Does Zimbabwe really 'Yearn for the Yuan'

Reserve Bank Governor Gideon Gono's proposal in November to peg a new Zimbabwean dollar to the Chinese yuan made a splash of headlines.

The Asia Times, for example, announced "Zimbabwe's yearn for yuan," while Al-Jazeera asked "To Yuan or not to Yuan, that is the question."

But the media excitement is misplaced for now. Gono and his allies in the Zimbabwe African National Union-Patriotic Front (Zanu-PF) cannot institute the peg with the current government in place. Indeed, Finance Minister Tendai Biti from the Movement for Democrat Change-Tsvangirai (MDC-T) made clear that Zimbabwe would continue using its multi-currency system until the economy stabilized.

Thus, like so much in Zimbabwe today, the future of the country's monetary regime hinges on the outcome of the upcoming presidential, legislative, and local elections. Disputes over the new draft constitution notwithstanding, the polls will likely go ahead. Zanu-PF is eager to hold them before their octogenarian leader Robert Mugabe passes. And MDC-T, while insisting on constitutional reforms prior to the vote, wants out of the coalition government. Their power sharing agreement sets June 2013 as the elections deadline.

If Zanu-PF gains a clear victory that puts a partisan at the helm of the finance ministry, the yuan peg could become a reality. While this outcome is far from assured, its possibility raises a number of important questions: what are Gono's and Zanu-PF's motivations behind the proposal? Can the peg meet the expectations that Gono has set? And, are there any viable alternative monetary regimes?

Looking to China
From Zanu-PF's perspective, the peg makes perfect sense. Tying Zimbabwe's monetary regime to the Chinese would be a logical step forward in its 'Look East' policy. Mugabe began reorienting his country eastward in 2003 as Western pressure over land seizures and human rights abuses grew.

Pragmatically, he believed Asia - namely, China, Malaysia, North Korea, Iran, and Indonesia - could compensate for the loss of Western investment. Asia also fits well with his party's anti-colonial narrative. "It is very important for us in Zimbabwe," he explained in 2005, "to develop the Look East Policy because that is where people who think like us are, same history of colonialism as ourselves, [and] people who have started developing their economies."

China has become increasingly central to the policy. In the first nine months of 2011 alone, Sino-Zimbabwean trade increased 62%, totaling $171 million (USD) according to Reuters. China has made investments in a host of industries including telecommunications, construction, and most importantly mining. Just last November, Chinese investors agreed to put $700 million toward developing Zimbabwe's mining sector.

Mugabe also uses the partnership to play up Zanu-PF's liberation credentials--its greatest political advantage. "Let us not forget," he often reminds Zimbabweans, "that the material assistance that helped us liberate this country came from China." That "material" continues to flow today as his security forces purchase Chinese arms without strings attached.

Internationally, China uses its influence abroad to protect Mugabe and his associates from Western pressure on human rights. It was one of the few countries to stand by Zimbabwe during the 2005 Operation Murambatsvina, in which the government bulldozed homes of an estimated 700,000 people. China has even shown a willingness to veto UN Security Council resolutions for Mugabe. It did so in 2008 for a resolution that threatened to freeze the assets and prevent the travel of top government officials. This support remains invaluable for Zanu-PF so it comes as no surprise that the party would oversell the prospects of closer ties to the Chinese.

Overselling the Yuan
In promoting the yuan, Gono seems to base his arguments more on Zanu-PF ideology rather than economic reality. He told state media that "the US dollar is fast ceasing to be the world's reserve currency and the euro zone debt crisis has made things even worse...There is no doubt that the Yuan, with its ascendancy, will be the 21st century's world reserve currency." The yuan, however, is far from rivaling the dollar in this respect. Today, the dollar accounts for 60.7% of global reserves followed by the euro, pound sterling, and Japanese yen. The yuan's share of reserves is negligible due to the strict capital controls China places on its currency.

Until China loosens these controls, little international trade can be denominated in yuan, which precludes its adoption as a reserve currency. The dollar currently accounts for 85% of trade compared to 0.3% of exchanges using China's currency. Thus, a Yuan peg would limit Zimbabwe's access to international markets at least in the short- and medium-term. China's rapid economic growth portends to the yuan gaining ground, but it will take decades to become a substantial portion of central bank reserves around the world.

Alluding to Angolan offers to bail out Portugal, Gono has suggested Zimbabwe might find itself in a similar situation. "By adopting the Chinese Yuan," he exclaimed, "it will not be long [until] we will also be volunteering to bail out Britain from her debt crisis." A look at the relevant figures shows the utter implausibility of Gono's assertion. According to the CIA World Factbook, Zimbabwe's debt burden is 230.8% of its $5.9 billion gross domestic product. It is difficult to imagine how Zimbabwe would be in a position to bail out the United Kingdom's $2.25 trillion economy, which has a debt ratio of 79.5%. A more likely scenario seems to be that Western countries will eventually forgive Zimbabwe's debt if a palpable leadership takes the government reigns.

Moreover, Zimbabwean state run media often touts the trade relationship with China, giving the mistaken impression that it's Zimbabwe's largest trading partner. The African Economic Outlook 2011 Report puts China's share of Zimbabwean exports at 3.4%, which compares to 14% of exports going to South Africa. Zimbabwe also has an unsustainable $2 billion trade deficit with South Africa, which a yuan peg would only augment. The yuan's undervaluation is widely recognized so it will continue to face upward pressure to appreciate. Conversely, the Zuma administration intends to devalue the rand. The peg thus would exacerbate the trade deficit by making Zimbabwean exports to its southern neighbor more expensive while South African imports would become cheaper.

Time to 'Look South'?
The multi-currency system used in Zimbabwe today has served an important transitional role. The government adopted the system in January 2009 as inflation rates, peaking at 79.6 billion percent just a few months prior, killed the Zimbabwean dollar. A host of foreign currencies--the rand, euro, pound, U.S. dollar, metical, and kwacha - became recognized legal tender in Zimbabwe, but the U.S. dollar soon supplanted the others. This "dollarization" reversed the run-away inflation and helped resurrect the country's short-term credit market.

Dollarization, however, is not the optimal long-term solution for Zimbabwe. Pragmatically, a paucity of U.S. coins in circulation makes it difficult for retailers to make change. And, from a nationalistic perspective, both Zanu-PF and MDC-T agree that Zimbabwe should eventually return to its own dollar. But, given the Reserve Bank's lack of credibility, simply bringing back and floating their dollar is not an option. Thus, Zimbabwe has to incorporate itself into credible, fiscally sound framework.

The Common Monetary Area (CMA) offers just such a framework. The CMA is a monetary union tying together many of Zimbabwe's largest trading partners - South Africa, Lesotho, Namibia, and Swaziland. The arrangement facilitates a one-to-one currency parity between the countries, which would prevent the Reserve Bank from firing up its printing presses. The reintroduced Zimbabwean dollar also would be backed by the CMA's foreign reserves and gold stocks, which would help restore lost confidence from the years of hyperinflation.

Joining the CMA would come with substantial economic and fiscal benefits. Further integrating its economy with the neighborhood, namely South Africa, would bring down barriers to capital flow, thereby boosting Zimbabwe's struggling long-term lending market and making cash transfers from the three million Zimbabweans living in South Africa more fluid. Additionally, the Zimbabwean government would gain much-needed revenues from seigniorage, which roughly speaking is the fiscal gains from printing currency for less than its actual worth.

The process of joining the CMA, however, would not be simple. The Zimbabwean government would have to overcome a number of hurdles. Domestically, Zimbabweans have a fairly negative long-term outlook for South Africa's economy so it would have to engage in a robust public relations campaign to elucidate the arrangement's benefits. CMA membership might have a relative advantage over a yuan peg in this respect given that the poor labor practices and sale of shoddy products (known as "Zhingzhongs") by Chinese companies has decreased their popularity among Zimbabweans. The government would also have to emphasize to CMA's membership that it would not hurt their economies given the relatively small size of Zimbabwe's gross domestic product. According to a 2010 IMF report, "the welfare of existing CMA members would fall marginally" if Zimbabwe joined.

Moving forward, Zanu-PF will continue looking east to the yuan, but the peg is far from a fait accompli. Rather, the upcoming elections will determine the future of Zimbabwe's monetary regime - a future that will prove much more promising if Zimbabwe's leaders look south.

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Andrew C. Miller holds a master's degree from Georgetown University's Walsh School of Foreign Service. He can be found on Twitter @andrewmiller802.