OPEN FORUM: Should Zimbabwe adopt the rand?

Source: OPEN FORUM: Should Zimbabwe adopt the rand? | The Financial Gazette October 19, 2017

By Shame Mugova

DOLLARISATION is a situation where a country uses another currency officially or unofficially as legal tender.
There are greater economic benefits to be realised by going for full official dollarisation compared to semi-official or unofficial dollarisation.

Dollarisation does not always involve the United States (US) dollar as the adopted currency, the euro can be adopted by non-European Union members in the same way Zimbabwe can adopt the South African rand.
Official dollarisation requires the surrender of monetary policy to another country and often a country loses seigniorage and an independent monetary policy.

If Zimbabwe chooses to officially adopt the rand, the country will still export and earn US dollars and use the same US dollars for imports and international obligations.
The only difference is that the rand will be the predominant or exclusive legal tender for local transactions.

The official adoption of the rand discussed here is not the same as formally joining the Rand Monetary Union.

South Africa shares seigniorage it derives from issuing currency, according to estimates of how many rand notes and coins are in circulation in a partner country.
South Africa has a well developed financial sector which is well regulated and backed by a sound regulatory framework.

According to the Banking Association of South Africa, it was ranked 3rd out of 148 countries in the 2013/14 World Economic Forum Global Competitiveness Survey.
South Africa’s financial sector compares favourably to financial systems of developed economies.
Adopting the rand is a reasonable option for Zimbabwe as this will bring stability to Zimbabwe’s financial sector and it is indeed a sensible solution to the problems of capital flight.
Zimbabwe needs to attract foreign direct investment.

Financial stability brought by the South African rand will attract foreign investment into the country.
Monetary sovereignty

Proponents against the official adoption of the rand do not want to sacrifice an independent monetary policy and fear that South Africa may wield greater power and influence over Zimbabwe.
The other view is that having a formal agreement with South Africa and surrendering monetary policy may require protracted political negotiations and time.

Dollarisation by itself does not create a colonial system, Panama is no less sovereign for instance. It is better for Zimbabwe to lose monetary sovereignity as this will allow the country to do away with the Reserve Bank of Zimbabwe (RBZ)’s wretched performance.

Dollarisation does not create a colonial relationship; countries in the rand community are not colonies of South Africa.
Official adoption of the rand by Zimbabwe will help to achieve credibility which cannot be guaranteed under the RBZ.

Zimbabwe used a currency board during the colonial times. The Rhodesian pound maintained a fixed exchange rate with its anchor currency, the pound sterling.
The impossible trinity of international economics
The impossible trinity of international monetary economics states that it is not possible to have all three of the following; a fixed exchange rate, free capital movement and an independent monetary policy.
Zimbabwe needs to sacrifice a sovereign monetary policy in order to maintain a stable exchange rate and enjoy free capital mobility.

Recently, Bloomberg reported that investors were trapped in Zimbabwe because of the country’s printing of money and they were seeking refuge in stocks.
Free capital mobility is very integral to the attraction of investors and ensuring they are also able to repatriate their return on investment.

A step backwards

The abolishing of the central banking system is not a step backwards. Zimbabwe has experienced more instability under the central banking system, including hyper-inflation, and a liquidity crisis caused by Treasury bills issued by the same bank.
If Zimbabwe had a stable financial system, it would have experienced higher economic growth.
The option of going for official dollarisation of the economy would be a step forward because it would provide a more stable currency.

Flexibility

The RBZ has always given the government what it desires or demands. The government of Zimbabwe has always desired to have greater flexibility in making changes of money supply hence the creation of bond notes.
The reason why the government desires to have control of money supply is so that they can continue on the path of perennial budget deficits as they have done.
Zimbabwe had better economic performance when its monetary policy was less flexible.
The history of Zimbabwe actually proves that the government has used a flexible monetary policy as way of mismanaging the economy.

Lender of last resort

Those against the official adoption of the rand have often used the no lender of last resort argument.
The absence of a central bank as a lender of last resort does not seem to have harmed countries with dollarisation or currency boards.

Zimbabwe’s financial sector was more stable before central banking began.
The use of the rand will provide Zimbabwean banks with more ability to borrow abroad because stability will facilitate access to international financial markets.
The Zimbabwean economy is very small compared to other countries prospering without central banks such as Panama.

There are many other countries which have done well without typical central banks before.

Effectiveness

The use of the rand will restrain the Zimbabwe government’s deficit spending.
It will not be possible for the government to undermine the monetary system if it officially adopts the use of the rand.

In 2015, Zimbabwe demonetised the Zimbabwe dollar while in 2016, it re-introduced the same Zimbabwe dollar in the form of bond notes and RTGS.

Zimbabwe’s policy inconsistencies may require strong legal protection and commitment to insulating the monetary policy from political pressure.

An important form of legal protection would be to make monetary policy reform part of the Constitution which would require amendment through the process of a referendum.

This article first appeared on https://shamemugova.blogspot.com