Zimbabwe Currency Reforms: The Rand adoption; challenges and dilemma

IN his recent address at the luncheon organised by the St Luke’s Anglican Church in Greendale that later turned out to be a bond note promotion gathering, the Reserve Bank Governor Dr John Mangudya dismissed suggestions by some sections of the business community that Zimbabwe should adopt the South African rand as its base currency.

By Brighton Musonza

Mr Mangudya said Zimbabwe required its own currency before joining the Rand Monetary Union and he went on to say 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 Zimbabwean to manifest its currency reforms by adopting the Rand; this 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 attempts to adopt the Rand as many subscribe to, it essential that we understand the background to formation 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 later provides currency stability in this economic intergration block.

Background and Legal challenges 

Zimbabwe cannot just walk into the Rand Monetary Union or Commona Market Area without facing monumental legal, economic and political 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 that formed the Common Market Area (CMA) agreement.

The CMA arrangement has its roots in a de facto currency union and common customs 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 loti, Namibian dollar and Swazi lilangeni. 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 reauthorized the use of the rand as legal tender alongside the lilangeni 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 Monetay 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.


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 the Southern African Customs Union (SACU) which are deposited by every member States 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.

Trade in the Common Market Area

Any suggestion that Zimbabwe can easily opt for radical currency reforms and submit itself into joining the Southern African Customs Union (SACU); has got to go be tested against what joining SACU entails.

SACU was established in 1910 in pursuant to a Customs Union Agreement between the then Union of South Africa and the High Commission Territories of Bechuanaland, Basutoland and Swaziland.

SACU is the oldest existing customs union in the world. It was established in 1910 in pursuant to a Customs Union Agreement.
Its aim is to maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. All customs and excise collected in the common customs area are paid into South Africa’s National Revenue Fund.

The revised 2002 SACU Agreement says it provides for a more democratic institutional structure; a dispute settlement mechanism; the requirement to have common policies on industrial development, agriculture, competition, and unfair trade practices; and a new system regarding the common revenue pool and sharing formula.

SACU revenue represents an important institutional mechanism for fiscal transfers across the customs union’s member countries. Of the SACU members, only Botswana is currently out of the CMA, having replaced the rand with the pula in 1976.

The revenue is shared among members according to a revenue-sharing formula as described in the agreement. South Africa is the custodian of this pool. Only member states: dubbed BLNS – Botswana, Lesotho, Namibia and Swaziland’s shares are calculated with that formula and South Africa receiving the residual. SACU revenue constitutes a substantial share of the state revenue of the BLNS countries. It is a distribution mechanism that would find no compromise with a bigger political regional player like Zimbabwe and its spending appetite.

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 principle 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 dollarized. 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 have 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.

Source: IMF Working papers - The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Challenges
Source: IMF Working papers – The Common Monetary Area in Southern
Africa: Shocks, Adjustment, and Policy Challenges

According to IMF, the small CMA countries have faced various shocks over the past decade. As all member countries peg their currency to the rand at par and a significant part of their exports are to markets outside the CMA, movements of the rand exchange rate have had a major impact on these countries’ external competitiveness.

In the case of Lesotho, multiple shocks, including a sharp drop in workers’ remittances relative to GDP due to the decline in mining jobs in South Africa, weakened economic performance.

When South Africa democratized in 1994, Swaziland lost part of its attractiveness. As foreign direct investment inflows declined, real GDP growth fell from 3.6 percent in the 1990s to just over 2 percent since 2000.

Political challenges

As well, South Africa know 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 possible but; 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 with South Africa as some in that country are calling for the country to be annexed by big brother. And there are evidence that South Africa exploiting the economic problems and fuelling the instability.

Since 1998 South Africa has meddled in Lesotho saying it is acting in the spirit of restoration of democracy and rule of law for a better stable state for economic integration in the Common Market Area (CMA) but when it deployed its troops in 1998, they stood by as the City of Maseru was badly damaged in riots and looting.

Due to Lesotho’s economic and geographical relationship with South Africa, some activists within Lesotho have urged the country to accept annexation. Lesotho (then Basutoland, a British protectorate) was annexed to the Cape Colony in 1871, but became separated again (as a crown colony) in 1884. When the Union of South Africa was formed in 1910, there were moves by Britain to include Lesotho, but these were rejected by the people. The Union of South Africa was originally the idea of African kings in colonial South Africa, Lesotho, Botswana and Swaziland. It was also the idea of the founders of the South African Native National Congress (SANNC).

South African former Member of Parliament and academic author of the book Towards Africas’ authentic liberation and The hidden side of South African politics Dr. Motsoko Pheko has writen of the long held desire of “annexing” or incorporating Swaziland, Botswana and Lesotho into “New South Africa” an invitation to the African territories. And he goes on to say; “This regional union should gradually be joined by African countries such as Zimbabwe, Namibia and Angola or by all present SADC countries all heading for the United States of Africa.”

In Zimbabwe there are some provinces in the South who feel have more close ties to South African than the rest of the country and these in future are more likely to cause future political instability.

The writer Brighton Musonza is a Portfolio Asset Management Accountant in the UK and part-time Business School student. He can be contacted at mmusonza@aol.com

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