Should Zimbabwe Adopt The South African Rand?

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 dollarized. 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 dollarize its economy or adopt the South African 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 stabilize 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 which can be purchased using Zimbabwean dollars or foreign currencies.

However, the introduction of the digital currency has received a lukewarm response. Critics argue that while the digital currency may help mop up excess liquidity, it does not address the underlying issues in the economy and the introduction of the gold backed digital currency is unlikely to restore confidence and trust in the country's financial system. Former Finance Minister Tendai Biti criticized the move, calling for the floating of the Zimbabwean dollar to establish market stability. But recent attempts at liberalizing the currency regime have only seen the Zimbabwean dollar plunge further.

In the face of this 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 Zimbabwean dollar, and an inability to effectively make use the country’s vast gold reserves to prop up the currency, the government may be forced to abandon the Zimbabwean dollar altogether. Zimbabwe would then have to decide between adopting either the US dollar or the South African rand as the new official currency. While both options may offer a respite from the current crisis, both options have shortcomings, and neither currency could be adopted without major structural reforms.

Rand versus dollar

The de facto dollarization 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 all its salaries in the currency. Meanwhile, the Reserve Bank of Zimbabwe has struggled to import sufficient cash dollars through South Africa. The move to cut ties by South African banks has been driven by concerns over potential fines imposed by the United States due to the sanctions on Zimbabwe, and the cash supply crisis has made the effective dollarization of the economy almost impossible.

If Zimbabwe held free and fair elections and sanctions were lifted, the country could better adopt the US dollar. Adopting the US dollar may provide increased stability for Zimbabwe's economy, certainly in terms of inflation, but would produce 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 South African rand. Although adopting the South African rand seems like a good solution, Zimbabwe has refrained from doing so due to the onerous conditions set by the Common Monetary Area (CMA), comprising South Africa, 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 several potential benefits that may arise from Zimbabwe adopting the South African Rand. By using South African rands as domestic legal tender, the 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 much larger export market in neighboring South Africa.

South African 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 South African 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 also allow Zimbabwe to receive currency directly from the South African 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 the sanctions lifted and improve investor sentiment. This would aid the dollarization of the economy by making it easier to import US dollar notes. While Zimbabwe could always decide to join the CMA and adopt the South African rand, this would also prove more effective if sanctions were lifted as South African banks and business would be more inclined to operate in the country.

Facing another currency collapse and hyperinflation, Zimbabwe could be forced to adopt a foreign currency to stabilize 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 required worthwhile. Although the dollarization of the Zimbabwean economy may seem inevitable, there are several reasons why the official adoption of the South African rand maybe the best option for Zimbabwe.