HomeOpinionEric Bloch: Multiple Currencies Best for Zim

Eric Bloch: Multiple Currencies Best for Zim

NINE months have elapsed since Zimbabwe effectively demonetised its currency, and replaced it with a basket of international and regional currencies, and yet the country is still pregnant with conflicting views and opinions on the currency that Zimbabwe should use.

The president, and many of those in his political entourage, recurrently demand reinstatement of the Zimbabwean dollar, contending that usage of any other currency constitutes a surrender of national sovereignty.

 

But the Zimbabwean dollar is so appallingly worthless that reverting to its usage at the present time represents naught but sovereignty over nothing!

Many others earning monies in US dollars, but incurring the greater portion of their expenditures in the South African rand (which is particularly prevalent in Bulawayo and its surrounds, undoubtedly primarily due to the close proximity to South Africa) have been significantly prejudiced by a major reduction in spending power.

 

This is as a consequence of the strengthening of the rand against the US dollar. In the past six months the rand has moved from approximately ZAR10:US$1 to ZAR7,2 to US$1, resulting in a decline in the number of rands realised for each US dollar earned of about 28%, and therefore a corresponding decrease in purchasing power.

There are diverse reasons for the strengthening of South Africa’s currency, amongst the foremost being that the substantial economic recession sustained in USA in 2008 and early 2009 has eroded confidence in the US dollar, with a consequential weakening of the currency against many others, especially those not as greatly affected by the global financial recession.

 

A by-product consequence has been that with the decline in confidence in the US dollar, demand for gold has substantially increased, driving its price upwards from approximately US$900 to over US$1 040. South Africa, being a very major gold producer, has benefited greatly from the surge in the gold price, with resultant strengthening of the rand.

Responsive to the greater decrease in value of the US dollar for those whose expenditures are mainly in the rand, those US dollar earners are embittered by the movement in the currency cross-rates, and therefore vigorously demand that Zimbabwe adopt the rand as its currency, and should abandon the multi-currency basket.

 

In doing so, and focused wholly upon their current stressed circumstances, they ignore that in the same manner as the strength of the rand surged upwards, so it could reverse in the future and very greatly weaken in value against the US dollar and other currencies in the future.

 

Should the rand become Zimbabwe’s currency and future weakening occurs, all advantage from abandoning other currencies and tying wholly to the rand will be lost, and buying power would become even less than is currently the case. But the advocates of a rand-based currency are oblivious to such a possibility, being only conscious of the current stresses afflicting them.

Yet a third school of opinion suggests that in view of the declared intent of Sadc to introduce a regional currency for the 15 countries comprising Sadc (in the same manner as the euro is the currency of most of the countries constituting the European Union) it would be premature for Zimbabwe to adopt any one currency, or to reintroduce its own currency, only to be faced with having to replace such currency with the intended new Sadc currency.

 

Although such argument has some substance, for recurrent currency changes are economically disruptive and undesirable, it must nevertheless be borne in mind that it is probably at least five years before a Sadc currency comes into being.

 

With the volatile and evolutionary state of the Zimbabwean economy, it may well be undesirable to await the introduction of a Sadc currency, albeit that it is equally undesirable for Zimbabwe at this time to concentrate exclusively upon one regional or international currency.

For Zimbabwe to commit itself to any one existing currency could be extremely disadvantageous, especially if that currency is the rand.

 

Although that country’s economy has demonstrated a surprisingly great resilience to the impacts of the intense international financial and economic recession, there is regrettably a likelihood that that economy will recede to a significant extent in the foreseeable future, although for the sake of Zimbabwe, and its neighbours, one must hope that that will not be so. However, there are harsh facts suggesting a South African economic decline is imminent.

Nearly 70% of South Africa’s textile industry has collapsed and ceased operations primarily due to an inability to compete against imports from the Far East, in general, and China in particular.

 

Similar circumstances are progressively impacting upon South Africa’s formerly substantial clothing industry. South Africa’s construction sector has been riding high, thanks to the magnitude of the 2010 World Cup projects, but as those projects attain completion, there is great uncertainty as to future demands on that sector of South Africa’s economy.

 

Concurrently, the global recession has impacted negatively upon demand, and therefore market prices, for diamonds, and diamond production is a meaningful component of the South African economy. And, although the gold production sector is enjoying a heyday as the global recession diminishes, and aligned thereto the US dollar strengthens, the world gold price may well recede, with inevitable adverse impacts upon the South African economy. Growing labour unrest is also beginning to impair that economy’s circumstances.

In the regrettable event that the South African economy does experience a decline, that decline will inevitably necessitate substantial changes to South Africa’s monetary policies.

 

These changes may, and probably will, be very desirable and positive for South Africa, and for an economic recovery, but could be totally unsuited to then prevailing Zimbabwean circumstances and needs. But if Zimbabwe is exclusively using the rand as its currency, it will then be locked into those monetary policies. Hence, adopting the rand as Zimbabwe’s currency would be unwise in the extreme.

Similarly, it would not serve Zimbabwe’s economy’s best needs to adopt any other country’s currency as its sole currency, for doing so would then commit Zimbabwe to that country’s monetary policies. In contradistinction, if Zimbabwe continues to use a multiplicity of currencies until such time as it is opportune to reintroduce a Zimbabwean currency, or a regional currency is introduced and adopted by Zimbabwe, then Zimbabwe is linked to a multiplicity of monetary policies, acting as hedges against negative consequences of any of them.

 

Therefore, despite the current cross-rate prejudices suffered by some, the national interest and the medium to long-term wellbeing of all, Zimbabwe should adhere to the current currencies’ basket for the foreseeable future.

 

Eric Bloch

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