Rand adoption illogical

Brains Muchemwa
ON July 10, 2007, I had the privilege to address a Zimbabwe National Chamber of Commerce conference.

My topic was “Price controls and the modern Zimbabwe’.

The discourse was unanimous that price controls, foreign currency shortages and high inflation were the biggest threat to the survival of industry and if these could be addressed, our industry was going to be forever prosperous.

What a fallacy!

Two years after this discourse, the economy dollarised and with that master-stroke, inflation, price controls and foreign currency problems disappeared overnight. Unfortunately, and to the surprise of many, real survival-threatening problems started for industry. And the period post dollarisation is replete with tales of industry giants of yesteryear that have since gone into liquidation or are teetering on the brink of bankruptcy. And with them, seven banks collapsed under the burden of bad debts, them bearing the brunt of the excesses of an economy that celebrated dollarisation as a panacea to competitiveness and took massive gambles that backfired.

That Zimbabwe is not competitive is indisputable when one looks at the challenges for the past two decades and the yawning current account deficit since dollarisation that has average US$3 billion every year, itself a sign of massive jobs exported and incomes lost.

Unfortunately for those proposing the adoption of the rand or its use as a reference currency, competitiveness is largely currency neutral.

The 2016-2017 Global Competitiveness Report, which evaluates global drivers of productivity and prosperity, had an interesting observation.  It noted that even monetary stimulus or quantitative easing is not a sufficient condition to sustain growth!

In its analysis of 135 economies, it concludes that competitiveness hinged more on updated business practices, innovation, sound infrastructure, effective skills and efficient market, among others.

It validates our own experience of the 2004-2008 era where wholesale printing of money via quasi-fiscal activities of the RBZ, in pursuit of propping up productivity, backfired and eventually drove productivity to its lowest ever levels since records began.

Industry capacity utilisation dipped below 10 percent in 2008 and massive goods shortages became a norm.

Zimbabwe, for its efforts in 2016, was ranked 101 out of 135 countries and to debunk the notion that a stable currency is bad for competitiveness, the top 30 most competitive economies have very stable currencies.

The thinking therefore that adopting the South African rand or adopting it as a currency of reference will cure productivity challenges and the current cash shortages is not only erroneous, but very misleading and should never be given policy consideration.

The Zimbabwe dollar, which was the weakest currency in the world during the 2002-2008 era, did not offer any competitive advantage at all to this economy.

On account of high inflation and subsequent currency debasing that eventually saw 25 zeroes having to be lopped off the currency, this currency was eventually abandoned by the economy, itself a living first-hand testimony that a weak currency is not a source of competitiveness.

Rather, a weak and unstable currency is, in fact, a threat to obtaining a stable macro-economic environment which, in itself, is an important pillar of competitiveness. In any case, the rand was rejected by this market over the term of this multiple currency regime on account of its volatility.

And with South Africa now having its own challenges and the subsequent credit rating downgrades, one wonders how adopting the rand will insulate Zimbabwe from the economic headwinds associated with SA’s volatile currency.

Equally, the pervasive thinking that the current cash shortages will be alleviated by adopting the rand or using it as a reference currency is not only shallow but illogical at the worst. Between December 2009 and 2016, banking sector deposits grew by 350 percent to $6,5 billion, yet the cash and nostro deposits, which support the same deposits, contracted 36 percent to around US$370 million in 2016 from the December 2009 levels.  No matter how much the policy makers would have pushed the economy towards plastic money or opted to use the rand, the cash crunch was inescapable, more so considering that a significant part of the economy is informal.

As broad money supply (M3) grew over the years on account of massive credit expansion, high interest rates, unrestrained fiscal deficits and fiscal assumption of pre-dollarisation debts, the economy’s ability to generate incremental net foreign currency, unfortunately, did not improve and this created the huge chasm that we see today between RTGS balances and the real cash supporting the same.  And the result has been the cash and foreign currency shortages.

Companies are having to wait months on end awaiting allocation of foreign currency in order to import or make foreign payments notwithstanding their domestic accounts being funded whilst depositors are having to queue endlessly to withdraw their hard-earned income as banks are failing to fund cash imports due to depleted nostro balances.

Lately, Econet has been struggling to meet its foreign loans obligations and torched a storm when it announced a rights issue in January that obligated shareholders to follow their rights by depositing money into foreign banks.

Ironically, Afreximbank, who are the guarantors of the $200 million bond note structure, happened to be among the foreign banks being owed by Econet and was surprisingly queuing to receive payment in foreign currency instead of the bond notes that are guaranteeing locally.

What a mess!

And unless the policy makers stem unproductive broad money supply growth and reduce import dependency, nothing will narrow the huge chasm between RTGS balances and the real cash supporting these.

And the policy makers need to understand that continued broad money supply growth is the biggest threat to the parity between bond notes and US dollar and, unfortunately, adopting the rand as a currency of reference will not cure this challenge.

Zambia, just next door, has economic structures and conditions that are more or less the same as Zimbabwe, but reflects a different monetary picture on account of its broad competitiveness aspects and not the weakness of the Kwacha.

As of December 31, 2016, Zambia had about US$1,26 billion in nostro balances or foreign currency, which amount is more than four times what Zimbabwe had, yet Zambia is not dollarised.

Logically, the expectation should favour Zimbabwe to have more foreign currency than Zambia because it has dollarised.

As a percentage of total deposits, including Kwacha deposits, Zambia nostro balances were at 26 percent, and when compared to Zimbabwe’s at about four percent for the same period, it reveals clearly why there are serious foreign payments settlements gridlocks in this country as well as acute cash shortages.

Germany, which is a member of the Eurozone, had a record current account surplus of US$284 billion in 2016, making it the largest in the world for 2016, even way ahead of China.

Interestingly, the majority of the Eurozone members, using the same Euro currency as Germany, are having structural challenges.

Therefore, to believe that by using the same currency as SA’s, Zimbabwe will be equally as competitive as its neighbour is fallacious.

Zimbabweans need to get over the thinking that there are quick fixes and quick wins.

 Brains Muchemwa is an economist and CEO of Oxlink Capital

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