FINANCE Minister Mthuli Ncube has reignited debate on adoption of the rand, saying it is the only way to deal with Zimbabwe’s chronic liquidity challenges.
This also comes as business executives and analysts have said it is time for President Emmerson Mnangagwa’s new administration to deliver chiefly on cutting Harare’s worsening budget and trade deficits, currency shortages and other economic ills.
The former African Development Bank vice president said on Monday that his plans to reform the country’s currency system include adopting “the United States dollar only and remove the bond notes from circulation through a demonetisation process and also liberalise exchange controls.
“The other way is to adopt the rand by negotiating to join the Rand Monetary Area, and this will close the gap in loss of competitiveness against our largest trading partner, South Africa,” Ncube said just after his swearing in.
The ex-banker, who is planning to set up an international advisory council to lead Zimbabwe’s re-engagement efforts with the international community, said another proposal would be to introduce a new Zimbabwe dollar to replace the bond notes that were introduced by the government in November 2016 to ease a biting liquidity crunch.
Zimbabwe discarded its fiat currency in 2009 after it was ravaged by hyper-inflation which had peaked at around 500 billion percent, rendering it unusable.
It then adopted a number of foreign currencies, including the US dollar and the South African rand, but the dollar was more popular.
A few years later US bank notes had started to run short, forcing the government to introduce a token currency – the bond notes – parallel to the dollar but have seen its value eroded by more than 50 percent to the greenback.
Industry experts who spoke to The Financial Gazette this week said rand adoption could help the country reduce domestic prices and raise its international competitiveness.
Having called on retailers and members to quote their prices in rand in May 2018, Confederation of Zimbabwe Industries (CZI) president Sifelani Jabangwe said shifting to the South African currency could help the authorities gain time and allow them to initiate a much needed shot in the arm in terms of implementing policies that are investor friendly.
“However, the rand issue requires a lot of engagements between government and private sector. This is to try and stabilise the economy. We have to assess all possible angles and open a robust debate. The good thing is that we have the technocrats who have the ability,” he said.
Tony Hawkins, a University of Zimbabwe lecturer, said it would be prudent to have a respected currency in place when bond notes are phased out.
“After removing the bond notes, we have to put something in its place for people to have something to transact with. Currently there are about only $400 million of bond notes in circulation,” he said.
Another economist Ashok Chakravat indicated that Zimbabwe could informally adopt the rand while it works on the formalisation into the South African Customs Union.
The Rand Monetary Union is made up of South Africa, Lesotho, Namibia and Swaziland.
“In order to join the rand union, we should have our own currency, so at the moment we can’t lose sleep over the bond notes, they are not the challenge,” Chris Mugaga, the Zimbabwe National Chamber of Commerce chief executive said.
Denford Mutashu, the Confederation of Zimbabwe Industries president, concurred with Mugaga and said there was need to address economic fundamentals first before adopting any other currency.
“Adopting the rand as the major transacting currency without fixing the fundamentals may not get us far. It will be a brilliant idea but are we saying government expenditure will decline because we are using the rand?” he said.
“South Africa is at its initial stages of its land reform while Zimbabwe is at the home stretch. What will happen to the rand at the peak of land reform, one wonders. We can actually invest in having our own currency if we are to manoeuvre out of the multi-currency system. It comes with sovereign benefits also,” Mutashu added.
Piers Pigou, Crisis Group Consultant, said while adopting the rand could bring a temporary relief to the cash-strapped country, the challenge was in reconciling real time gross settlement cash with actual money.
“Whether the country chooses the rand or not as its primary currency, it is still stuck with the problem of RTGS. How do you fill the gap of the RTGS accounts, which are not backed by real currency? Will the depositors be willing to take a haircut and lose the value of their money when their accounts are converted to rands?” he said.
United States-based economic commentator Francis Mukora said the new Finance minister’s move to adopt the rand should be supported as the measure has potential to boost trade between Zimbabwe and South Africa.
For many years, South Africa has been Zimbabwe’s single largest trading partner.
“When the rand becomes the de facto currency of Zimbabwe, the country’s economic woes could seriously start to diminish and this would drive confidence in Zimbabwe as being a place to do business and invest,” he said.
Mukora noted that the use of the rand will restrain the Zimbabwe government’s deficit spending.
“Zimbabwe’s policy inconsistencies may require strong legal protection and commitment to insulating the monetary policy from political pressure. As such, it will not be possible for the government to undermine the monetary system if it officially adopts the use of the rand,” he added.
Fingaz