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Source: www.africaecon.org

Africa Economic Institute

Zimbabwe Adopting the South African Rand?


  Zimbabwe's economic crisis is dire. Last month, Morgan Tsvangirai, the new prime minister, announced that Zimbabwe would need approximately $2 billion in aid to jump start the economy. But due to the current political situation, funding from the international community will be very unlikely. Zimbabwe is now looking for…

Zimbabwe’s economic crisis is dire. Last month, Morgan Tsvangirai, the new prime minister, announced that Zimbabwe would need approximately $2 billion in aid to jump start the economy. But due to the current political situation, funding from the international community will be very unlikely. Zimbabwe is now looking for an alternative solution to restart the comatose economy.  Potentially, Zimbabwe could join the South African rand monetary union. The two nations are presently negotiating the possibility and formalization of using the rand in Zimbabwe. If Zimbabwe ends up adopting the rand, the nation will join other Southern African Development Communities (SADC) that currently use  both the rand and its own local currency. The countries that currently have two forms of currency include Namibia, Swaziland and Lesotho.

Tsvangirai made the announcement of potential currency change to business leaders. Zimbabwe’s central bank Governor Gideon Gono welcomed this alternative strategy to re-start the economy. Sources state that the two governments are currently in the process of introducing this strategy. Tsvangirai is also hoping that switching currencies would also help in obtaining international loans and assistance packages.

South African President Kgalema Motlanthe, the current SADC chairperson, has urged other countries in the SADC to also offer support to Zimbabwe as the country tries to rebuild its economy.

Presently, Zimbabweans already use foreign currencies such as the United States dollar, Bostwana pula, British pound and European euro to stabilize prices of goods and services and combat the high inflation rate that shroud’s Zimbabwe’s economy. According the World Bank, Zimbabwe’s current inflation is the highest in the world and has the second highest rate of inflation in the world’s history.

The introduction of the rand will lend itself as much as a relief to Zimbabweans. Not only will the implementation of the rand combat inflation but also permit government and locals to save. One analyst said that using the rand will allow the government to have the ability to plan and save money for major infrastructure projects, such as building roads, hospitals and reviving day-to-day government operations. For local Zimbabweans, the rand would allow for people to restart or open personal savings accounts, which currently cannot happen because of the Zimbabwean dollar’s rapid value changes.

However, critics object to such a policy because they believe that it inevitably will not fix Zimbabwe’s economy. If Zimbabwe does indeed adopt the rand, it would essentially giving up control of its economic policy to South Africa. Although the plan might stabilize the economy in the short term, the long term would imply that Zimbabwe would become solely dependent on South Africa’s economy and would inevitably become a province of South Africa.

Zimbabwe’s current Finance Minister, Tendai Biti, is one of the dissenters to the idea of adopting the rand. Instead, Minister  Biti believes that Zimbabwe should introduce its currency to the market and let the true value of the current currency adjust itself.

Despite the criticism of the policy, Tsvangirai traveled to South Africa where he met up with South African President Molanthe to discuss a potential rescue package. In order to help its neighbor, South Africa has organized a meeting of regional finance ministers this week in South Africa to discuss matters of a rescue package to Zimbabwe and ways to assist the Zimbabwean government.

 African regional bankers recently visited Zimbabwe to assess the current economic situation and the extent of the problems. The bankers looked at the feasibility of developing credit lines for the country. Bankers from the African Development Bank (ADB), officials from Common Market for Eastern and Southern Africa (COMESA) and SADC were amongst the participants.

Introducing the rand as the common currency and convincing the international community to offer aid will be difficult tasks. With the global financial crisis, Zimbabwe will find it difficult to borrow money. Many of the projects in Zimbabwe might be sound investments, but with the fickle and inconsistent policies, long term financing seems unlikely.

Zimbabwe’s economy is fraught with many problems. Hyperinflation causes prices to double almost everyday. This had led to the collapse of the country’s education and health sectors. Teachers and nurses are now refusing to work unless their salaries are paid in American dollars. Many civil servants have left the country to find better job employment opportunities. The historically generating sectors of agriculture, mining, manufacturing and tourism have taken a nose-dive.

The country, according to statistics from the 2009 National Budget, currently has a budget deficit of $410 million. Exports have dropped 14 percents, whilst imports have increased by 7.6 percent to a mere $1.9 billion, leading to a negative balance of payments for Zimbabwe. If the government decides to implement the rand, it will be interesting to see how the government handles the transition and how long the new currency will be used for, as there will be substantive positive and negative side effects in both the short and long term.

Source: www.AfricaEcon.org
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Source: www.africaecon.org