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Does Zimbabwe ‘yearn for the yuan’?

The Asia Times, for example, announced “Zimbabwe’s yearn for yuan”, while Al-Jazeera asked “To Yuan or not to Yuan, that is the question”.

But the media excitement is misplaced for now. Gono and his allies in the Zanu PF cannot institute the peg with the current government in place. Indeed, Finance minister Tendai Biti from the MDC-T made clear that Zimbabwe would continue using its multi-currency system until the economy stabilised.

Thus, like so much in Zimbabwe today, the future of the country’s monetary regime hinges on the outcome of the next elections. Disputes over the new draft constitution notwithstanding, the polls will likely go ahead this year. Zanu PF is eager to hold them when their octogenarian leader Robert Mugabe is still relatively fit. And MDC-T, while insisting on constitutional reforms prior to the vote, wants out of the coalition government. In terms of Zimbabwe’s constitution elections must be held by 2013.

If Zanu PF gains a clear victory that puts a partisan at the helm of the Finance ministry, the yuan peg could become a reality.

From Zanu PF’s perspective, the peg makes perfect sense. Tying Zimbabwe’s monetary regime to the Chinese would be a logical step forward in its “Look East” policy. Mugabe began reorienting his country eastward in 2003 as Western pressure over land seizures and human rights abuses grew.

Pragmatically, he believed Asia — namely, China, Malaysia, North Korea, Iran, and Indonesia — could compensate for the loss of Western investment. Asia also fits well with his party’s anti-colonial narrative. “It is very important for us in Zimbabwe,” he explained in 2005, “to develop the Look East Policy because that is where people who think like us are, same history of colonialism as ourselves, and people who have started developing their economies.”

China has become increasingly central to the policy. In the first nine months of 2011 alone, Sino-Zimbabwean trade increased 62%, totaling US$171 million, according to Reuters. China has made investments in a host of industries including telecommunications, construction, and most importantly mining. Just last November, Chinese investors agreed to put US$700 million toward developing Zimbabwe’s mining sector.

Mugabe also uses the partnership to play up Zanu F’s liberation credentials — its greatest political advantage. “Let us not forget,” he often reminds Zimbabweans, “that the material assistance that helped us liberate this country came from China.” That “material” continues to flow today as his security forces purchase Chinese arms without strings attached.

Internationally, China uses its influence abroad to protect Mugabe and his associates from Western pressure on human rights. It was one of the few countries to stand by Zimbabwe during the 2005 Operation Murambatsvina, in which the government bulldozed homes of an estimated 700 000 people.  China has even shown a willingness to veto UN Security Council resolutions for Mugabe. It did so in 2008 for a resolution that threatened to freeze the assets and prevent the travel of top government officials. This support remains invaluable for Zanu PF.

In promoting the yuan, Gono seems to base his arguments more on Zanu PF ideology than economic reality. He told state media recently that “the US dollar is fast ceasing to be the world’s reserve currency and the eurozone debt crisis has made things even worse… There is no doubt that the yuan, with its ascendancy, will be the 21st century’s world reserve currency.”

The yuan, however, is far from rivalling the dollar in this respect. Today, the dollar accounts for 60,7% of global reserves followed by the euro, pound sterling, and Japanese yen. The yuan’s share of reserves is negligible due to the strict capital controls China places on its currency.

Until China loosens these controls, little international trade can be denominated in yuan, which precludes its adoption as a reserve currency. The dollar currently accounts for 85% of trade compared to 0,3% of exchanges using China’s currency. Thus, a yuan peg would limit Zimbabwe’s access to international markets at least in the short-to-medium term.

Alluding to Angolan offers to bail out Portugal, Gono has suggested Zimbabwe might find itself in a similar situation. “By adopting the Chinese yuan,” he exclaimed, “it will not be long until we will also be volunteering to bail out Britain from her debt crisis.”

Zimbabwe’s debt burden is 230,8% of its US$5,9 billion gross domestic product. It is difficult to imagine how Zimbabwe would be in a position to bail out the United Kingdom’s US$2,25 trillion economy, which has a debt ratio of 79,5%. A more likely scenario seems to be that Western countries will eventually forgive Zimbabwe’s debt.

Moreover, Zimbabwean state run media often touts the trade relationship with China, giving the mistaken impression that it’s Zimbabwe’s largest trading partner. The African Economic Outlook 2011 report puts China’s share of Zimbabwean exports at 3,4%, which compares to 14% of exports going to South Africa. Zimbabwe also has an unsustainable US$2 billion trade deficit with South Africa.  The Zuma administration in South Africa intends to devalue the rand. The peg thus would exacerbate the trade deficit.

The multi-currency system used in Zimbabwe today has served an important transitional role. The government adopted the system in January 2009 as hyperinflation, peaking at 79,6 billion percent just a few months prior, killed the Zimbabwean dollar. A host of foreign currencies — the rand, euro, pound, US dollar, pula, metical, and kwacha — became recognised legal tender in Zimbabwe, but the US dollar soon supplanted the others.

This “dollarisation” reversed the runaway inflation and helped resurrect the country’s short-term credit market. Dollarisation, however, is not the optimal long-term solution for Zimbabwe. Pragmatically, a paucity of US coins in circulation makes it difficult for retailers to make change. And, from a nationalistic perspective, both Zanu PF and MDC-T agree that Zimbabwe should eventually return to its own dollar.  Thus, Zimbabwe has to incorporate itself into credible, fiscally sound framework.

The Common Monetary Area (CMA) offers just such a framework. The CMA is a monetary union tying together many of Zimbabwe’s largest trading partners — South Africa, Lesotho, Namibia, and Swaziland.

Joining the CMA would come with substantial economic and fiscal benefits. Further integrating its economy with the neighbourhood, namely South Africa, would bring down barriers to capital flow, thereby boosting Zimbabwe’s struggling long-term lending market and making cash transfers from the three million Zimbabweans living in South Africa more fluid. Additionally, the Zimbabwean government would gain much-needed revenues from seigniorage, which roughly speaking is the fiscal gains from printing currency for less than its actual worth.

Rather, the upcoming elections will determine the future of Zimbabwe’s monetary regime — a future that will prove much more promising if Zimbabwe’s leaders look south.  —  AllAfrica.com.

 

•Andrew C Miller holds a master’s degree from Georgetown University’s Walsh School of Foreign Service. He is on Twitter @andrewmiller802.

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