Zimbabwe must adopt the rand, says Fitch Solutions

ZIMBABWE must adopt the South African Rand to deal with the worsening currency crisis caused by the shortage of United States dollars, an international research firm has said.

United Kingdom-based financial services firm Fitch Solutions said in its latest report on Southern Africa that Zimbabwe's currency crisis was a result of "current account deficits and insufficient foreign investment over recent years".

When monetary authorities last month announced the separation of current accounts into dedicated electronic money foreign currency accounts (FCAs) and nostro FCAs thus localising the former, this worsened the currency crisis.

"The final option, we believe, would be to join the South Africa rand monetary union, which includes Lesotho, Namibia and Botswana as well as South Africa," Fitch Solutions said

"A major advantage of this system would be that Zimbabwe's currency would track that of its main trading partners, which would improve Zimbabwean businesses' competitiveness.

"Indeed, broad strength of the US dollar against the South African rand over recent years has negatively affected competitiveness."

Fitch Solutions said the current currency system would not permit economic recovery, which is why authorities needed to make urgent efforts to change the system.

"As of May 2018, commercial banks' stock of foreign currency notes and coins stood at $62,8 million, equivalent to around 1% of total banking sector deposits (ostensibly also denominated in US dollars), meaning that banks simply cannot meet clients' cash withdrawal demands. This has led to the majority of transactions being carried out using debit cards and electronic transfers," the research firm said.

"However, because these electronic balances cannot be used abroad to pay for imports, they trade at a discount to hard currency cash."

Economists have in the past called on authorities to adopt the rand before as South Africa is the country's largest trading partner and the rand is one of the official usable currencies.

Previous suggestions indicate the rand's adoption could be done by ring-fencing it with the United States dollar as a reserve currency given there are no reserves. By doing this, the country could keep its own monetary policy, avoid any potential shocks from any downturn in the South Africa economy and meet foreign and local currency demands without putting a strain on the currency.

Former Finance minister Tendai Biti said in May last year that former President Robert Mugabe in 2010 blocked the use of the South African rand as the official currency because he felt he would be politically subservient to South Africa.

President Emmerson Mnangagwa's government has not discussed adopting the rand although Finance minister Mthuli Ncube discussed its adoption as a fix to the currency dilemma prior to his appointment. Fitch Solutions said authorities attempted to ease the cash crunch by introducing relatively small quantities of the quasi-local currency, bond notes, but that did not work as they "are not usable abroad".

The current account deficit is due to the country importing more than it exports while low outside investment is due to a foreign debt stock to $11,5 billion expected by year end, according to the Parliament Budget Office, which has chased away fresh investment.

The currency crisis created the parallel market that serves as a huge source of forex and as such exarcebating the United States dollar and real time gross settlement parity rates with the latter being known as "zollars", according to street lingo. As of last Friday morning, parallel market rates were 250% in terms of the greenback/ RTGS money parity.