Or should it adopt only one international or regional currency? Should it change its currency of reference from the US dollar, while continuing to use the multi-currency basket? Or should it revert to having its own currency?
There was, therefore, no intent to pursue the subject again for it is said that “one should not cook the cabbages twice”. However, for every rule there is an exception, and the ongoing calls from divers sectors of the population for government to determine that the currency of usage, or of reference, in Zimbabwe should be the South African rand, constitutes such an exception.
For months, many letters to Zimbabwe’s newspapers have called for the South African rand to become Zimbabwe’s principal currency. At last month’s congress of Zanu PF, spokesmen of that party’s Matabeleland South branch did likewise. And, last week, the influential Confederation of Zimbabwe Industries (CZI) made a similar call.
CZI strives to assure the wellbeing and growth of Zimbabwean industry, sometimes successfully, and sometimes unsuccessfully. But its call for government to consider the adoption of the rand is most ill-advised, should be reconsidered by CZI, and disregarded by government.
CZI president, Kumbirai Katsande, is reported saying: “We as the CZI have held meetings on the adoption of a single currency, and it was agreed that the use of a single currency will be critical in the survival of the local industry”.
He continues that the adoption of the rand would alleviate the challenges faced by local industry, chief among them being the firming of the rand against the greenback (the US dollar). He said “the South African rand is a stable currency, hence its adoption would be a positive move for the country”.
First of all, the contention that the rand is a stable currency must be disputed. Nine months ago, the exchange rate approximated R10: US$1, and then it progressively strengthened, within a few months, to R6,85:US$1, then slightly weakening, to approximately R8:US$1, whereafter it again strengthened marginally, to levels approximating R7,35:US$1. Movement over a nine month period of as much as 26% cannot be credibly regarded as being “stable”!
Moreover, there is every likelihood that in the course of 2010 the rand will weaken substantially. Its significant strengthening in 2009 was primarily due to two related circumstance, neither of which were a reflection of South Africa’s economy.
The first of these was that the intense global economic recession of 2008, spearheaded by the collapse of many US and British banks, destroyed confidence in the US dollar, which weakened considerably, aligned to the considerable disintegration of the US economy.
As the value of the US dollar diminished, the value of the rand automatically rose, in US dollar terms. And the second cause of the strengthening of the rand was a direct consequence of the first.
As the US dollar became weaker and weaker, countries with accumulated monetary resources, such as Saudi Arabia and China (and many others) became increasingly reluctant to be possessed of US dollars, the value of which was progressively eroding.
So they invested in gold and platinum, disposing of their US dollars. Over a nine-month period, the world market price of gold soared from approximately US$730 per ounce to over US$1100. Being one of the world’s largest producers of gold and platinum, this was very beneficial to South Africa.
However, the adage applies: “What goes up, must come down”, and that will surely happen to gold and platinum prices, as it had done many, many times before, whereupon the rand will inevitably weaken considerably.
In fact, the South African economy is already showing marked signs of weakening (notwithstanding the grossly exaggerated expectations of World Cup 2010). Numbers employed in South Africa’s textile industry have apparently declined by almost 70%, the industry being unable to compete against the unfair, excessively subsidised, Chinese producers.
Similarly, there are reports of a more than 55% shrinkage of South Africa’s clothing industry. Other reports indicate that, with most World Cup 2010 projects nearing completion, about 30% of construction workers have been laid off.
As the South African economy contracts, so the rand must inevitably weaken. Moreover, there are pronounced indications that most of the developed, first-world countries are progressively recovering from the appalling recession of the last 18 months, and as that recovery continues, the US dollar must strengthen, which means that the rand will weaken.
Therefore, it is fallacious, in the extreme, to contend that the rand is a stable currency, and hence it would be foolhardy for Zimbabwe to adopt the rand as its currency.
Furthermore, as greatly as Zimbabwe cannot, and must not, wish for a South African economic decline, it must recognise that as that decline occurs, South Africa will very necessarily have to modify its monetary policies, to minimise and reverse the decline.
Those modifications will probably be very desirable from a South African point of view and, hopefully, successful over a period of time, but they could well be totally unsuited for Zimbabwe, which is already in the first phases of economic recovery.
Instead of being locked into South Africa’s monetary policies, Zimbabwe should be hedged by the divers monetary policies of the five currencies that constitute its multi-currency basket, supplemented by its own policies (where it can formulate them without conflicting with those that automatically apply by using the various currencies).
It must be acknowledged that the Zimbabwean populace, and economy, suffers some considerable prejudice from the innumerable cross-rates of the US dollar to the rand being applied by commerce and industry.
But adoption of the rand as Zimbabwe’s currency is not the ideal solution to that prejudice, for the disadvantages of so doing outweigh the advantages. Instead, government should consider prescribing that all must adhere to the internationally determined exchange rates. This would ensure nationwide cross-rate consistency.
The proponents for adoption of the rand, including CZI, should think again, and not pursue an emotive, counterproductive solution to a problem which creates even greater problems and economic constraints.
Instead, Zimbabwe should adhere to its multi-currency basket until the economy is fully recovered. Also Zimbabwe can either reintroduce its own currency, or can join a wide-ranging, southern African monetary union.