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Zimbabwe currency crisis: The rand and long history of trade with South Africa

The hand of South African Reserve Bank Governor Gill Marcus is seen holding South Africa's new rand banknotes in Pretoria

AS Zimbabwe goes through a deep liquidity crisis, sparking a new series of economic and currency problems against a background of 2008’s record hyperinflation, raging debate on these issues has gone on full throttle since last week’s monetary policy measures by the Reserve Bank governor John Mangudya to contain the situation.

By Brighton Musonza

Against the backdrop of the renewed currency debate, there are now growing calls for the full adoption of the South African Rand as the only legal tender in Zimbabwe to replace the multi-currency system, which has in its basket nine currencies including the United States dollar, rand, euro, the British pound, Chinese yuan, pula, Australian dollar, Indian rupee and Japanese yen.

Mangudya is dominating the headlines as he grapples with a serious currency crisis and cash shortages, and his latest intervention has caused panic accusations that he is trying to bring back the reviled Zimbabwe dollar through the back door.
The rand has been part of the multicurrency regime introduced in 2009 to replace the defunct Zimbabwe.

The question resonating in some quarters is: why does Zimbabwe use the US dollar instead of the South African rand? The simplistic view is that it would have been surely easier to use the currency of the country’s nearest and largest export market.

Answers to these pertinent questions go further and deeper through a myriad of legal, political and economic issues, as well as implications and complications around the subject of Zimbabwe fully adopting the rand as its official currency.

In the meantime, many holes have to be plugged. South Africa is seen as a country that could play a larger role in changing Zimbabwe’s trajectory, particularly if it adopts the rand as the main currency.

But efforts in this regard raise another fear among Zimbabweans — the longstanding fear that this may be the start of Zimbabwe finally becoming the de facto 10th province of South Africa.

The pursuit of a seemingly unfruitful bilateral trade arrangement with South Africa that President Mugabe has over the years banged on and only to mellow down as the country went into an economic meltdown, reflects on the continued participation in overlapping, but non-functional regional free trade areas, that has left Zimbabwe in foreign trade dilemma, especially in the light of the deteriorating terms of trade with South Africa, her main trading partner and competitor for both mutual and regional trade.

Zimbabwe and South Africa use the free trade area and customs union models of international trade. Whereas a functional bilateral trade agreement or a regional customs union culminating in a common market might have improve Zimbabwe’s regional competitiveness in the short run’ due to South Africa’s economic dominance and protectionist trade policies, Zimbabwe’s potential to benefit from trade with non-participants would be severely curtailed.

However, a broad free trade area, which allows flexibility to pursue national trade policies, seems less harmful. Zimbabwe’s trade history in that respect has traces to pre-colonial times; and that is explained below.

An initial trade agreement between South Africa and Zimbabwe in 1964 provided for preferential rates of duty, rebates and quotas on certain goods traded between the two countries.

The single stage transformation rule policy option provides for significant liberalisation of the SADC rules of origin and entails the application of the relaxed “single transformation” during manufacturing in all regional member countries.

It is therefore essentially important to look into this history of international trade between Zimbabwe and South Africa on the basis of the Southern African Customs Union (SACU) and how the Rand as SACU’s supranational currency cannot be politically and economically be the solution to the Zimbabwean context.

As a strong and influential member of SADC, it would have been easier for Zimbabwe to be able work with others closely enough to be able to produce and support a common currency. So, what is stopping us?

There are many reasons prominent of which Zimbabwe cannot find itself under the same momentary system as that of South Africa and other SACU member states; and this pause a possible situation that would leave the country at the mercy of the South Africa Central Bank.

It is therefore important that we look at the history of SACU and the Rand; because currency or exchange rate forms the key part of international trade and regional cooperation.

SACU is the oldest existing customs union in the world. It was established in 1910 in pursuant to a Customs Union Agreement between the then Union of South Africa and the High Commission Territories of Bechuanaland, Basutoland and Swaziland. With the advent of independence for these territories, the agreement was updated and, in 1969, it was relaunched as the SACU with the signing of an agreement between the Republic of South Africa, Botswana, Lesotho and Swaziland.

The updated union officially entered into force in 1970 and after Namibia’s independence from South Africa in 1990, it joined SACU as its fifth member.

The 1903 SACU was a multilateral treaty between the British colonies and protectorates in Southern Africa that created a customs union between the territories.

In 1910, SACU was created as the successor to the 1903 union; however, Southern Rhodesia (Zimbabwe) did not join the 1910 customs union. So; this marks underlines our position in the history and probably go back and ask why did we not join? Our answers could probably help find the solutions for today’s problems.

The revised 2002 SACU Agreement says it provides for a more democratic institutional structure; a dispute settlement mechanism; the requirement to have common policies on industrial development, agriculture, competition, and unfair trade practices; and a new system regarding the common revenue pool and sharing formula.

It is the member states’ objective that once in force, the new SACU Agreement, combined with multilateral trade liberalisation and outward-orientation, will help SACU countries to foster their integration into the world economy.

So for those who are pushing for Zimbabwe to adopt the Rand currency in full or what is commonly known as the Rand Union in the Multilateral Monetary Area (MMA); must be fully aware of the legal, political and economic consequences of such a move. And a few questions have to be answered.

Also of note; in SACU, although the Rand is the legal tender in all member states in the MMA formerly known as Common Monetary Are (CMA) which links South Africa, Namibia, Lesotho and Swaziland into a monetary union; the other member states still issue their own currencies: the Lesotho (loti), Namibian (dollar) and Swazi (lilangeni).

However, these are exchanged at par with the rand and there is no immediate prospect of change. On the backdrop of that, Zimbabwe has no currency of its own and hence its entry into the MMA or SACU would complicate matters for member states.

Of the SACU member states; only Namibia is still using its own currency, the Namibia dollar which is at par with market rate but it still, by default, ring-fenced with the Rand. Of these SACU member states, only Botswana is currently out of the MMA, having replaced the rand with the Pula in 1976.

In the MMA, foreign exchange regulations and monetary policy throughout SACU continue to reflect the influence of the South African Reserve Bank.

And that would probably mean that Zimbabwe would need to disband or reduce the influence of its already battered Reserve Bank of Zimbabwe on its domestic economic policies and submit itself into the hands of the South African monetary policy.

Metaphorically, that would like politically waving a white cloth of surrender in capitulation and give up its sovereignty.

The Rand Union Monetary Area (RMA), was established in December 1974; and it presides over the CMA which has since been replaced by the present MMA as 1992, when Namibia formally joined the monetary union.

What this means is that Zimbabwe cannot unilaterally pronounce the Rand adoption in place of the U.S dollar without violating international agreements that dates back to the 70s.

As well there maybe undue pressure from South Africa to obtain favourable trade terms and asking that the country submits to the SACU agreements.

To that effect; economically, Zimbabwe will end up being a South African protectorate and politically some Zimbabwean provinces can as well easily demand to be South African provinces like what is currently happening in Lesotho.

Since 1998 South Africa has meddled in Lesotho on trumped up reasons of restoration of democracy and rule of law on the reasons for a better stable state for economic integration but when it deployed its troops in 1998, they stood by as the City of Maseru was badly damaged in riots and looting.

The implications to Zimbabwe joining SACU means; all customs and excise collected in the common customs area are paid into the South Africa’s National Revenue Fund and shared among members according to a revenue-sharing formula as described in the agreement.

South Africa is the custodian of this pool and hence it wields its political and economic influence.

During the Zimbabwe’s coalition government; South Africa’s ANC led government was happy with the idea of Zimbabwe using the Rand as its official currency but after consultations with its central bank and also after looking deeper into the legality of such a move; they dithered.

As well; it is possible that, after witnessing what happened in the Eurozone with the Greek debt crisis; South Africa would be worry of having Zimbabwe in the Rand Union because; compared to Lesotho, Swaziland, and Namibia, it is a much bigger economy with a bigger current account with its own mega-black hole that could easily cause instability within the Rand Union.

As well, South Africa know that Zimbabwe is also a major political force in the region such that it could easily cause regional factions through intransigence that could give power to other lesser states in the Rand Union block.

What this therefore means is that, at the adoption of the U.S dollar; if Zimbabwe had taken on the rand as the “official currency”, taking the geographical proximity into consideration, Zimbabwe would have been economically and politically more dependent on South Africa as is the case in point with Namibia, Lesotho and Swaziland.

And the risk of exposure to South Africa’s own Rand’s volatility and rising political instability are also a cause for concerns.

South Africa is the source of 60% of Zimbabwe’s imports and the destination of more than 40% of its exports.

About 70% of Zimbabwe’s tourists come via South Africa, although numbers are declining as the destination becomes more expensive for rand-bearing visitors.

There is a significant South African business presence in Zimbabwe. About 27 of South Africa’s biggest listed companies have operations there, and a number are also listed on the Zimbabwe Stock Exchange.

Some of these are Zimbabwe’s top performers. South African companies continued to find ways to deal with the country’s distorted and largely dysfunctional economy in order to maintain a presence there in expectation of eventual political change and economic recovery.

There is a muted push within Zimbabwe to get South African companies, which provide most of the consumer goods for Zimbabwe’s well-stocked supermarkets, to manufacture domestically and hence government officials are saying the country should demand that South African companies produce within Zimbabwe for that market.

The lack of equity in the local market for partners in Zimbabwe to take up stakes in South African-owned or run companies is proving to be a problem in an environment where there is increasing pressure for indigenisation.

Zimbabwe is not alone in pushing foreigners to manufacture locally, with countries such as Nigeria banning a range of goods to this end.

Zimbabwe is not an attractive prospect for investors right now. Apart from liquidity challenges and the high-cost operating environment, there is also the politics. The country is riven by fierce political faction fighting, and policy-making tends to be driven by political expedience and crisis management.

At the centre of Zimbabwe’s convoluted economic problems; there is the currency matter that centres on our international trade and that the trade balance between Zimbabwe and South Africa has over the years been in favour of South Africa.

Zimbabwe’s trade deficit with South Africa has increased more than ten-fold in recent years – imports have been rising, exports declining thereby resulting in the widening of the trade balance between the two countries in favour of South Africa.

On the back of that the depreciating Rand against the dollar has seen Zimbabwe importing long standing deflationary pressures that are hurting the local industry and partly to blame for ongoing de-industrialisation. The volatility of the South African economy to many of the World’s problems have become our Achilles heel.

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