Should Zimbabwe adopt the rand?

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By Gardner Rusike

I HAVE followed debates on Zimbabwe’s exchange rate policy religiously as an economist.

Some suggestions promote ideas around an auction system and dollarisation. But the hot topic at the moment is on adopting the rand as the new currency for Zimbabwe. The issue of adopting the rand is far complicated than it seems.

Before we look at the potential economic considerations, there has to be political will. If a policy is deemed politically incorrect, then there will be no political will. Until such a time, those policy proposals are deemed to be politically correct, only then can they be adopted.

I believe adopting the rand in our present circumstances will not help us reduce our economic problems for a number of reasons. As it stands, the rand is a single currency for Common Monetary Area (CMA) countries i.e. South Africa, Lesotho and Namibia. Botswana is a de facto member of the CMA.

In order for this arrangement to work, the CMA countries undertook to strive to maintain similar targets on macroeconomic variables such as interest rates and inflation. As a result, the smaller countries lose some degree of autonomy in monetary policy formulation to the dominant country which is South Africa.

Over time, the macroeconomic conditions in each of the CMA countries have moved together thus converging. To public knowledge, Zimbabwe’s macroeconomic conditions are the worst in the world and would need divine intervention for macroeconomic convergence to take place in the short term.

Given that Zimbabwe is an outlier and its numbers are different from the other states, it is not advised that Zimbabwe adopts the rand as a new currency.

Lack of foreign currency reserves and supply in the country is also another setback that we face if we are to adopt the rand. In order for the exchange rate to be stable, there is need for demand to equal supply of the rand. As long as demand for foreign currency continues to outstrip supply, there will continue to be misalignments in the exchange rate.

We would recall that one of the reasons why our exchange rate policies have not been successful, particularly the foreign exchange auction system of 2004, is the inadequate supply of foreign currency. It is therefore paramount that monetary authorities should have adequate reserves to manage the exchange rate.

Also, South Africa and Zimbabwe’s monetary policy orientations are different. South Africa follows an inflation targeting framework where inflation is the sole and prime objective of the central bank. On the other hand, Zimbabwe’s monetary policy focuses on monetary targets such as money supply growth.

The differences in the monetary regimes indicate the different stages of economic development. It is also imprudent to base your monetary policy decisions on a country like South Africa which is experiencing a boom phase in its business cycle, while Zimbabwe is a country in recession.

At present, South Africa is making efforts to reduce credit demand in the economy by increasing interest rates, while Zimbabwe would be looking at stimulating credit through reduction of interest rates.

For any economic reform to be successful in Zimbabwe there is need for international financial support. As long as the country remains isolated, the exchange rate will continue to be overvalued and feeding into other problems such as increased inflation, reduction in output and an increase in unemployment levels. Hence, any solution on the exchange rate front should have mechanisms that include inflows of foreign currency from the international community to meet the demand in the market.

Gardner Rusike is a teaching assistant in the economics department at Rhodes University, South Africa

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