in April. Although the assessments of the current economic situation have been slightly upgraded, the economic expectations for the next six months remain cautious, indicating that in Africa’s largest economy the first recession in 17 years looms. Capital expenditures and the export sector are expected to weaken further in the next six months. Private consumption, in contrast, is expected to stabilise over the next half of the year. Unemployment and lack of skilled labour continue to pose the most economic problems, according to WES experts.”
Somewhat similarly, the Governor of the South African Reserve Bank, Tito Mboweni, has voiced concern that the magnitude of the strengthening of the rand could fuel negative economic developments in the foreseeable future, and that remedial monetary policies may become necessary.  Those policies may be very necessary and desirable for South Africa, but not suited to Zimbabwe’s needs, and yet if Zimbabwe joins the Rand Monetary Union, they would substantially bind it.
Thus, Zimbabwe is faced by a currency conundrum, in that it is presently increasingly linked to the rand, but such linkage may well develop against the best interests of the Zimbabwean economy. Therefore, Zimbabwe is better placed by “hedging its bets”, by maintaining a basket of lawful currencies, until such time as the economy is sufficiently stable as to restore substance to its own currency, rather than becoming bound to any one country’s monetary policies.