HomeOpinionEric Bloch: Multicurrency, rand or Zimdollar?

Eric Bloch: Multicurrency, rand or Zimdollar?

ALMOST 15 months have elapsed since Zimbabwe demonetised its currency, substituting it with a multi-currency basket (US dollars, South African rand, Botswana pula, British pounds and the euro). 

Despite the passage of time, arguments rage on as to whether Zimbabwe should continue with the multi-currency basket, or should only utilise the rand (possibly joining a rand monetary union), or should revert to its own national currency.
Those who vigorously contend that Zimbabwe should reintroduce its own currency primarily base that contention on the premise that using other countries’ currencies constitutes a surrender of national sovereignty.  They claim that Zimbabwe’s usage of foreign currencies subjugates Zimbabwe to the monetary and allied controls, and even the political determinations, of the country whose currency is being used by Zimbabwe.  They argue that without a national currency of its own, Zimbabwe’s monetary policy determination ability is wholly emasculated. 
It must be acknowledged that, to a limited extent, there is some substance to those contentions, but only minimally so. Even when using the currencies of other countries, Zimbabwe still has the power to formulate and implement diverse monetary policies, and to considerably counter those of countries whose currencies are used.
Those who are pressing for a reversion to Zimbabwean currency are mostly those who had significant amounts of Zimbabwe dollars at the time of demonetisation, which were overnight rendered valueless, and those wholly dependant upon pensions denominated in Zimbabwe dollars (and which, after the slashing of 25 zeros over three years, and then conversion to US dollars at a rate of 20 redenominated Zimbabwe dollars to one US$, were reduced to minimal values).  However, reintroduction of a Zimbabwean currency will not restore value.  If a new currency came into being, the old currency would still have no value, and this would apply similarly to the pensions. 
On the other hand, if the former Zimbabwe dollar was reinstated, that in circulation would vastly exceed Zimbabwe’s minimal monetary reserves, and hence would be valueless. This would reinstate the horrendous hyperinflation of yesteryear, and yet again decimate Zimbabwe’s already parlously low international credit rating. Consequently, the minimal foreign investment, lines of credit, and supplier credits would diminish further.
When presenting his 2010 national Budget the Minister of Finance Tendai Biti said Zimbabwe would not reintroduce a national currency until the economy was wholly stable.  He said that the measure of such stability would be economic growth of at least 7% per annum for each of two successive years, measured on Gross domestic Product.  This policy declaration was realistic, practical, and most commendable, and a prerequisite for Zimbabwean economic recovery.
A wildly pursued demand is that Zimbabwe should abandon the multi-currency basket, and that instead the rand should be Zimbabwe’s currency.  This demand is particularly pronounced in Matabeleland, especially in Bulawayo, where the rand is extensively used and the proximity to South Africa enhances access to the South African currency.  At the time when Zimbabwe adopted the multi-currency basket, the exchange rate prevailing internationally approximated R10: US$1, but the rand rapidly strengthened; within nine months the rate being at levels of R7: US$1.  However, most businesses in general, and informal sector operations in particular, retained the former exchange rate which the populace deeply resented, recognising the gross exploitation by the traders and the resultant high costs of living.  Therefore they vociferously called for the rand to be the only lawful currency, thereby obviating the exchange rate prejudices.
But, in doing so, they overlooked the longstanding principle that “that which goes up must come down”, and that in time that would happen to the rand.  It was unrealistic to anticipate a continuing strengthening of the rand, or even that it would endlessly hold its value.  In the last six weeks the rand has been weakening, its exchange rate to the US dollar fluctuating between R7, 3 and R7, 55, and there are widespread expectations of further value decline over the months ahead, and especially so after conclusion of World Cup 2010.
Moreover, there is intensifying commercial pressure in South Africa for government to effect a substantial devaluation of the rand, perceived as necessary if South Africa is to counter intense international competition (particularly so from the Far East), and regain export market penetration and hence increased economic productivity.  Last week a strong statement demanding devaluation of the rand was jointly issued by the Congress of South African Trade Unions, the Federation of Unions of South Africa, the National Council of Trade Unions, the National Association of Automotive Components and Allied Manufacturers, and 10 major private sector companies.  The statement urged that the South African government should link the rand to a basket of currencies (as Zimbabwe has done), and that the base exchange rate should be fixed by government at R10, 50:US$1.
Were this to happen, being an almost
50 per centum of devaluation of the rand, most of those Zimbabweans who have been howling for the rand to be Zimbabwe’s currency will weep, and demand that the
US dollar be Zimbabwe’s currency.  They will also vitriolically castigate government for heeding the call for Zimbabwe to use only the rand.
The hard fact is that despite attendant negatives, Zimbabwe is best placed (for the foreseeable future) to hedge its circumstances by continuing a linkage to a multi-currency basket, thereby minimising the impacts of major variations in value of any one specific currency, until such time as Zimbabwe can credibly and constructively resort to its own national currency.  Moreover, doing so avoids Zimbabwean vulnerability to the monetary policies of any one country, for each country will
from time to time modify its policies to its economic needs, and not those of Zimbabwe.
It would be an economic disaster for Zimbabwe, and its people, if the multi-currency basket was abandoned within the foreseeable future, notwithstanding that the usage also has attendant negatives.


Eric Bloch

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