Opinion / Columnist
Dollarisation vs Yuanisation: The Zimbabwe Dilemma
15 Jan 2016 at 16:41hrs | Views
Zimbabwe should forget the Chinese Yuan and the US dollar and adopt the South African Rand and join the Southern African Customs Union (SACU).
SACU should be transformed and be the pre-lude to a SADC regional currency that is founded on free trade between member states with a common monetary union with responsibilities for monetary policy (harmonising inflation and interest rates) right across the region. The region already has shared cultures, with trade amongst member states much deeper and the economies interconnected. Free trade will eliminate a lot of transaction costs and facilitate growth and shared developmental agendas. This will clear the mystery of uncertainties and exposures prevalent in the current trade set-up.
With China writing off the US$40million it was owed by Zimbabwe it paved the way for the country to officially adopt its currency, the Yuan (aka The Renminbi), thus making history to being the only country outside China where the Yuan is legal tender. Critics point out that the Yuan had already been added to the multi- currency trading basket, yet transactions have mostly been dominated by the US dollar and to some extent the South African rand.
In this article I look at the two options (dollarisation and yuanisation) that the authorities in Harare have tinkered with in their attempt to neutralise the economy from a free-fall.
The Yuan has seen its worst start to the New Year (2016) and dropped to its lowest in 4 years against the US dollar and other major currencies. In the past week trade in the country's stock exchange was suspended twice as the circuit breaker kicked in following a 7% drop in China CSI 300 Index. Investors dumped Chinese shares en-masse owing to a misguided secretive currency policy which put a huge dent on the Chinese foreign exchange reserves. The result was a fall in the global markets from the Dow Jones in the US, the London Stock Exchange and the emerging markets.
Coupled with weak manufacturing data, China the world's second largest economy is facing a slowdown in its economy with drastic consequences for the emerging markets. Its appetite for resources in Africa has slowed down and most African economies dependent on China are experiencing sluggish growth.
China's options include devaluing its currency making exports cheaper and imports dear.
However, it risks a currency war with its neighbours and this neo-mercantilist nation is accustomed to such having undervalued its currency against the US dollar for decades.
This is the currency that will be circulating in Zimbabwe. Is this good for the Zimbabwean economy? Definitely not, besides the political grandstanding years of look east policies have failed to resuscitate the economy which is still in the intensive care.
Does China benefit from this arrangement?
Of course the country strengthens its foothold on the country and its appetite for resources is well documented.
The US dollar on the other hand brought stability to the economy and eliminated the hyper inflationary periods.
A look at the current scenario reveals that after eradication of the Zim dollar and the stabilisation arising from the multi-currency period dominated by the US dollar the country should have moved on to a more permanent currency that is in accordance with the developmental level of the economy and the region. Zimbabwean exports have become expensive drastically reducing the country's competitiveness. Industries face liquidity constraints and Bulawayo, the once industrial hub of the country is now a ghost city of informal traders and yet the country spends a lot of foreign exchange (US$1 billion annually) on the imports of second hand Japanese cars from the East.
Panama, widely referenced as a fully dollarised country has deeper ties and trade relations with the US and yet the absence of currency risk does not insulate the country from swings in the market.
A dollarised country loses seignorage as the US does not share yet an arrangement exists between South Africa and the three other SACU members (Lesotho, Namibia and Swaziland) that use the rand. A dollarised country relinquishes its autonomous monetary and exchange rate policy and politically the symbol of its nationhood (its own currency).
Conclusion:
Zimbabwe needs a sober economic debate looking at the cost and benefits of the Yuan vs US Dollar vs The Rand. This debate needs to take place in the context of a developmental state that is deeply integrated with Southern Africa, with South Africa as its largest trading partner and accounting for 48% of total trade in terms of value.
The destiny of the country cannot be tied to the East nor the West; we need to look at both the East and West and wherever the country's developmental agenda will be addressed.
SACU should be transformed and be the pre-lude to a SADC regional currency that is founded on free trade between member states with a common monetary union with responsibilities for monetary policy (harmonising inflation and interest rates) right across the region. The region already has shared cultures, with trade amongst member states much deeper and the economies interconnected. Free trade will eliminate a lot of transaction costs and facilitate growth and shared developmental agendas. This will clear the mystery of uncertainties and exposures prevalent in the current trade set-up.
With China writing off the US$40million it was owed by Zimbabwe it paved the way for the country to officially adopt its currency, the Yuan (aka The Renminbi), thus making history to being the only country outside China where the Yuan is legal tender. Critics point out that the Yuan had already been added to the multi- currency trading basket, yet transactions have mostly been dominated by the US dollar and to some extent the South African rand.
In this article I look at the two options (dollarisation and yuanisation) that the authorities in Harare have tinkered with in their attempt to neutralise the economy from a free-fall.
The Yuan has seen its worst start to the New Year (2016) and dropped to its lowest in 4 years against the US dollar and other major currencies. In the past week trade in the country's stock exchange was suspended twice as the circuit breaker kicked in following a 7% drop in China CSI 300 Index. Investors dumped Chinese shares en-masse owing to a misguided secretive currency policy which put a huge dent on the Chinese foreign exchange reserves. The result was a fall in the global markets from the Dow Jones in the US, the London Stock Exchange and the emerging markets.
Coupled with weak manufacturing data, China the world's second largest economy is facing a slowdown in its economy with drastic consequences for the emerging markets. Its appetite for resources in Africa has slowed down and most African economies dependent on China are experiencing sluggish growth.
China's options include devaluing its currency making exports cheaper and imports dear.
However, it risks a currency war with its neighbours and this neo-mercantilist nation is accustomed to such having undervalued its currency against the US dollar for decades.
This is the currency that will be circulating in Zimbabwe. Is this good for the Zimbabwean economy? Definitely not, besides the political grandstanding years of look east policies have failed to resuscitate the economy which is still in the intensive care.
Does China benefit from this arrangement?
Of course the country strengthens its foothold on the country and its appetite for resources is well documented.
The US dollar on the other hand brought stability to the economy and eliminated the hyper inflationary periods.
A look at the current scenario reveals that after eradication of the Zim dollar and the stabilisation arising from the multi-currency period dominated by the US dollar the country should have moved on to a more permanent currency that is in accordance with the developmental level of the economy and the region. Zimbabwean exports have become expensive drastically reducing the country's competitiveness. Industries face liquidity constraints and Bulawayo, the once industrial hub of the country is now a ghost city of informal traders and yet the country spends a lot of foreign exchange (US$1 billion annually) on the imports of second hand Japanese cars from the East.
Panama, widely referenced as a fully dollarised country has deeper ties and trade relations with the US and yet the absence of currency risk does not insulate the country from swings in the market.
A dollarised country loses seignorage as the US does not share yet an arrangement exists between South Africa and the three other SACU members (Lesotho, Namibia and Swaziland) that use the rand. A dollarised country relinquishes its autonomous monetary and exchange rate policy and politically the symbol of its nationhood (its own currency).
Conclusion:
Zimbabwe needs a sober economic debate looking at the cost and benefits of the Yuan vs US Dollar vs The Rand. This debate needs to take place in the context of a developmental state that is deeply integrated with Southern Africa, with South Africa as its largest trading partner and accounting for 48% of total trade in terms of value.
The destiny of the country cannot be tied to the East nor the West; we need to look at both the East and West and wherever the country's developmental agenda will be addressed.
Source - vusumuziblog.wordpress.com
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