The Zimbabwe dollar and South Africa’s Rand (ZAR) have held par for almost two weeks now, reigniting debate on whether monetary authorities should re-consider adopting the rand as a functional currency alongside the local unit.
Or is the currency conversion just a flash in the pan?
As at the close of business yesterday Zimbabwe dollar to rand interbank exchange rate maintained parity at an average of 0,9992 after the currencies conversion rate initially merged last Monday (September 23).
This has encouraged calls for adoption of the rand, which analysts believe could help mitigate the adverse effects of the volatility of free-floating currency and the constraints of a fixed exchange rate.
Earlier in June, the Government effectively ended the long-standing multi-currency system and re-introduced the Zimbabwe dollar through Statutory Instrument 142 of 2019 as Zimbabwe faced a US dollar crunch.
And since then, the local currency has rapidly depreciated against the greenback to trade at an average of 15,25 as of yesterday.
There are observers who see the benefits of Zimbabwe adopting a dual currency, especially if the other currency is for its biggest trading partner such as South Africa.
“There are compelling economic, political, geographic and social justifications for pegging the local currency to the ZAR or adopting a dual currency (ZAR trading together with the ZWL) as the case with Rand Monetary Union member states (eSwatini’s Lilangeni trades together with the ZAR at 1:1, Namibia’s dollar trades together with the ZAR at 1:1), said one analyst.
“The Reserve Bank of Zimbabwe can use ZAR RTGS alongside the ZWL RTGS as the RTGS system can accommodate up to four currencies. This is the faster and effective way of introducing an unofficial peg or dual currency.
“Remittances and trade inflows will assist in oiling the ZAR RTGS. Authorities will only need to keep money supply in check.
“Chiefly, Zimbabwe is a recovering economy and needs exchange rate and price stability. Such stability enables long term planning and successful execution of capital intensive infrastructure projects.”
Over the past decade, there have been muted calls for Zimbabwe to join the Rand Monetary Union, but adopting the Rand as a functional currency alongside the Zimbabwe dollar would side-step a number of complexities that have acted as obstacles.
The Zimbabwean Government is working on policies to help the economy to recover, and currency stabilisation is largely viewed as a vital step toward stabilising the economy as a whole.
Said the analyst: “Another important aspect is the international tradability of the ZAR. According to the Bank for International Settlements (BIS) latest Triennial Central Bank Survey 2019 which tracks global foreign exchange activity in major markets, South Africa’s rand was ranked as the 18th most traded currency in the world. This was an improvement from the last report in 2016, where South Africa was ranked 20th. Therefore, the ZAR would be a credible reference currency for the IBR.
“Furthermore, countries that have pegged their currencies to the ZAR have very low inflation, 1,7 percent for eSawatini and 3,7 percent for Namibia.
Their central bank policy rates are also tracking that of South Africa Reserve Bank (SARB) with the benchmark repo rate at 6,5 percent. South Africa’s inflation is at 4,3 percent and pegging the IBR to the ZAR will make monetary policy more credible and predictable..”
Most importantly, South Africa is also Zimbabwe’s largest trading partner with more than 60 percent of imports emanating from South Africa. However, the choice of which currency to peg the ZWL is also driven by exports which are the core source of financing and ensuring liquidity in the economy.
Zimbabwe is facing relatively similar challenges in respect of currency depreciation, as during the hyper-inflationary years of the earlier part of this century.
At that time, Marian Tupy — the editor of HumanProgress.org and a senior policy analyst at the Centre for Global Liberty and Prosperity — made somewhat similar suggestions in respect of the adoption of another currency.
“Pegging the Zimbabwean dollar to a foreign currency might not send a strong enough signal to reassure the markets, because abandoning the peg in the future is relatively easy.
“The government should therefore adopt the South African Rand or the Euro as its national currency — since South Africa and the European Union are Zimbabwe’s main trading partners — and the possession, use, and exchange of other currencies should be freely permitted,” he wrote in a 2007 article for the CATO Institute.
Economist Pascal Mandeya is of the opinion that Zimbabwe’s economic fundamentals are not yet right for either the adoption of the Rand as a functional currency alongside the Zimbabwe dollar or joining the Rand Monetary Union.
“To join the common currency area, there are political negotiations that are required, on some of the issues we need to address regarding budget deficits and debt levels; we do not qualify.
“It’s out of the equation, we do not qualify because you do not just wake up and decide that you have joined (Rand Monetary Union); that option is dead in the water, besides it will take long to join; its unlike what we did on the multi currency issue to just wake up one day and adopting it.
“Besides, if we do it what will be done to the assets and debts people have accumulated, which are denominated in Zimbabwean dollars; so adopting the rand does not make sense,” said Mandeya.
“Pegging the Zimbabwe dollar is not an option; what will you be trying to fix. The things that need to be fixed . . . we are part of a plan (the Transitional Stabilisation Programme) running until end of 2020, we should just allow the whole thing to go through or do an analysis of whether targets are being met.
“Pegging (the Zimbabwean dollar to the South African Rand) creates more problems than it solves because a lot of our exchange rate are determined on the parallel market, it does not work.”
Economist Dr Gift Mugano said Zimbabwe needs to work on its economic fundamentals more than anything else.
“I have said it before and I will say it again, Zimbabwe’s problem is not one of currency but we have a problem of production.
“We had the United States dollar, which is the strongest currency in the world but there was too much outflow of it because of a high level of imports due to the lack of production.”