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The case for the SA rand

Mr Brains Muchemwa wrote an article in The Sunday Mail of April 9, 2017 entitled “Rand adoption illogical”. He is patently wrong.

No! Competitiveness is not currency neutral as he supposes.

Competitiveness, in addition to structural and macro-wide issues, also responds to the real exchange rate — itself a function of both the nominal exchange rate and inflation differentials between countries.

If that were not the case, China would not have expanded on export-led growth for more than three decades, generating billions annually in trade and current account surplus by maintaining an undervalued exchange rate as core and integral framework of its export-led growth strategy — year after year and decade after decade.

In addition to structural challenges in Zimbabwe, one of the reasons why Zimbabwe’s trade deficit is in excess of US$3 billion a year is because of the strong US dollar, which makes imports cheaper and exports expensive in real terms.

This abiding problem of a strong currency has progressively been compounded by the fact that the rand, the currency of our major trading partner, South Africa, has depreciated over 91 percent since August 2011 and will continue to depreciate.

We may debate the magnitude but not the direction of where the rand is heading, heretofore.

What he raises validly as fuelling money supply growth — large and recurring fiscal deficits — clearly contributes to the underlying macro imbalances, leading to growing trade and current account deficits, but this is also aided and abated by an appreciated real exchange rate, which is decimating exports.

Pointedly and correctly, improved business processes, ICT and technological innovations and new equipment positively impact productivity, but if the underlying currency is too strong and strengthening day by day, that can create a fire-storm in the desert for the economy.

As for wholesale money-printing, which engineered hyperinflation in 2007/08, I do not know if reasonable comparison can be made with the rand.

There are challenges in South Africa — political and economic — but inflation is below 6,5 percent and has not exceeded that in recent years. Trying to compare that to our situation in 2008 may be comparing an ant and an elephant.

From a macro-policy point of view, what we do not see (such as the real exchange rate, the real interest and real wages) are some of the most important production determinants for any economy, especially for small, open economies like Zimbabwe, beyond the near term.

To be sure, adoption of the rand on its own will not address the macro and structural challenges that must be addressed through comprehensive reforms as a matter of priority.

In this regard, there is quite notable progress with respect to the Ease of Doing Business reforms spearheaded by the Office of the President and Cabinet and line ministries.

Rand adoption will certainly not be a magic wand outside comprehensive reforms, but removing the real exchange rate problem of the USD and its pervasive effects on the economy must be an integral part of the package of economy-wide reforms, which are critical for recovery and sustained growth of the economy.

There are critical structural policies that must be implemented with regards to fiscal policy, the investment environment, agriculture policy, State enterprise reforms, further doing business conditions, the cost of business; structural, macro and sectoral policy reforms as necessary to get the economy on a growth path.

But the issue of currency is at the centre and the USD is unsustainable.

Monetary authorities highlight that as much as US$1,8 billion was externalised by individuals and corporates.

This comes as a direct result of a strong USD, which is used by all countries as a reserve currency.

The US dollar accounts for nearly 60 percent of the world’s international payments systems and everyone wants it.

Zimbabwe has become a gold mine for cheap US dollars — and our economy is too small to sustain that.

If Zimbabwe had adopted the rand, the bane of externalisation would be immaterial. Who would fly from far away to set up shop in Zimbabwe for the express purpose of externalising the rand?

The USD has magnetised all sorts of fly-by-night briefcase “companies”.

To suggest that the rand was “rejected” in the current multi-currency basket is to be deliberately subjective. Zimbabweans will not reject the rand as an option to the current long queues at banks.

What we have is a multi-currency basket in theory. In practice, it is a USD environment with marginal references to a few other currencies.

Anyone who accepts the rand in the present USD payments system immediately suffers losses in the order of between US$12 and US$15 per US$100.

Last but not least, the issue of Germany and the eurozone highlighted in Mr Muchemwa’s article is quite illuminating, not on account of the German trade surpluses as gloriously painted, but more for what is omitted — the Greek crisis.

The strength of the euro (modelled on the strong German deutsche mark by the Maastricht criteria) has exacerbated the Greek crisis, and there is no solution in sight.

The IMF, ECB and Germany insist the answer is more austerity for Greece. Now, Greece — or more accurately, large segments of Greece — desperately wants to be part of the euro, so the country is doing much to adhere to the prescribed austerity medicine, but with little success.

This as because Greek exports cannot expand, even in competitive areas, because at the core of the problem is a euro too strong for their economy.

Can we then say the answer to the Greek problem is more production and productivity? But how does Greece increase production when exports are weighed down by a strong euro?

Would Greece be better outside the strong euro?

Would Greece benefit from introducing its own weak currency and immediately devaluing?

Sure, there will be adjustment costs and suffering in the near-term, but beyond the near term, could there be possibilities for Greece?

If Zimbabwe is to have any chance of re-introducing her own currency in the next 15 years, the rand is the only option and we can have that option without necessarily joining the Customs Union.

There is no country in recent memory that completely dollarised and subsequently successfully de-dollarised just like that.

Think of El Salvador, Ecuador, Bolivia and Cambodia. Not one of them has de-dollarise and reverted to own currency coming straight out of the US dollar.

Going forward, if US dollars continue to flow out of the formal system, we may have only two options left: either full-scale return to the Zimbabwe dollar or adopting the rand.

Unless we count on miracles, the only logical step to take is the rand, simultaneously addressing deep structural and macro imbalances to get our industrial production back to full capacity, increase exports and forex reserves and, thereafter, a graduated return of the local currency.

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