Govt at odds over rand adoption

Source: Govt at odds over rand adoption – DailyNews Live

Gift Phiri      14 May 2017

HARARE – President Robert Mugabe’s administration is at odds over proposed
currency reforms, with divergent views emerging about adopting the South
African rand as Zimbabwe’s anchor currency.

Fiscal and monetary authorities sharply differ over proposals to make the
rand the currency of choice ostensibly because of Zimbabwe’s strong trade
links with South Africa.

Reserve Bank governor John Mangudya has ruled out rand adoption, telling a
local weekly it will also be “externalised” just like the US dollar, which
has vanished from the open market.

“What guarantee do we have that if we adopt it as our major currency it
won’t suffer the same fate of externalisation and hoarding? Worse still,
it only takes a few hours to reach South Africa,” he said.

Zimbabwe’s currency basket has over the years become dominated by the
greenback due to its global appeal and demand.

As a result, externalisation has been rife, with independent estimates
pointing out the country needs close to $1 billion in cash to plug its
dollar deficit and return to liquid normalcy.

Speaking last week on the liquidity crisis which he claimed “is
temporary,” Finance minister Patrick Chinamasa said: “We have to find ways
to make rand more available. We would like a situation where we borrow in
rands from South Africa, pay back in the same currency. We will continue
to engage them.”

But Mangudya has said the rand has been part of the multi-currency basket
since 2009.

The nation abandoned its own currency in April 2009 as runaway inflation
rendered it worthless, opting instead for a basket of currencies that
includes US dollars, South Africa’s rand, the pound and Botswana’s pula.

“We continued to use it (the rand) until such a time when some
unscrupulous dealers started rejecting it,” Mangudya said.

Veteran economist John Robertson said Zimbabwe would need South Africa’s
permission to adopt the rand and said it “would never give that permission
if Zimbabwe’s behaviour seemed likely to undermine the stability of the
rand.”

“For that reason, if South Africa agreed to let Zimbabwe adopt the rand,
the terms of that agreement would be highly conditional,” he told the
Daily News on Sunday.

“Zimbabwe would have to meet all the requirements of the Common Monetary
Area, made up of South Africa, Lesotho, Namibia and Swaziland. “When
Namibia became independent and chose to remain a member, this was renamed
the Multilateral Monetary Agreement and all four members, together with
Botswana, belong to the Southern African Customs Union.

“This makes movements of capital and goods very mobile across the region,
but disciplines have to be imposed by the South African Reserve Bank on
the central banks of the member countries to keep the arrangements under
control. South Africa would have to impose the same disciplines on
Zimbabwe.

“Current thinking in Zimbabwe suggests that the country would be highly
unlikely to accept strong South African influence over Zimbabwe’s monetary
policy.”

But University of Zimbabwe economics professor Ashok Chakravarti said
there were are no economic issues in adopting the rand tomorrow.

“All it needs is a simple law, a statutory instrument from government with
an exchange rate re-denomination of all US dollar balances, salaries and
prices,” said Chakravati, who is also Mugabe’s economic advisor.

“The rand is also a non-convertible currency that will remain in the
region and, therefore, cash will be maintained.”

No permission had to be requested from the United States to make the US
dollar Zimbabwe’s functional currency.

“This is because the US dollar is an international reserve currency,”
Robertson explained.

“But it was a good choice as all Zimbabwe’s exports are priced in US
dollars,” he said.

Despite authorities injecting more bond notes into the market and
increasing their weekly importation of US dollars by 50 percent, the
government continues to battle to stem the country’s severe cash shortages
which have seen desperate Zimbabweans besieging overstretched banks as
they despairingly try to withdraw their money.

At the same time, analysts have warned that the accelerating disappearance
of the fiat currency – bond notes, which were meant to mitigate the
country’s acute cash crunch – was worsening the panic and spurring
increasing calls for rand adoption.

Tinashe Kaduwo, an economist at financial research firm Equity Axis, said
adopting the rand may entail formally joining South Africa’s monetary
union.

“It may imply opening up our borders, removing all trade barriers and
allowing free movement of capital, labour and goods between the two
countries.

“One major disadvantage of a monetary and trade union between a weaker and
stronger economy is that it favours more the stronger economy,” he said,
warning of a decrease in real purchasing power and industrial
competitiveness; increasing unemployment and social disintegration given
structural deficiencies in Zimbabwe’s productive sectors.

Chantelle Matthee, an analyst at NKC African Economics said the real issue
relates to how Zimbabwe is going to gain access to sufficient amounts of
the currency for it to improve domestic liquidity, be it through a pegged
arrangement or simply adopting a foreign currency as the sole exchange
medium in the country.

“Adopting the rand should make trade between Zimbabwe and South Africa
easier, but domestic production would still need to be ramped up for
Zimbabwe to generate more rands through exports, and the mere adoption of
the rand would not necessarily incentivise increased domestic output,
especially if the currency comes under pressure and exporters prefer to be
paid in US dollars,” she told the Daily News on Sunday.

“Adopting the rand would also mean Zimbabwe gives up the independence of
monetary policy and could also expose the country to shocks in South
Africa, but aligning policy to that of its larger neighbour would not
necessarily be a bad thing as it would be accompanied by increased
stability and transparency.”

Robertson said to have money; the country must be very productive and
competitive.

“Or we could borrow it, but every lender wants to be repaid, so they will
lend to us only if we are productive and competitive enough to earn the
money needed to repay them,” he said.

“Some lenders used to think we could be trusted to repay them and we have
let them all down, so they won’t lend to us before that changes.”

Zimbabwe owes more than $1 billion in World Bank arrears and another $600
million-plus to the African Development Bank.

Robertson said Zimbabwe has worn out the generosity of its friends.

“The ones that are still supporting us with aid are doing so because they
are sorry for the completely innocent victims. But aid cannot fix the
underlying problem.

“So, still on the first point, to have money, we have to make it. When
we’ve made it, we can decide – we can choose – in which currency it should
be held, stored or banked.

“And on the international currency markets, we could convert whatever we
have into whatever we would prefer. But we have to earn it first.

“One of our failings is that we are not earning enough, so the amount we
are earning as a country is not enough to pay for the things the country
wants to import. So, the country has got to get back to work.”

He said government disabled the whole economy, sweeping out of existence
the collateral value of agricultural land.

Not less than 500 000 people who used to have a job have now lost their
jobs because the economy is only half the size it used to be.

But another failing is that the business climate in Zimbabwe is so hostile
that people who have money in the country are eager to bank it somewhere
else.

“So a bad situation is made worse by the lack of confidence that comes
from harsh conditions that are imposed by things like business licences
and permits, confiscations of mining claims, indigenisation demands, high
taxes, Zimra’s ability to raid company bank accounts, police road blocks,
power cuts, the Reserve Bank’s Priorities List, high interest rates, high
wages, the problems involved in drawing cash and difficult labour laws,
just to mention a few,” he said.

Chakravati has said Zimbabwe gave itself extra problems by choosing a
strong currency, the US dollar, when it could have done itself a favour by
choosing a weaker currency, the rand.

“The dollar is an international currency in great demand. It is therefore
not possible for a developing country to maintain a dollarised economy
while being surrounded by a non-dollarised region and world.

“There will always be a continuous leakage or `externalisation’ of the
dollar out of the economy,” he said.

But Robertson said this claim is not untrue for those with a very
short-term view, but it is very dangerous thinking.

“The challenge Zimbabwe has to face is that it has to become competitive
to make real progress and our producers have to continue improving to
recapture the markets they want to serve. Any thought that we, as a
country, can hope to succeed without having to become good at what we are
doing is bound to be a very damaging thought.

“If we can improve and if we do win markets in competition with the
world’s best producers, it will not be long before we can regenerate our
own currency again and make it a currency that is worthy of respect.

“We cannot do that now, but we never will do it if we think we need only
adopt a weak currency to become successful again. What we want we have to
work for, so all the policies have to concentrate on getting Zimbabwe back
to work and on getting the investors to commit to Zimbabwe’s longer-term
future,” he said.