The Sunday Mail
Persistence Gwanyanya
WHEN Zimbabwe adopted the multi-currency system in February 2009, the Zimbabwe dollar was officially discontinued.
At the time of its introduction, the multi-currency regime was intended to be temporary, but, to this day, this system is still in use; ostensibly because it has been working well in a number of ways, including stabilising the economy.
However, some analysts are now calling for the multi-currency system to be revisited, arguing that it is not the best in the current illiquid economic environment.
There are those who see adoption of the South African rand as a better alternative. And then there are those who say the return of the Zimbabwe dollar is the best option.
I will state why I think the country should continue with a multi-currency system anchored on the US dollar. I will also explain why Zimbabwe should not adopt the rand as a number of analysts now seem to suggest.
The US dollar has remained a better anchor currency option than the rand because the US economy is more stable and transparent than South Africa’s.
This is buttressed by the fact that US capital markets are more developed, efficient, integrated, well-regulated and more accessible than South Africa’s.
Being the major reserve currency with a weight of more than 40 percent in the basket of reserve currencies, the US dollar is more tradeable and acceptable than any other currency in the world.
Importantly, when Zimbabwe dollarised, its citizens demonstrated more preference for the US dollar over all other available currencies.
Even before dollarisation, the country leant towards the US dollar as a reserve currency.
A look at why some analysts now think the rand is a better anchor currency than the US dollar is a good starting point to understand why I suggest that the multiple currency system should remain in place.
Arguments in favour of adopting the rand are largely based on the theory of “Optimal Currency Area”, in reference to a geographical region in which economic efficiency can be maximised by using a single currency.
The rand protagonists argue that the currency offers the benefits of a nominal anchor currency to Zimbabwe due to a number of factors; which include high level of trade between the two countries, synchronised business cycles, high level of labour mobility between the two countries and availability of smaller denominations for change.
These are the same arguments normally advanced in support of currency unions such as the euro zone and the South Africa Customs Union.
An analysis of all these factors would seem to favour the use of the rand.
However, as already highlighted, when Zimbabwe dollarised, the market exhibited more preference for the US dollar compared to all other currencies.
When the concept of foreign currency licensed shops was introduced in 2008, which allowed the lincensing of some shops to sell their products in foreign currency, the US dollar emerged as the preferred currency.
It is estimated that more than 80 percent of transactions during that period were in US dollars despite the fact that the US was softening while the rand – supported by firming global prices – was strengthening.
This might have influenced the choice of the US dollar as an anchor currency and a unit of account when the country announced the 2009 National Budget subsequent to the introduction of the multi-currency system.
Whilst the Optimal Currency Area concept would have favoured the rand as an anchor currency on the basis that it makes economic sense for a country to adopt the currency of its major trading partner to reduce transactional costs, US dollar preference might have been influenced by its status as a reserve currency. A reserve currency is internationally acceptable currency.
It is not unusual for companies, even in South Africa, to invoice their goods in US dollars especially when their won currency becomes unstable.
Also, it must be considered that using the greenback as a reserve currency meant Zimbabwe did not have to go through an official arrangement with the US for it to use its currency after discontinuing the Zimbabwean dollar.
According to the IMF, at dollarisation, South Africa was Zimbabwe’s largest trading partner with an estimated 40 percent of the country’s imports originating from across the Limpopo.
Zimbabwe exported 25 percent of its goods and services to its neighbour.
Conversely, Zimbabwe’s trade with the US was very small, with imports from the US of three percent and exports of four percent.
To date, South Africa remains Zimbabwe’s largest trading partner accounting for around 45 percent of imports and 40 percent of exports.
Despite the synchronised business cycles that existed between Zimbabwe and South Africa from the 1990s, there is no real value that can be derived from synchronising the two countries’ monetary policies, which is usually one of the key conditions of joining the Rand Monetary Area. This is because the South African rand is very unstable, which makes planning difficult.
Since South Africa attained independence in 1994, the rand has been fluctuating widely between US$1:ZAR6 and US$1:ZAR18, mainly because South Africa is a commodity-dependent economy largely influenced by global economic and financial conditions.
Despite the fact that US monetary policy may not be in sync with economic conditions obtaining in Zimbabwe, as demonstrated by the fact that the US dollar is assumed to be overvalued by some 45 percent here, there is still no merit in adopting the rand because of the high risk of a currency crisis.
Since the beginning of 2015, the rand has depreciated by an estimated 50 percent, which means rand-denominated wealth has been reduced by the same proportion.
Not surprisingly, most Zimbabweans in South Africa who chose to travel home for the festive season had to cut back on spending because of the limitations of using a depreciating currency.
So, even the fact that there are more Zimbabweans living and working in South Africa than anywhere else in the world might not be enough to warrant adoption of the rand.
Some analysts argue that it will be easier for Zimbabwe to improve its competitiveness and match it with South Africa if the two countries were using the same currency.
Because Zimbabwe is a high-cost economy, a weaker currency, they believe, would support competitiveness and exports.
Whilst this makes some economic sense, it seems overly simplistic because Zimbabwe’s competitive challenges are beyond the overvalued US dollar.
Issues of competitiveness are mainly a result of dilapidated infrastructure, de-industrialisation and low levels of productivity than the fact that the US is overvalued in Zimbabwe.
It is possible to internally devalue the US dollar in Zimbabwe through price reductions and improved productivity without necessarily adopting the rand.
Immediately after dollarisation there was an outcry from the market that the country should use the rand because it was available in small denominations for change purposes.
The Reserve Bank of Zimbabwe’s introduce bond coins and put paid to suggestions that switching over to the rand would help with small denominations for change. It important to note that it is easier for a country to get into dollarisation than to come out of it. A look at Panama, which has been dollarised for the past 100 years, reveals this.
The benefit of a multiple currency system is that it reduces the risk from inordinate exposure to the US dollar. When the US dollar moves unfavourably, economic agents can easily convert their holdings into a currency of choice. That is why I suggest the multiple currency system should remain in place.
Persistence Gwanyanya is an economist, banker and a member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback [email protected] and WhatsApp +263773030691
