AMID currency crisis gyrations, there are calls for Zimbabwe to join the Rand union from some pundits. The Rand union is a monetary union that includes South Africa (SA), Namibia, Lesotho, and Eswatini. Joining the Rand union would mean that Zimbabwe would adopt the South African rand as its official currency. It is therefore imperative to assess the implications and opportunity costs of joining the union.
Zimbabwe has been facing a severe currency crisis for several years now. The country's economy has been struggling due to hyperinflation, a shortage of foreign currency, political instability, and economic mismanagement. The government has tried various measures to stabilize the currency, but none of them have been successful so far. In an effort to address these problems, a call to join the Rand union seems to be gaining momentum in economic spaces, given the country’s history with the Rand in the multi-currency regime almost a decade ago.
One of the main benefits is that it would provide Zimbabwe with access to a stable currency. The South African rand is one of the most stable currencies in Africa and has been relatively stable against major currencies such as the US dollar and the euro in over a decade.
This stability would help to reduce inflation in Zimbabwe and make it easier for businesses to operate. Another benefit of joining the Rand union is that it would make trade between Zimbabwe and other member countries easier. Currently, Zimbabwe uses a highly fragile currency, the Zimdollar, which is not accepted in other jurisdictions outside the country and this makes it difficult for businesses to trade with other countries as they have to constantly incur hurdles in exchanging currencies. By adopting the South African rand as its official currency, Zimbabwe would be able to trade more easily with other member countries.
Currently, businesses have to deal with multiple currencies when conducting transactions with their trading partners in the region. Adopting a single currency would simplify transactions and reduce costs, particularly exchange losses.
However, the move to join the Rand union is not as rosy as it appears on the surface. One concern is that Zimbabwe would lose control over its monetary policy.
The South African Reserve Bank sets monetary policy for all member countries in the Rand union. This means that if Zimbabwe were to join, it would have less control over its interest rates and money supply.
As part of the union, Zimbabwe would not be able to set its own interest rates and this could limit its ability to respond to economic shocks and will lead to a loss of monetary sovereignty.
- Forex demand continues to fall
- Paltry US$11m traded on auction market
- Zim businessman ‘flouts’ SA exchange regulations
- Ceteris Paribus: Bite-size snapshot of the VFEX activity flurry
Spontaneously this will also result in increased dependence on South Africa as it becomes closely tied to SA's economy. This could be problematic given the foreseeable economic shocks in SA, as well as the current economic turbulences in SA which would have a ripple effect on Zimbabwe.
Additionally, joining the Rand union could lead to a loss of competitiveness for Zimbabwe's exports. The South African Rand is a relatively strong currency compared to other currencies in the region.
This could make Zimbabwean exports more expensive and less competitive in international markets. South Africa has a much larger economy than Zimbabwe and many businesses may struggle to compete with South African businesses. The country’s national output may decline while jobs are lost.
While it would provide access to a stable currency, increase trade, and potentially lead to increased economic stability, joining the Rand union could also stifle local businesses and limit Zimbabwe's ability to control its monetary policy. Ultimately, whether or not joining the Rand union is beneficial for Zimbabwe will depend on how well the country is able to navigate these potential drawbacks.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_