Mixed views on rand adoption

HARARE - Propasals  for Zimbabwe to adopt the South African rand as the major instrument of trade amid growing United States dollar shortages has attracted mixed views, with some economists firm that it will boost the economy while some warn it could upend the country’s wealth through devaluation.

The comments by leading economists in a wave of recent calls for rand adoption offer the first glimpse of the balancing act fiscal and monetary authorities must perform.

While some economists applaud pro-rand adoption proposals that have now earned the support of top bosses in the Reserve Bank of Zimbabwe (RBZ), some are raising alarm about a policy that may hurt Zimbabwean consumers and perhaps their own balance sheets.

RBZ deputy governor Kuphukile Mlambo has said the central bank was considering a basket of currency reforms, the centrepiece of which is rand adoption, to try to shore up liquidity after the offer to Zimbabwean producers for a 5 percent bonus on the value of what they export in US dollars - funded by the new bond notes introduced last November - have failed to address the cash crisis.

Banks are now disbursing a maximum of $30 dollars a day, sometimes in coins only, down from their usual $100 — while those that had capped the maximum withdrawal limit at $500 a week have pulled this back to $200.

The central bank has also dramatically failed to keep US dollars in circulation at a time imports massively outstrip exports.

The only option is a painful adjustment in wages and prices through adoption of the rand to stem continuous leakage or “externalisation” of the dollar out of the economy, University of Zimbabwe economics lecturer and President Robert Mugabe’s economic advisor Ashok Chakravati said.

He said the US dollar is an international currency in great demand; therefore it was not possible for a developing country like Zimbabwe to maintain a dollarised economy while being surrounded by a non-dollarised region.

He called on the government to adopt the South African rand and ditch the dollar.

“I have said this before, we need a weaker currency. The weaker, the better for us. As South Africa has just been downgraded, this is an opportune time,” he said, referring to South Africa losing its investment-grade credit rating from S&P Global Ratings for the first time in 17 years last week in response to a Cabinet purge by President Jacob Zuma that saw the sacking of Finance minister Pravin Gordhan who was replaced with former Home Affairs minister Malusi Gigaba, a rookie when it comes to finance and business, in a stunning reshuffle that weakened the rand.

Zimbabwe’s largest business lobby group has also called on the government to adopt the rand as its “reference currency” instead of the dollar.

But economist Persistence Gwanyanya warned that switching to the rand was not a short-term solution.

“Any forced conversion at a devalued dollar-rand exchange rate would have enormous repercussions which will lead to litigations,” Gwanyanya warned.

“Savings, pensions, and corporate balance sheets would need to be similarly devalued, though in a less catastrophic way to dollarisation in 2008/ 9.”

Zimbabwe’s government adopted the use of foreign currencies such as the rand and US dollar nearly eight years ago, abandoning the local dollar which had been rendered worthless by years of hyperinflation during a decade of economic decline.

Gwanyanya said unless the rand fell steeply, the country will remain hugely uncompetitive because of deep-seated structural challenges characterised by production constraints that have made it difficult to re-balance the economy.

The Zimbabwe Economics Society member said this economic imbalance — reflected by high levels of consumption and imports against low production and exports levels — has conspired with the country’s inability to attract and retain both local and foreign capital to produce the undesirable state of a faltering economy in stress.

Equally, he said, the poor investment policies and market indiscipline has resulted in undesirable levels of capital flight.

The RBZ reported that in 2015 alone, the country lost about $2 billion through externalisation.

Bankers Association of Zimbabwe president Charity Jinya, who is also MD of MBCA Bank, a subsidiary of South Africa’s Nedbank, has said that the rand had to be urgently adopted.

“It is not sustainable for the US dollar to continue as the major transacting currency, so we recommend that the South African rand be used as the main transacting currency. This would reduce concentration of risk on the US dollar,” said Jinya.

“We also recommend that the US dollar be reserved to make offshore payments and local electronic payments. That will reduce the amount of US dollars likely to leave Zimbabwe through unofficial means.”

Gwanyanya admitted bond notes have been less potent in curtailing externalisation.

“As long as influence-peddlers who have the ability to access the US dollar and cart it across the border loom large on the economy, prospects to significantly cut smuggling will remain dim,” he said, adding no wonder $600 million is reportedly sitting in offshore accounts when the country is in dire need of capital to rebuild.

Since 50 percent to 60 percent of Zimbabwe’s total trade is with South Africa, the most advantageous foreign currency for this country to adopt is the rand, Chakravati insisted, adding it is a non-convertible currency and therefore it will remain mainly in South Africa and in Zimbabwe.

“There is no incentive for economic agents to try and externalise the rand,” he said.

An adequate supply of rand is available from Zimbabwe exports to South Africa, Diaspora remittances from South Africa, and access to the South African banking system with which many of Zimbabwean banks and financial institutions such as MBCA are already connected.

Chakravati said the informal sector will be able to trade easily with South Africa.

“Use of the rand will help prices, costs and wages in Zimbabwe to equilibrate with South Africa, and this will result in the increased competitiveness of our industries, and the economy as a whole,” Chakravati said, adding Zimbabwe’s sources of US dollars were limited to export earnings, foreign direct investment (FDI) and Diaspora remittances which have been dwindling.

Diaspora remittances, which account for 30 percent of the country’s foreign exchange earnings, declined by 17,9 percent from $1,9 billion received in 2015 to $1,5 billion in 2016 of which $779 million are remittances from the Diaspora while remittances from international organisations running local NGOs amount to $795 million, according to the RBZ.

“The fall in remittances is attributed to the poor performance of the global economy, fall in the dollar-denominated value of remittance inflows as a result of continued appreciation of the US dollar against regional currencies as well as increasing use of informal remittance channels,” said a 2017 monetary policy analysis presented in the National Assembly on Thursday.

“This has affected general market liquidity in the economy with adverse effects on aggregate demand and sustained economic recovery.

“Government must continue to offer incentives to the diaspora community to ensure sustainable flow of funds from this community.”

Chakravati said Zimbabwe’s sources of US dollars was “barely enough to cover the foreign exchange requirements of import demands.”

While bond notes have added to liquidity to some extent after the injection of $102 million so far, “they are not a solution to the problem,” the economic advisor to the President and Cabinet said.

“Even if the RBZ today released the total amount of $200 million in bond notes, the liquidity problem would not be solved,” he said.

Chakravati said a good tobacco season being anticipated will ease the situation and provide temporary relief, but it is not a solution to the problem even after newly registered tobacco farmers increased by 56 percent to 13 950 from 8 959 farmers in the previous season under the 2016/17 season, .

Central bank governor John Mangudya has said the opening up of the tobacco auction floors on March 15 will boost the country’s foreign exchange earnings and this is expected to go a long way in ameliorating the liquidity challenges in the market.

The area under tobacco for the 2016/17 season increased to 110 216 hectares, from 102 537 hectares in the previous season.

“This is inclusive of 87 603 ha under contract arrangements, wherein, 19 companies are participating in supporting tobacco farmers,” Finance minister Patrick Chinamasa said in the latest Treasury bulletin.

South Africa is the second largest buyer of Zimbabwe’s tobacco crop.

Tobacco sales to South Africa have increased by more than 50 percent since 2015. And the cash crisis is also hitting tobacco farmers delivering their crop to the auction floors.

Chakravati said the continued US dollar use cannot be a basis for competitiveness and sustained growth irrespective of what administrative measures are taken, “it will continue to be externalised out of the country over time.”

He said ideally, Zimbabwe, like all other developing countries, should have its own national currency in circulation.

“Unfortunately, there are stringent conditions for the re-introduction of a national currency, and since these conditions are not present in the economy today, the introduction of a national currency is not an option open to us today,” he said.

Comments (9)

This Chakravati guy being an economic advisor to the president is partly to blame for the current crisis thus cannot claim to have solutions. There are a myriad of requirements for a state to be in the Rand Community one of which is own currency prudent eceonomic policies not partisan rule of law property rights etc which the current regime is allergic to.

Sinyo - 10 April 2017

I believe the USD is no longer an option. The Z$ is not an option. Surely the Rand is the best option. There are risks to adopting the Rand but there are greater risks in not adopting the Rand. So why are we waiting? We must just accept the risk and put mitigatory measures, or live with the risks. But we cannot continue debating ad infinitum. Proverbs 22:3 says "A wise man sees trouble and avoids it, but the foolish go on and suffer the consequences." Let us not be foolish

Raphael Toro - 10 April 2017

Exactly but what if the rand starts to rapidly inflate with what Zuma has recently done?

Young Zimbo - 10 April 2017

rand adpotion is the way for the moment

gidza - 12 April 2017

Who says our industries will become competitive when we adopt the rand? Try it and you will see. You were praising the bond notes, now you lost faith in them. which economic policy has our government implemented and worked? Go on try it?

clevers - 15 April 2017

Chackravati is a stooge of Zanu PF. If govt introduces the Rand, then you, the bank account holder must open up a separate Rand account divorced from your US$ account. If you get paid in US$, then you pay that into your US$ account, similarly, if you are paid in Rand then you deposit that into your Rand account. The Banks should not be allowed to 'liquidate' your US$ account into Rand. Also, most importantly, ALL retail shops, and I mean ALL OF THEM, must overnight change their prices from US$ to Rand, to mitigate any Rand exchange rate for the goods. None of this putting up an exchange rate sign everyday. In any event, changing to the Rand will never work, because after a couple of months of the big wigs stealing the Rand, there will not be enough cash to go around, just like the US$ of today. The only solution is to get rid of this present government and all the thieves.

Homo Erectus - 15 April 2017

People this country needs robust economic policies. Look at Zambia they did it why not us. At the helm of the throne need the right people. Now Mangundla is telling us that the US dollars were externalised because we allowed $3000 and $5000 to be drawn a day. Is that make sense? They allowed it because they were siphoning the country. Go Switserland their accounts are full.

piyo chiradza - 28 April 2017

#1 USD externaliser - Mugabe. All those foreign trips sucking out hard earned USDs. #2 Grace. Buying a $1M ring, imagine what else she has done that we don't know. #3 Russell - Grace's son. We saw on social media couple of ultra luxury MB cars with ZANU plates. What does he do to make all that money?

Zuze - 10 May 2017

No country can use a currency like the USD and survive. The USD can only be used as supporting currency. Zimbabwe can adopt the Rand without being a member of the RMU. All of the products we have, if not manufactured loclly, it is from South Africa. Therefore we need the Rand more than we need the USD. Again, the use of the USD has encouraged black market. The USD has been withdrawn and stuffed into individual pockets, suffocating the required currency circulation. Even the banks would have noticed that they can score big time on the black market and would therefore prefer to deal in the black market whee they can make more profits. The economy has therefore suffered. The introduction of the bond note also was doomed because it would take the same route as the USD. Adopting the Rand will mean that every Zimbabwean is using the same currency and there wont be any need for exchanging. The black market will therefore cease to exist and the currency will star circulating which will stabilize our economy. Its surprising why these economists wouldn't have seen this coming because to me it was an obvious case. We went to as far as creating FB page urging Zim to adopt the use of the Rand. Who can deposit money he/she cant withdraw later? You are limited to $30, what is $30 to a household? These people must stop toying with the masses and adopt the Rand NOW.

Vusa - 19 July 2017

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