Zimbabwe once again finds itself grappling with a currency crisis as the Zim dollar plummets, leaving citizens vulnerable to hyperinflation and economic uncertainty.
Despite the government’s attempts to prop up the currency, the economy has become increasingly dollarised. While the Zimbabwean stock market has experienced a meteoric rise as Zimbabweans seek to safeguard their wealth, the accelerating inflation rate is cause for serious concern. Perhaps the time has come for Zimbabwe to fully dollarise its economy or adopt the SA rand.
Zimbabwe’s recent currency collapse is not an isolated incident. The nation has witnessed a recurring cycle of economic turmoil, marked by hyperinflation and several subsequent attempts to reintroduce and stabilise the Zimbabwean dollar. The government has even unveiled a plan to introduce a gold-backed digital currency in an effort to address these recurring issues. The central bank-issued token is intended to serve as legal tender and a store of value that can be purchased using Zim dollars or foreign currencies.
However, the introduction of the digital currency has received a lukewarm response. Critics argue that while it may help mop up excess liquidity, it does not address the underlying issues in the economy, and the introduction of a gold backed digital currency is unlikely to restore confidence and trust in the country’s financial system.
Former finance minister Tendai Biti is one of those who has been critical of the move, calling for the floating of the Zimbabwean dollar to establish market stability. But attempts at liberalising the currency regime have only seen the Zim dollar plunge further.
In the face of the most recent bout of currency instability Zimbabwe’s stock market has experienced a remarkable surge. Faced with the erosive effects of hyperinflation, ordinary citizens are investing their money in stocks to preserve their incomes, and the stock market has become a haven for those seeking to shield their wealth from the devastating effects of currency devaluation. Yet the soaring stock prices offer only a fleeting sense of security, as hyperinflation looms ominously on the horizon.
Given the consistent failure to reintroduce a stable Zim dollar, and an inability to make effective use the country’s vast gold reserves to prop up the currency, the government may be forced to abandon the Zim dollar altogether. Zimbabwe would then have to choose between adopting the US dollar or the SA rand as the new official currency. While both options may offer respite from the current crisis, they both also have shortcomings, and neither currency could be adopted without major structural reforms.
The de facto dollarisation of the Zimbabwean economy has not resolved the nation’s economic woes. One of the issues is that the government does not earn enough US dollars to pay public servant salaries in the currency. The Reserve Bank of Zimbabwe has also struggled to import sufficient cash dollars through SA due to a move by SA banks to cut ties, driven by concerns over potential fines imposed by the US due to the sanctions it has imposed on Zimbabwe. The cash supply crisis has made the effective dollarisation of the economy almost impossible.
If Zimbabwe held free and fair elections and sanctions were lifted, the country would presumably find it easier to adopt the US dollar. Doing so would offer increased economic stability, certainly in terms of inflation, but would also throw up other challenges, including a loss of monetary sovereignty. Zimbabwe would be reliant on the monetary policies set by the US Federal Reserve, limiting its ability to adapt monetary policy to its economic needs. The use of the US dollar may also create balance of payment difficulties and would likely place fiscal constraints on government spending.
The only other viable alternative to the US dollar for Zimbabwe is the rand. Though adopting the rand seems like a good solution, Zimbabwe has refrained from doing so due to the onerous conditions set by the Common Monetary Area (CMA), which comprises SA, Lesotho, Swaziland and Namibia. Joining the CMA would mean relinquishing fiscal and monetary policy flexibility and adhering to stringent obligations, which could hinder Zimbabwe’s economic recovery efforts. These risks pose a serious dilemma for policymakers in Harare.
But there are also several potential benefits that could be gained from Zimbabwe adopting the rand. Even if it was to use rand as domestic legal tender the Zimbabwean government would still be able to build up foreign exchange reserves in US dollars. This would provide a degree of flexibility in the management of the nation’s finances. Using the rand could also boost regional trade synergies and provide Zimbabwe with increased access to a far larger export market in neighbouring SA.
SA businesses and banks have a long history of operating across the border. As such, adopting the rand could see Zimbabwe gain access to increased private loan capital and receive increased levels of investment from SA businesses. The conditions attached to adopting the rand would also force the government to enact beneficial structural reforms, including fiscal consolidation and better maintenance of foreign exchange reserves. Joining the CMA would allow Zimbabwe to receive currency directly from the SA Reserve Bank.
Free and fair elections
All things considered, holding free and fair elections later this year may be the most important thing Zimbabwe can do to improve its financial fortunes. Fair elections would see international sanctions lifted and improve investor sentiment. This would aid the dollarisation of the economy by making it easier to import US dollar notes. While Zimbabwe could always decide to join the CMA and adopt the rand, this would also prove more effective if sanctions were lifted, as SA banks and business would be more inclined to operate in the country.
Facing another currency collapse and hyperinflation, Zimbabwe could soon be left with no choice but to adopt a foreign currency to stabilise its economy. While the adoption of the rand or dollar would limit Zimbabwe’s fiscal and monetary policy flexibility, both currencies would likely reduce inflation, making the tough structural reforms that are required worthwhile.
Though the dollarisation of the Zimbabwean economy may seem inevitable, there are several reasons why officially adopting the rand may be the better option.
• Shubitz is an independent Brics analyst.
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