IN his recent address at a luncheon organised by St Luke’s Anglican Church in Greendale, Harare, Reserve Bank Governor Dr John Mangudya dismissed suggestions by sections of the business community that Zimbabwe should adopt the South African rand as its base currency. He said Zimbabwe required its own currency before joining the Rand Monetary Union and that it was still impossible to bring back the Zimbabwe dollar because the current conditions were not conducive for such an action. What the governor said goes a long way to back what has been consistently said in search for answers and urgency for radical currency reforms.

The argument has always been that it is practically, politically, economically and legally difficult for Zimbabwe to manifest its currency reforms by adopting the Rand; not because of its existing volatility, but the complex nature within the regional economic bodies of the Common Market Area (CMA).

To understand the challenges Zimbabwe faces in its attempt to adopt the rand as many subscribe to, it’s essential that we understand the background of the Rand Union in the Common Market Area (CMA) and the role of Southern African Customs Union (SACU) since 1903 and identify the strong correlation between the two as the latter provides currency stability in this economic integration block.

Background and legal challenges
Zimbabwe cannot just walk into the Rand Monetary Union without facing monumental legal challenges. It is impossible for the country to unilaterally adopt the rand without infringing on the agreement that binds the Rand Union member States as appended to a 1974 pact signed as the basis for the formation of the Common Market Area (CMA) agreement.

The CMA arrangement has its roots in a de facto currency union.

In 1921, after the establishment of the South African Reserve Bank (SARB), the South African currency (initially the pound, since 1961 the rand) became effectively the sole medium of exchange and legal tender in South Africa, Bechuanaland (now Botswana), Lesotho, Namibia, and Swaziland.

The CMA was revised in 1986 as a trilateral Monetary Agreement among the governments and it originated from the Rand Monetary Area (RMA), which was established in 1974.

The signatories of the latter were South Africa, Lesotho, and Swaziland. The CMA has since been replaced by the present Multilateral Monetary Area (MMA) as of 1992, when Namibia formally joined the monetary union.

South Africa accounts for over 90 percent of the CMA’s GDP, trade and population. The CMA represents a large regional entity: In 2004, it had an estimated combined GDP of US$224 billion, about 43 percent of that of sub-Saharan Africa.

Although the South African rand is legal tender in all states, the other member states issue their own currencies: the Lesotho maloti, Namibian dollar and Swazi elangeni. Lesotho established its own central bank and issued its national currency, at a one-to-one rate to the rand, in January 1980. In 2003, after 17 years of interruption, Swaziland reauthorised the use of the rand as legal tender alongside the elangeni in the country.

According to the IMF, the exchange rate arrangements of the small countries under the CMA share certain characteristics of a currency board — domestic currency issues are required to be fully backed by foreign reserves.

These countries’ currencies are exchanged at par with the rand. Foreign exchange regulations and monetary policy throughout the CMA continue to reflect the influence of the South African Reserve Bank on the exchange rate and monetary policies of the rest of the CMA.

In recent years, South Africa has moved from a pegged exchange rate to a policy regime based on inflation targeting and a more flexible exchange rate.

Currency Arrangements Article 2 of the CMA (Multilateral) Agreement gives the three small member countries the right to issue national currencies and their bilateral agreements with South Africa define the areas where their currencies are legal tender.

The local currencies issued by the three members are legal tender only in their own countries.

The South African rand, however, is legal tender throughout the CMA. Under the current parity arrangements, national currencies of the small countries and the rand are perfect substitutes; there is no transaction cost in conversion. On this backdrop, Zimbabwe does not have sufficient background qualities to fulfil membership requirements within the Rand Monetary Union.

The country does not have its own currency like all Rand Union members, whereas Rand Union member States as individuals have their domestic currencies.

Misconception
The misconception by many in Zimbabwe including business community, economic and academic commentators (including the Zimbabwe Bankers Association’s official position) is that the use of the rand in the Rand Union refers to the rand notes and coins simply circulating in member states. And that member states’ national budgets and financial systems are presumably factored in the rand.

Well, that is not true, because in exchange rate terms the Rand Monetary Union or shall we say the Multilateral Monetary Area refers to domestic currencies of member states merely pegged in parity against the rand or the currency stability of member states’ stability backed and configured to a single monetary policy.

This exchange rate policy is administered in the Common Monetary Area as replaced by the Multilateral Monetary Area (MMA). While national currencies circulate in small countries, there is a de facto common currency — the currency of the core country, South Africa.

The Multilateral Monetary Area (MMA) economic activities are micro-managed by the South African Reserve Bank monetary policy and the currency stability of member states is ring-fenced on customs revenue collections from within SACU which are deposited by every member state into South Africa’s National Revenue Fund and distributed to member states according to an agreed formula.

Under the Lesotho-South Africa and Namibia-South Africa bilateral agreements, the central banks of Lesotho and Namibia are required to maintain foreign reserves at least equivalent to the total amount of local currencies they issue. Such reserves may comprise the central bank’s holdings of rand balances, the rand currency the central bank holds in a Special Rand Deposit Account with the SARB, South African government stock (up to a certain proportion of total reserves) and investments in the Corporation for Public Deposit in South Africa.

Economic rationale

There is a significant South African business presence in Zimbabwe. About 27 of South Africa’s biggest listed companies have operations in the country and a number are also listed on the Zimbabwe Stock Exchange.

An argument in favour of the adoption of the rand being floated around by many is that the rand is already being used widely in Zimbabwe and more so in the southern provinces. And that the ATMs are already dispensing the rand notes.

Well, the answer to that is, the rand or any other in the basket of multi-currency is not the principal currency in Zimbabwe; the dollar is.

The Government’s national and local authorities budgets are factored in dollar terms and so is the Balance Sheet of every financial institution in the country. In economic terms — Zimbabwe’s financial system is dollarised. The deposits held by the banks as factored in dollar form are reflective of their Balance Sheets and the subjects can transact with any other currency in that basket of multi-currency regime. In Zimbabwe, more volume of the rand in circulation is reflective of the trade with South Africa and also the fact that there are more Zimbabwean people working in South Africa. However, that does not translate into what the rand Union entails, in exchange rate form and the subsisting SACU customs agreements.

It is also essential to know that South Africa and other countries in the Rand Union would not openly welcome Zimbabwe to adopt the rand because of the huge black hole in the budget’s current account; this albeit there having been wild invitations from ANC officials and other business people in that country over the years. This is a proposal that would not pass the test of the South African Reserve Bank and SACU member States.

Obviously there is fear in South Africa and other CMA member states reflecting on the Greece debt crisis contagion in the Eurozone. The Union could end up engaging in costly bail out to Zimbabwe to enforce the stability of the rand.

Political challenges

As well, South Africa knows that Zimbabwe is also a major political force in the region that the existing CMA members and its influence could easily cause divisions and strong resistance in economic integration body. With strong intransigence Zimbabwe could give power to other lesser states in the Rand Union block.

And so the probable, albeit remote way, into the Rand Union for Zimbabwe is to disband the sovereignty of Reserve Bank of Zimbabwe and submit to the South African Reserve Bank run Multilateral Monetary Area (MMA) and the Southern African Customs Union (SACU) and dive into that regional pool and swim with the big shark in the neighbourhood alongside the smaller fish sharing the spoils. That will be like giving up all forms of industrial production and accept that Zimbabwe be like Lesotho and Swaziland turned into giant supermarket for South Africa and relying on remittances from that country.

The political upheavals in Lesotho are linked to their over reliance on South Africa as some in that country are calling for the country to be annexed by big brother. And there are suggestions that South Africa could be exploiting the economic problems in that country and has expansionist inclinations.

The writer is a Portfolio Asset Management Client Accountant and part-time Business School student. He runs the website, The Zimbabwe Mail. He can be contacted at mmusonza@aol.com.




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Source: Herald, Zimbabwe.

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