Rand adoption logical

Economist Brains Muchemwa wrote an article on 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.

BY JOSEPH MVERECHA

The Zimbabwean dollar in 2008 (or what was left of it), was the weakest currency but the real exchange rate was shooting through the stratosphere with debilitating effects on exports and industry capacity utilisation

The Zimbabwean dollar in 2008 (or what was left of it), was the weakest currency but the real exchange rate was shooting through the stratosphere with debilitating effects on exports and industry capacity utilisation

If that was 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 the country’s trade deficit is in excess of $3 billion a year is because of the strong currency — the 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 has depreciated over 91% 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 — this 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, Information Communication Technology innovations, new equipment — all these positively impact on productivity but if the underlying currency is too strong and strengthening day by day — that can create a firestorm in the desert for the economy.

As for the wholesale money printing which engineered the hyperinflation inferno of 2007/08 — I do not know if reasonable comparison can be made with the South African currency. There are challenges in SA both political and economic, but inflation is well below 6,5% and has never exceeded that threshold over the past years.

Trying to compare that to our situation in 2008, when the official inflation reached a staggering 231 million percent and climbing, may indeed be comparing an ant to an elephant. Unofficially, our inflation was several hundred billions, if not quintillions.

The Zimbabwean dollar in 2008 (or what was left of it), was the weakest currency but the real exchange rate was shooting through the stratosphere with debilitating effects on exports and industry capacity utilisation. From a macro policy point of view — what we do not see (such as the real exchange rate, the real interest and real wages) — these are some of the most important determinants for any economy, especially for small open economies like Zimbabwe, in particular beyond the near term.

To be sure adoption of the rand by itself — and if it becomes an end in itself – of course will not address the macro and structural challenges, which must be addressed through comprehensive reforms as a matter of priority.

In this regard, there is quite notable progress with respect to the “Doing Business” reforms spearheaded by the Office of the President and Cabinet and line ministries. The rand adoption will certainly not be a magic wand outside comprehensive reforms, but removing the real exchange rate problem of the dollar and its pervasive effects on the economy — this must be an integral part of the package of economy wide reforms, which must be instituted 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 growth path. But the issue of currency is at the core and the United States dollar is unsustainable.

Monetary authorities highlight that as much as $1,8 billion was externalised, (Governor’s monetary policy statement) — this is yet another hemorrhage, which comes as a result of a strong currency (dollar) which is used by all countries as a reserve currency, from Andorra to Vanuatu.

The dollar accounts for nearly 60% of the world’s international payments system and everyone wants that currency. Zimbabwe has become a gold mine for cheap transfer of dollars to the rest of the world 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 Lebanon or other countries to come to Zimbabwe and set up shop expressly, for the purpose of externalising the rand?

The dollar has magnetised all sorts of fly-by-night briefcase totting “hunters” from everywhere, whose main attraction is the dollar and they have been taking it out as evidenced by statistics from monetary authorities.

To suggest that the rand was “rejected” in the current multi-currency basket is to be deliberately subjective — at best partially truthful. Zimbabweans will not reject the rand as an option to the current scenario of endlessly long lines at banks for cash, provided, there is an even currency playing field and currently it is not there.

What we have is a multi-currency basket in theory — in practice it is a dollar environment with marginal references to a few other currencies. Anyone who accepts the rand, in the present dollar payments system immediately suffers loss of the order between $12 and $15 per every $100 by migrating from rand to make payments in a dollar environment.

Equivalently, the moon shines brightest at night when there is no sun.

At day break, the dominance of the sun is overpowering. If one were to analyse the moon during the day in the glowing brilliance of the sun, chances are very high, you may actually conclude that the moon has no capacity to illuminate.

Lastly, but not least — the issue of Germany and the eurozone highlighted in his article is quite illuminating — not on account of the Germany trade surpluses as gloriously painted, but more for what is omitted — the Greek crisis.

The strong Euro (modelled on the strong Germany deutsche mark by the Maastricht criteria) — the strength of the Euro has exacerbated the Greek crisis and there is no solution in sight. The triumvirate (the IMF, ECB and Germany) insist that the answer is more austerity for Greece. Now Greece (or more accurately, large segments of Greece) desperately wants to be part of the Euro or “Fortress Europe”.

As such she has done everything to try to adhere to the austerity medicine as prescribed, but with little success — Greek exports cannot expand even in areas where she has competitive advantage like the olive oils and refined petroleum sectors because at the core of the problem is an appreciated euro, which is too strong for the Greek economy.

Now we can say, the answer to the Greek problem is more production and productivity. Well said. But, the question is, how does Greece increase production when exports, which are part of the domestic production function are weighed down by a heavy and strong euro, which is too strong not only for Greeks, but other southern European states as well — Portugal, Spain and Italy?

The crisis in Greece has been deeper and lasted longer than comparable countries like South Korea and Thailand, which were among the countries hardest hit by the Asian crisis in 1997 and 1998. How is it that these countries were able to adjust following the crisis and achieve sustained growth path, a few years after the crisis? But Greece remains mired in a deepening crisis!

In the main, it reflects the fact that these Asian and other countries can adjust their nominal exchange rate to prevent a real exchange rate appreciation and of course, Greece cannot do that, as it is “married” to the euro. Not that, a Grexit would necessarily deliver breathtaking growth, but at least it provides options, not presently available to Greece.

Would Greece be better outside the strong Euro-modelled after the strong deutsche mark? Would Greece benefit from introducing its own weak currency and immediately devalue — 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 inside the next decade and a half — the rand is the only option and we can have that option, without necessarily joining the Customs union.

There is no history in recent memory of a country completely dollarising and subsequently successfully de-dollarising just like that. The world is full of examples — El Salvador, Ecuador, Bolivia and Cambodia among others — not one country has managed to de-dollarise and revert to their own currencies, coming straight out of the US dollar.

Going forward, if dollars continue to flow out of the formal system, as at present maybe we will have only two options left — either a full scale return to the Zimbabwean dollar or the much maligned rand. An immediate return to the local currency is not sustainable — significant long term damage can be done to this economy through a hurried and injudicious return of the Zimbabwean dollar.

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

Joseph Mverecha is an economist with a local commercial bank. He writes in his personal capacity. He is reachable on: jmverecha@gmail.com

17 Responses to Rand adoption logical

  1. fakamari April 20, 2017 at 7:46 am #

    I cant agree with you more Mr Mverechena.I also read Brians ‘s article and thought he lost it on that one though he usually writes authoritatively on economic issues.Adopting the rand is the only viable option Zimbabwe has now.Printing more of these bond notes wont help as it is likely to fuel inflation.

  2. Richard Deschain April 20, 2017 at 10:02 am #

    Insightful and nicely written article but currency change is the only one of a wide number of issues Zimbabwe needs to address to improve the economy. Zimbabwe needs to restore the rule of law, tackle corruption, attract investment to compliment the Rand adoption.

    • vembuya April 20, 2017 at 10:35 am #

      True corruption is very high, its a public secret that when an ordinary person get an investor to partner they have a hidden paper they slide to you and tell you to also incorporate some of their guys else no paper will be processed and this is one great thing that has hampered doing business in Zimbabwe, so we will continue depending on imports. We have a whole minister who shouts horse about a 15million dollar facility ti dump USD across borders and think it makes business sense when the money is used to import mabhero, canned foods and soaps thereby hampering our industry growth. Imagine what that 15 million dollar could do to reequip industry. We can have Shizha currency and works if its supported by productivity, but we see what Zimbabwe call SMEs are mabhero vendors just imagine. We have boys trying to manufacture freezits machines and maputi machines but have no funding because we are spending it on vendors so that they import the maputi and the freezits rom RSA, Botswana and Zambia. We have people with no ideas but in power and people with ideas powerless.

      • mdhara April 22, 2017 at 7:26 am #

        currency ngaichinjwe

    • chunga April 20, 2017 at 12:24 pm #

      A better and informed analysis.

  3. Tanaka Honest April 20, 2017 at 10:57 am #

    What do you mean by ‘rand adoption’? We are already using the rand here in Harare; the rand is one of the currencies in the multi-currency system. If everyone wants the USD then we also need it in the multi-currency system. We don’t want policies that benefit a few individuals at this moment. As for me, I need the Indian Rupee and the yuan. Do your business with Johannesburg, I am going eastwards to Mumbai and Beijing. Produce and be competitive. Competitiveness is currency neutral!

  4. Antony Matake April 20, 2017 at 10:59 am #

    Well argued article. However, introducing the rand with Mugabe still at the helm is a wild goose chase. All the structural adjustments you mentioned can only happen if Mugabe steps down.

  5. Sinyo April 20, 2017 at 11:29 am #

    One of the first requirements to join the Rand Monetary Union is that a member state must have its own currency forget this rand adoption fallacy. In any case nothing will work with the current regime in charge. They will wipe out those rands before sunrise

  6. chunga April 20, 2017 at 12:21 pm #

    We don’t have a currency issue in Zimbabwe but the challenges are structural. Change the ZANU PF government today and everything falls into place. Our issues are to do with gross misgovernance, corruption, policy bankruptcy and lack of understanding of fundamental economic and social issues. Rand adoption does not address the issue of competitiveness in Zimbabwe. For argument’s sake if a pint of beer is retailing at R0,60 in SA and in Zimbabwe it’s currently R1,30 (equiv of $US1), how then does the adoption of the Rand reduce the prices in Zimbabwe without changing the cost structure which is driven by higher electricity costs and other utilities, high fuel/distribution costs, high raw material prices etc?

    Brain Muchemwa has a logical argument which makes economic sense.

  7. chunga April 20, 2017 at 12:31 pm #

    The Rand is as volatile as any other currency in the emerging markets. It has depreciated from 1:6 to the USD in 2009 to 1:16 in 2016 and now around 1:13 to the USD. By adopting this currency you will be importing inflation into Zim whilst we know that we have had negative inflation in Zim since the adoption of the multi currency in 2009. The USD is a reserve currency and a store of value, you can’t say that with the Rand which is not even tradable in most countries. With the junk status cast upon South Africa why then adopt a currency of such a country. You also need to realise that those countries in the Rand Union are more or less extensions or provinces of SA as they don’t even have a manufacturing base of their own.

  8. Danai Pazvagozha April 20, 2017 at 1:51 pm #

    Mverecha you are very wrong. I am busy preparing a vibrant response to your article, and will also send it to Daily News for publication. A very fallacious premise laden in your argument is this that “Currency (type) is vital for economic growth” when in essence currency is essentially a medium of exchange. As an economist, you must know that the Zimbabwean currency problem has nothing to do with US$ , just as the use of English language as a medium of communication has nothing to do with the third-world status of Zimbabwe. You also seem to be confusing the ‘use’ of the Rand with the integration of Zim into Rand union, where RBZ will then be subservient to RSA reserve bank. Otherwise I don’t really see how the rand will differ from US dollar in terms of function. Are you aware that the Rand is easily convertible to US dollar??

  9. Madirativhange April 20, 2017 at 3:51 pm #

    I think this is a well balanced proposition. The biggest negative we have in this country I think is the lack of political commitment to get our problems to end. The powers that be have so much been used to benefiting from maladministration to the extend that they don’t even think they still tend to benefit together with us if they sacrifice to work and make things right. An example is the former Philippines President (that woman forgot her name), when she was elected into office, she instructed that all top of range government fuel guzzlers be sold to cut govt expenditure; J Magufuli is again another example of political commitment. If leaders fail while trying in earnest, its there for everybody to see but that is completely different from our scenario.
    I agree with Jo that we adopt the Rand, its not the ultimate solution but it presents much opportunities for recovery than the USD. I rest my case

  10. Janana wa Bikaz April 20, 2017 at 4:12 pm #

    As long as we have a comatose economy,the introduction of the Rand will not change anything.There are quite a number of economic fundamentals that needs to be addressed first.We have unfriendly investor policies,we have a bloated and wasteful cabinet,we have ghost workers who are paid for doing absolutely nothing in government,corruption in the high echelons of power goes unabated,government funds are diverted to aid the zanu pf mafia party,Funds paid by the taxpayers is not used for the intended purposes,Zinara has been cashing in on motorists for a couple of years but look at the state of our roads,it is as if Zinara is the one paying the motorists.The bottom line is as long as this mafia party called zanu pf is in power any thought of economic improvement is just as good as a snowball’s chance in hell.Kick out the old dictator and his hangers on and a sober and just government takes over and the restas they say will be history.Zvimwe zvese izvi kukama imbwa chaiko varume.

  11. Zvusvumbwi April 20, 2017 at 4:41 pm #

    Lets all agree that the moon has no capacity to illuminate both during pitch darkness or daylight, rather that light will always comes from the sun. It’s therefore a mirage to those who have never been at the moon’s surface who believe, mistakenly though, that the moon has the power to illuminate. In our case the economy is the sun and the currency is the moon. Concentrate on the moonlight and you shall harvest hunger, but if you put all you effort in tracking and trapping sunlight then there shall have abundance.

  12. Hiw April 20, 2017 at 5:52 pm #

    Trillion Dolllars, US $, Bond Notes, Goats now the Rand ……..

  13. meaky April 21, 2017 at 3:50 pm #

    Gentleman those who don’t understand issues must not comment otherwise you will always dilute well balanced pieces from brilliant writers such as Mverecha. Simple mathematics will tell you that using the rand will have the effect of diminishing US dollar inflows to SA as our major trading partner. The balance of trade with SA is already in our favor so its a definite score for us. Number 2, SA companies are deliberately producing in SA so that they can harvest US dollars in Zim. If we change to rand will it still make economic sense to manufacture for example cooking oil in SA and then transport it to Zim for packaging? Definately some of the companies like Tongaart will reconsider reopening some of their closed companies like FOOD and Industrial. The advantages for trying the Rand far outweigh the disadvantages. Our economy is too small to cause the Rand to depreciate. Mbiri yekuda kushandisa US dollar will never make you stronger like the US.

  14. Danai Pazvagozha April 24, 2017 at 9:31 am #

    Meaky, kkkkkkk. Am surprised that it is you who doesn’t know what you are talking about. Your wishes willnot be factual outcomes young man. So if RSA stopsgetting us and get Rands how does that benefit? Do you know what you mean when you say The ‘Balance of trade is in favour of Zim? How, when we have a deficit vis-a-vis RSA? We buy more than we export in relation to RSA. Well the rest of your articles are just wild dreams, similar to a teenager boy fantasizing being loved by a queen’s budding girl of his age. How the Rand use is nonsensical and irrelevant to zim problems is as follows: if your salary is $1000, you will still get $10000 as your salary. And when you factor other resources cost of production, then goods produced in Zim will still mantain their ‘US$ cost’, but now in form of Rands. Otherwise 1 litre coke produced in Zim will still have a price of that more than R25 (that is $2.50) when the same coke produced in RSA sells for R15 (that is $1). So how does Zim boosts its exports then? Only in the fantasizing minds of those who have elementary economics knowledge

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