adminClive Mphambela
There is no doubt that the introduction of the multi-currency system in 2009 stabilised an economy that had been in free fall by taming hyperinflation, which had stalked the country for several years.
The multi currency System – MCS, which in its genesis was anchored primarily on two major currencies in the multi-currency basket, the United States dollar and the South African Rand, as the two dominant currencies enjoyed roughly equal shares of influence, ushered in a period of macroeconomic stability that saw inflation being reduced from 9 digits to single digit levels literally overnight.
Supermarket shelves quickly filled up and despite high prices, retailers enjoyed buoyant sales. Local Industrial capacity utilisation, which had become virtually non-existent, began to pick up significantly as a handful of industries were able to garner new capital for retooling.
However, the introduction of the Multi Currency System also brought to the fore certain structural constraints that are a natural consequence of adopting a foreign currency on an economy.
Firstly, the Government lost its ability to stimulate the economy through fiscal and monetary tools.
As a result, the Government faced new significant constraints in executing its traditional functions of lender of last resort through the RBZ and employer of last resort through fiscal tools.
The country also lost the benefit of signorage revenues as the US dollar and indeed all the other currencies in the multi-currency basket could not be printed locally.
Limited sources of liquidity
The economy relied entirely external sources of liquidity to augment domestic savings, namely :-
Export proceeds
Diaspora remittances
Foreign Direct Investments
External lines of credit
The growth in these cashflow streams was been in most part relatively strong, save for the FDI, which has not kept pace with growth in export receipts, diaspora remittances and external lines of credit.
Challenges of the multi-currency regime — Strength of the U S D
However, militating against the growth in inflows, there has been a growing appetite for imports, which has put tremendous pressure on the country’s balance of payments.
The high demand for imports has significantly dented the liquidity situation in the economy.
There were very significant leakages of cash from the economy, which led the Reserve Bank of Zimbabwe to be concerned about externalisation of cash. Banks were importing large amounts of cash , depleting nostro reserves, but there was a discernible behaviour change by the banking public, which has manifested itself over the years with less and less cash finding its way back into the banking fold.
A significant amount of resources were therefore being lost through legitimate imports on one hand and both legitimate and illegitimate exports of foreign currency and cash, owing to a very relaxed and friendly exchange control environment, on the other.
The strength of the USD as the anchor currency also brought to the fore competitiveness issues of the local industry. The USD has over the last few years exhibited a dominant strength over the other currencies adopted in the multi-currency basket with economists putting the relative exchange rate of the USD at more than 50 percent of its level back in 2009 by the end of 2016.
The strength of the US dollar has increased significantly especially on the back of strong growth in the US economy in the last two years.
This has seen the share of the USD in terms of circulating foreign currency in Zimbabwe soar from about 50 percent in 2009 to 99 percent dominance currently.
This strength has caused a number of challenges, which include the commoditisation of the US dollar where a significant portion of the increased demand for USD was for speculative purposes and for holding US dollar cash and demand deposits as a store of value.
Is adoption of the rand a feasible option for Zimbabwe?
Discussions around adoption of the rand have received proponents and opponents in equal measure. There are however some good arguments for the adoption of the rand as a currency of reference for transactions given our unique position and the evolution of the MCS thus far.
The most important reasons being put forward are:-
Potential for local economy to tap into rand markets
There may be a quantitative easing if adoption of the rand will be accompanied by a support mechanism from the South African Reserve bank. This may be in the form of an explicit package or implied in the easing of exchange control measures of South African Banks for example who may want to extend credit to local banks and corporates.
Local banks may therefore have a real opportunity to dissipate liquidity challenges under a rand structure, as banks and Zimbabwe businesses will have greater fluidity in terms of funding. But this at this stage is only theoretical. The practical realities may be a lot more complex.
Expansionary wealth effects of “randisation”
The re-denomination of assets and savings in a weaker rand may induce some kind of expansionary ‘‘wealth effect’’ as consumers spend higher nominal balances which are currently denominated in USD. This wealth effect may have a positive stimulating impact on the economy. It will also introduce steady inflation, which will be a consequence of the weaker currency.
Fall in real prices of goods and services
The real prices of local goods and services will have to fall as prices realign with regional prices and pricing parity is restored. The differential between prices of consumer goods in Zimbabwe and South Africa will reduce to levels that represent cost of logistics and an economic profit margin.
Super margins will therefore be reduced. Consequently the average cost of living will drop in Rand Terms (the standard of living will rise)
To use a simple example. a crate of 30 eggs which is priced at about ZAR28 in South Africa (less than US$2,00 ) is selling at about RTGS $8,50 in Zimbabwe, while a standard loaf of bread is RTGS$1,50 in Zimbabwe (ZAR34) and only about ZAR10 in SA.
Rise in standards of living/fall in cost of living
This fall in the cost of living can be equated to a rise in real incomes without the burden of real wages rising. In simple terms a ZAR6 000 wage will go further in a consumers hands than a US$400 wage. Business costs will slowly stop cascading upwards and there maybe a gradual stability in real labour costs.
Forced / induced efficiency in productive industries
The economy will be forced to become more efficient as price parity is achieved with our major trading partners, uncompetitive and inefficient Zimbabwean businesses will naturally have to shut down and these will be have to be replaced by more competitive and more efficient ones. That will be a good thing.
Positive impact on exports
Adopting a depreciating currency may benefit exporting businesses and create an incentive to grow exports. Such an incentive presently does not exist. There will be an immediate need for businesses to realise that you need to export to remain viable and to gain access to foreign currency, which is not the case at the moment. Right now no one wants the hustle of creating and developing export markets in order to get foreign exchange because they simply get foreign exchange(USD) from selling stuff down the street.
The creativity and export drive has since died in the economy under the weight of the USD, but that will possibly change if the rand is adopted. Zimbabwean businesses will have to get their export strategies which they shelved in 2008 back onto the table and get on with the business of developing export markets.
Disincentive for net importers
The steady depreciation of the Rand will keep exporters viable and in business and act as a significant disincentive to net exporters!!! The country may have a gradual shift in people investing in export businesses because the steady net devaluation of the rand will potentially be generating in Rand Terms for exporters. Domestic operating costs particularly wages will likely rise slower that the rate of depreciation of the ZAR, making export businesses attractive.
Excess rand capital may find Zimbabwe markets attractive
South African excess capital may find it viable under certain conditions to enter the Zimbabwean via the rand market, subject of course to exchange control regulations on either side of the border. Already there are significant numbers of South African manufacturing businesses that have expressed intentions to come to set up shop locally.
Improved liquidity for imports
Banks will now have to keep USD in their nostros, there will be no incentive to import huge amounts of USD cash. Net exporters can opt to keep export receipts in US dollars in bank nostros. Furthermore, rand deposits can easily be converted into other currencies on a global scale as the rand is a readily convertible currency. Seventy percent of Zimbabwe’s recorded trade is with and through South Africa. All bona fide importers and exporters will have very little exchange rate risk to contend with in executing trade deals.
Improving terms of trade and competitiveness of Zimbabwean firms
In the short to medium term, terms of trade should begin tip in Zimbabwe’s favour due to higher levels of unemployment. Domestic Labour costs will remain subdued and local industry will soon enjoy better competitiveness. This is perhaps one of the most compelling arguments for the adoption of the Rand.
It should, however, be understood that Making the rand the Reference Currency does not mean that the MCS will be done away with.
Less prone to externalisation and leakage
Clearly the rand will be less prone to externalisation pressures that have been witnessed and therefore the country will be less susceptible to capital flight on a grand scale.
Potential challenges in adoption of the rand
Some challenges however are seen in the adoption of the rand
Institutional Support for Randification/Randisation
The Government has repeatedly issued statements to effect that the Rand is already in circulation in the Multicurrency basket and there is no additional merit in its adoption as a benchmark trading currency.
Industry on the other hand has been lobbying in favour of the rand. There is need for continued dialogue and greater engagement with authorities on the matter so that there is alignment and congruence of Industry and national/ sovereignty objectives.
Acceptance by the Public and the Markets
The rand has already been substituted by the USD as the dominant currency and it may be difficult to change attitudes of the public. Every currency fights for its own space. The Rand was muscled out of the multi-currency basket by the more versatile US dollar.
The rand is seen as a potentially a very volatile and unstable currency and policy makers and businesses may want to avoid the unforeseen consequences of using such a volatile reference currency. However, the banking system is able to provide adequate trade finance and foreign currency hedging tools which will also aid in the deepening and sophistication of the markets.
There are significant legal and institutional hurdles that the country may face in adopting the Rand which may take a long while to be negotiated with the South African Government.
The accounting complications of re-basing the whole economy maybe great. This is especially difficult now that we have in effect an official exchange rate between real nostro US dollars and RTGS of 1:1 on one hand, whilst market determined rates are very disparate and much higher. Valuations of Assets and Liabilities of many companies and institutions are now fraught with many unknowns. There is need for experts in accounting and law to unravel this valuation conundrum.
Rand offers the economy a softer redollarisation
The economy needs to redollarise and in fact adopting the rand fully is technically redollaristion with the rand as the reference currency. It would seem there are significant grounds for stakeholders to continue seriously engaging in robust debate to look into the potential of the Rand as a reference currency.
I am, however, confident that notwithstanding the challenges the move would usher, the benefits on balance, will outweigh the challenges and it should be the preferred option for the market to go this route.
How about the fundamentals
Adoption of the rand however, will be ineffectual if our core fundamentals are not addressed. There is need to maintain austere budget management and prudence in managing our imports Bill. There should be greater emphasis on expanding export earnings and foreign exchange receipts from production rather than relying on long term credit to finance current import requirements.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the he is associated or connected with. Clive is reachable on [email protected] and on mobile number +263772206913
Bongani Ndlovu