Should Zimbabwe adopt the Rand as official currency?

-


Dollarization 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 dollarization compared to semi-official or unofficial dollarization. Dollarization does not always involve the US dollar as the adopted currency, the euro can be adopted by non-EU members in the same way Zimbabwe can adopt the South African Rand through full official Randrisation. Official dollarization requires to surrender monetary policy to another country and often a country loses seigniorage and an independent monetary policy. If Zimbabwe chooses dollarization by adopting full official randrisation, 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 randrisation 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 partner country.


South Africa has 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 the Zimbabwe’s financial sector and it is indeed a sensible solution to the problems of capital flight. Zimbabwe needs to attract foreign direct investment and financial stability and development brought by the South African Rand will attract foreign investment into the country. 

Monetary Sovereignty

The proponents against the Randrisation of the economy 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. Dollarization by itself does not create a colonial system, Panama is no less sovereign for instance. It is better to lose monetary sovereign as this will allow the country to do away with RBZ’s wretched performance. Dollarization does not create a colonial relationship, even countries in the Rand community are not colonies of South Africa. Full and official Randrisation of the Zimbabwe economy will help to achieve credibility which cannot be guaranteed under the Reserve Bank of Zimbabwe. Zimbabwe used a currency board during the colonial time, the Rhodesian pound maintained a fixed exchange rate with its anchor currency, the pound sterling. The impossible trinity of international monetary economics states that it not possible 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 and maintain a stable exchange rate and enjoy free capital mobility.

                               The impossible trinity of international economics



Recently Bloomberg reported that investors are trapped in Zimbabwe because of the country’s printing of money and they are seeking refuge in stocks. Free capital mobility is very important aspect to attract investors and ensure 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, 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 options of monetary reform of going for full official dollarization or randrisation of the economy would be step a forward because it would provide a more stable currency.

No Flexibility

The Reserve Bank of Zimbabwe 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 that they can continue on the path of perennial budget deficts as they have done. Zimbabwe had better economic performance when monetary policy was less flexible. The history of Zimbabwe actually proves that the government has used flexible monetary policy as way of mismanaging the economy.

No Lender of Last Resort

Some people against Randrisation of the Zimbabwean economy has often used the no lender of last resort argument. Lack of central bank as a lender of last resort does not seem to have harmed countries with dollarization or currency boards. Zimbabwe’s financial sector and financial system 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.

Zimbabwe Is So Big, It Must Have Its Own Central Bank

The Zimbabwean economy is very small compared to other countries prospering without central banks such as Panama. There are also 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 under full official Randrisation. In 2015 Zimbabwe demonetized the Zimbabwe dollar whilst in 2016 they re-introduced the same Zimbabwe dollar under the bond notes and RTGS not backed by cash. The Zimbabwe’s policy inconsistencies may require strong legal protection and a credible commitment to insulate the monetary reform from political pressure. An important legal protection would be to make monetary reform part of the constitution which require amendment through the process of a referendum.

Comments

Post a Comment

Popular posts from this blog

Public financial transparency and accountability of government revenues and expenditures in Zimbabwe

-
Zimbabweans are familiar with budget statement presented by the Minister of Finance in the parliament every year but unfortunately the public has never received detailed financial statements after expenditure. Zimbabweans usually know the amount which is allocated to certain ministries such as health, education social welfare but the public has never received financial reports detailing how the money was used. The lack of financial reporting means that the public has no information to make the government accountable. Accountability has been viewed since time immemorial as a channel for ascertaining the use of power by an individual or an organization that has been entrusted with the task of performing prescribed tasks (Premchand 1999).  Kautilya wrote a manual on bureaucracy before the Christian age, he observed that human nature was disposed to acquire public money for private gain. He wrote: “Just as it is impossible not to taste honey or poison that one may find at the tip ...
Read more

Understanding Zimbabwe’s budget deficits, government debt and economic effects

-
The policy that ‘we eat what we kill’ was made popular in Zimbabwe during the Global Political Agreement period when Tendai Biti was the Minister of Finance. This is a principle advocated for by balanced-budget proponents. On the contrary governments also run budget deficits I have dedicated this article to explain the concept of budget deficits. A budget deficit the amount by which public spending exceeds revenue over a particular period of time. The Zimbabwean government is currently running budget deficits. The harmful effects of running budget deficits include; crowding out of the private sector, high real rates of interest, low national savings, low economic growth rates, large current account deficits and inflation, among others. John Maynard Keynes holds that in times of severe economic shriveling in the private economy, it is tolerable for the government to go into debt and increase spending to compensate for the fall in consumer and other private sector expe...
Read more

Will Zimbabwe's dedollarization efforts through bond notes succeed?

-
Image
The recent introduction of a new currency by Zimbabwe’s central bank the Reserve Bank of Zimbabwe (RBZ) result in a process called reverse dollarization. Baliño, Bennett, and Borensztein (1999) note that reversing dollarization may be difficult because changes in practices regarding the settlement of transactions may be a slow process that depends on institutional changes and takes place only when there are significant benefits to be gained by switching currencies. The process will not be easy as people’s preferred choice of holding and storing value remains United States dollars and not the surrogate currency. There are no significant benefits to be gained by switching from foreign currency to bond notes. Forced dedollarization has had limited success, while dollarization may have fallen in the short run and was sustained in some cases, countries that tried to force dedollarization experienced financial disintermediation and capital flight (Menkulasi, Erasmus, & Leichter, 2009)...
Read more