Rand option dilemma as currency crisis worsens

FINANCE minister Mthuli Ncube, who has publicly said joining South Africa’s Multilateral Monetary Area could be a solution to Zimbabwe’s currency crisis, is agonising over currency reforms, as it dawns on him that his preferred choice is a herculean task, while a plethora of problems are standing in the way of other potential solutions.

Owen Gagare

When announcing the 2019 National Budget statement in parliament last month, Ncube skirted the volatile currency reform issue, insisting the bond note and Real-Time Gross Settlement are still at par with the United States dollar.

Before and upon his arrival from Switzerland in September amid a populist storm and blaze of publicity, Ncube spoke about macro-economic fundamentals, fiscal and monetary policy reforms, debt, budget deficit, current account deficit, clearing of arrears with international financial institutions (IFIs) to secure new funding, lines of credit and currency reforms.

He got his fingers scorched soon after taking up his new job when he attempted to officially re-dollarise the economy, demonitise bond notes and later bring back the defunct local currency.

His remarks that bond notes would be abolished in December sent the rate of the quasi-currency rocketing in relation to the US dollar on the parallel market.

Although he did not address the elephant in the room during his budget presentation, Ncube told editors last week that currency reforms were a necessity.

He said he would tackle them once economic fundamentals are addressed, emphasising that the options he spoke about before and after his appointment were still on the table.

He admitted, though, that he was facing serious hurdles as he tries to implement the necessary reforms.

“We will confront the currency issue at a point when we feel our fundamentals are strong enough to sustain currency reform.

“If you look at what we are doing, we are not doing a big bang approach. It is very clear, otherwise we would have done it,” Ncube said.

Among other issues, Ncube said Zimbabwe needs to speedily build credit lines and reserves.

“So the timing would not allow us to do anything fast on that. So we have to watch these fundamentals, I said the deficit is going very well. We literally have a primary surplus. That’s already signalling that we are getting closer and closer,” Ncube said.

“Number two is: I cannot announce the days of the currency reforms. Actually that’s not how you reform currency. Even if you give the clearest signal, you must never be specific. In the end you must just act. Why? Because people take positions and so on. Currency introduction is one of the most sensitive things you do in an economy. In fact, when we do it, probably only three people will know about it.”

Soon after arriving to take up his new Treasury job, Ncube told the media bond notes could be gone by the end of this year. He also spoke about the possibility of full dollarisation, adopting the rand and re-introducing the Zimbabwean dollar.

“I am very clear that there have to be currency reforms and the (current) currency approach is not working. In doing so, there are three choices that I will explore and pursue with urgency: One, adopt the US dollar only and remove the bond notes from circulation through a demonetisation process and also liberalise exchange controls,” Ncube said in September.

“Two, adopt the rand by negotiating to join the Rand Monetary Area, and this will close the gap in loss of competitiveness against our largest trading partner, South Africa.

“Three: adopt a new Zimdollar, and here one needs to be clear that it has to be backed by adequate foreign reserves and macroeconomic conditions for its stability. Foreign currency accounts will also be introduced. For sure, currency reforms will be implemented.”

Ncube said the options were still on the table, but revealed that being in office had given him a reality check after realising he could not speedily implement his ideas, as previously reported by the Zimbabwe Independent.

“When you are in government and you are in a position of decision-making, you weigh the options. You weigh to say ‘which will be the most harmful, which will be the least harmful?’ When I was outside there, I am an adviser, I am a consultant. It’s very different when you have to pull the trigger yourself.
It’s very different,” Ncube said.

“But then you must know that at some point you will have to pull the trigger. You understand that something that you think you could have done fast you can’t because of one, two, or three reasons. You have to go slower but you must still do it and that’s where we are right now. You know it will be done, but you know that there are one or two steps that you need to take. You cannot wish those steps away.”

Ncube revealed that joining the Multilateral Monetary Area, which he previously recommended in a scientific journal, was a cumbersome process.

“And that rand paper is the most in-depth research paper. It’s actually published in a professional journal, globally. It’s actually a scientific paper where I showed that we have actually lost 50% of our competitiveness by using the US dollar. Those were the facts there. It’s properly researched. Absolutely!

“So you have the rand route. But now think about it, trying to join the Rand Monetary Area. How long is that going to take you? How many regulations to comply with? Forty-eight. We removed 12 for you, it’s actually 60.

“Forty-eight requirements that you need to satisfy before you join the Rand Monetary Area, so now you are faced with the reality now.

“. . . Join next week, let’s see, and then South Africa says, ‘but we run this thing, so let’s check your budget deficit, ummm 10%, you don’t qualify. It should be below 3,5%’. Current account deficit should be below 3%. Reserves, local currency and other things. You should have a local currency before joining.

“So there are administrative impediments of otherwise doing the right thing or what you may think may be the right thing.”

Member countries of the Multilateral Monetary Area — South Africa, Namibia, Lesotho and Swaziland — would also need to agree on whether to admit Zimbabwe or not, taking into account its macro-economic imperatives and economic indicators.

Ncube, who was accompanied by his permanent secretary and former Bankers Association of Zimbabwe president George Guvamatanga, said using the rand informally was also difficult because of South Africa’s tight exchange control regulations.

Guvamatanga said it is easier to import US dollars from South Africa than to import the rand.

“Most of the banks here import US hard currency from a bank in South Africa, First Rand, for that matter. So it’s easy for you to obtain US$50 million from First Rand than to import R5 million from First Rand because of exchange control regulations in South Africa,” Guvamatanga said.

“So even to use it informally, that room is non-existent. It is very tight and I’m talking from experience.

“We tried it at one point in time, we thought we were smart. We tried with my previous employer. We said let’s bring in more rands and pump rands onto our ATMs. We couldn’t bring in the rands. So joining the rand union informally is completely impossible. If I say today may you bring US$50 million and transfer the money, by tomorrow it would have come. And if I ask for R5 million, they will ask a hundred questions and it will not come.

“Those are some of the practical realities that are there. When we sit now and I phone (South African Reserve Bank Governor Lesetja) Kganyago, he will say ‘my brother I need to go to parliament’.”

Ncube said re-introducing the Zimbabwean dollar would be disastrous without foreign currency reserves, gold reserves and poor export performance.

Government officials say dollarisation would be very difficult without enough dollars. Zimbabwe only has US$1,5 billion and about US$400 million in bond notes in circulation. The market is dry in terms of hard currency because of low production and low exports.

The other sources of foreign currency such as foreign direct investment, diaspora remittances, investment inflows and donor aid are limited, hence the forex shortages.

To exacerbate the situation, formalising a currency deal with the United States is impossible due to Washington DC’s economic and financial sanctions on Harare. US President Donald Trump in August signed Congressional amendments to the Zimbabwe Democracy and Economic Recovery Act (Zidera) which tighten the restrictions.

“It doesn’t mean that the options are not on the table; they are still on the table, but the issue is now processes and speed,” Ncube said.

“We have to choose an option that is credible, that is sustainable, that is least costly, both in terms of time administratively and in terms of time building reserves. There is a cost to introducing a currency so you have to evaluate all of this.

“But before you do that, sort out the fundamentals. You cannot introduce a new currency when the budget deficit is 12%. You are not credible,” he added.

Ncube, however, said Zimbabwe was making progress in terms of addressing the economic fundamentals necessary for currency reforms, including balancing of the budget.

Zimbabwe achieved a budget surplus of US$29 million last month, the first time in many years.

Ncube said the achievement is the first indication that the country is on track to meet a narrower budget deficit of 5% of gross domestic product in 2019 from an estimated 11,7% this year. – ZimInd