The impact of Zimbabwe – and other countries - adopting the rand

By Isabelle Coetzee

The leading opposition party in Zimbabwe, the MDC Alliance, announced in its manifesto that, if elected, it will adopt the rand as legal tender.

A survey released by the Afrobarometer in June showed that 31% of Zimbabweans intend to vote for the MDC Alliance – as opposed to 42% who plan to support ZANU-PF.

With the general election taking place at the end of July in Zimbabwe, there’s a chance the MDC Alliance may come to power and embrace the rand as its official currency.

But what are the economic and political consequences of more countries adopting the rand? And what impact will this have on South Africa?

Justmoney found out more from Sean Gossel, a senior finance lecturer at the University of Cape Town’s Graduate School of Business. Gossel’s expertise lies in financial globalisation and macroeconomics, and during lectures he places this in historical context with emerging markets.

According to Gossel, the adoption of the rand in neighbouring countries is a complex matter.

“This is clear from the debates when Zimbabwe considered adopting the rand with the initial demise of the Zimbabwean dollar,” says Gossel.

The rand is currently used in a pegged exchange rate arrangement as well as legal tender in Lesotho, Namibia, and Swaziland, as part of the Common Monetary Area (CMA).

Officially enacted in 1986, the CMA links members by adopting the rand as legal tender in parallel with their local currencies.

This includes the Lesotho loti, the Swaziland lilangeni, and the Namibian dollar. When Namibia officially joined in 1992, the CMA changed its name to the Multilateral Monetary Area (MMA).

“Since the rand is legal tender in the three countries, South Africa must compensate each of the countries for foregoing seigniorage,” says Gossel.

This is the profit a government makes from issuing a currency, in this case the difference between the value of the rand and the cost to produce it.

“Although the other MMA currencies are pegged to the rand, the South African rand follows a floating exchange rate arrangement,” says Gossel.

“This means that monetary policy for the MMA countries is set by the South African Reserve Bank (Sarb), which is based on domestic policy objectives,” he explains.

While this arrangement stabilises inflation in the MMA countries, often the Sarb objectives do not benefit MMA countries.  This is because of the volatility of the rand, the disproportionate size of South Africa’s economy, and South Africa’s global integration.

For context, South Africa’s population reaches more than 56 million, whilst the second largest population group in the MMA is Namibia, with just over 2 million.

Gossel believes these differences are why the remaining Southern African Development Community (SADC) members prefer to rely on their own exchange-rate agreements.

In addition to the MMA members, the SADC includes Angola, Botswana, Comoros, Democratic Republic of Congo, Madagascar, Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zimbabwe, and Zambia.

The SADC is an inter-governmental organisation which aims to create regional cohesion in Southern Africa through cooperation and socio-economic integration.

The main benefits of currency integration can be the limiting of exchange-rate related transaction costs and the dampening of exchange rate volatility, says Gossel.

In addition, if adopted in countries that are closely linked because of inter-regional trade, the shared currency can lessen inflation and trade related volatility.

“For poor countries, such as most SADC countries, the shared currency also lowers the amount of money the reserve bank has to hold in reserves,” he says.

Gossel points out that the SADC has already declared that it will slowly move towards a currency union to foster greater inter-regional trade.

However, he believes there’s a danger in correlating business cycles, which is inevitable with increased integration.

Since many of these countries depend on resource exportation, integration would heighten the regional correlations between domestic business cycles and international resource cycles, says Gossel.

This in turn could lead to regional instability and conflict in times of declining demand for resource exports, he explains.

According to his own research, Gossel found that the South African economy would specifically benefit from extending the MMA to Botswana, Mauritius, Mozambique, and Tanzania.

However, he believes inter-regional trade among these countries is still too small to significantly improve South Africa’s economic growth prospects.

In spite of this, Gossel explains that the greater use of the rand could increase regional stability because many African countries have weak central banks.

“Effectively the Sarb would become the most powerful central bank – provided it maintains its independence,” says Gossel.

“This would likely strengthen the rand, but it all depends on the extent to which inter-regional trade grows and the economic stability of the cross-currency countries,” he adds.

With 51% of Zimbabweans fearing they might become victims of political intimidation or violence during their general election (survey), Zimbabwe does not yet resemble stability.

However, if the country manages to break its dominant-party system with ZANU-PF, adopting the South African rand may contribute to its climb out of economic ruin, and could contribute to regional stability.

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