Should Zim abandon the Zim Dollar?

Zimbabwe’s inflation is accelerating towards Germany’s 1922 record of 204 billion percent.

Estimates currently put Zimbabwe’s inflation at between 2.2million and 15million percent. The effect on the exchange rate is proportioate.

So what would happen if Zim were to abandon the Zim Dollar and use the South African Rand as legal tender? It is a possible natural path for Zim to follow once they have removed the “political impediments” to change. However, given that much of Zim’s manufacturing and production facilities are running at 20% to 50% of capacity, in a recovery most economists would recommend an expansive monetary policy to expand production until aggregate demand gets closer to full employment. It should be possible to do this without major inflation since the economy is so far behind full employment.

Namibia, Swaziland and Lesotho are all part of the common monetary union that pegs their currencies to the Rand. Botswana used the South African Rand for a period during the 60s and 70s. According to the SARB, the Rand is legal tender in 21 countries around the world. Ironically, proposals in around 2006 for a common currency across all the SADC countries were based on all SADC countries managing single digit inflation by 2008.

So, clearly Zim is out of the low inflation club. So is South Africa. I’m guessing that has dampened the condescening attitudes that were developing durng a few years of the boom.

Perhaps this indicates that our economies are still too unstable, too unpredictable, with too large differences in output potential and economies in different parts of the business cycle to merge our currencies into one. If European countries were (still are, some might argue) wary to hand over control of their monetary policy to a central entity, one that could not take into account differences in economic growth levels in different countries, how much more should this concern us.

The interesting result of Zim adopting the Rand would be that it would remove the ability to print money (literally and figuratively) to pay soliders and party supporters. That sounds like the collapse of an entire power system. I don’t know whether I really want to recommend that particular path of chaos.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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