Yuan offers escape to a Zimbabwe cornered by strong greenback

Zimbabwe is in denial. Its eight-year marriage to the US dollar is on the rocks. The greenback’s strength has sapped the Zimbabwean economy and the sooner the southern African country ditches the currency, the better.

A solution could lie with China.

Zimbabwe is still dealing with the legacy of its hyperinflation era, when political and economic turmoil caused inflation to reach 231 million per cent. The country even issued a $100 trillion bill.

Nowadays it uses a basket of nine foreign currencies, but the US dollar dominates – 95 per cent of the pricing system is in US dollars and people who have other currencies must first convert to the greenback.

The government’s latest attempt to salvage the dollar affiliation came last week. On Wednesday, the reserve bank governor John Mandugya said that bank withdrawals would be limited to US$1,000 a day, and that to ease the country’s cash shortage, “bond notes” would be created that could be converted into US dollars.

Lately the shortages have grown more serious as confidence in the economy has waned.

Whereas the float of US dollars has in the past sufficed, there are now suspicions that people are hoarding their greenbacks, the latter being an international currency and safe haven. There are also suspicions that some people are shipping their dollars out of Zimbabwe, to countries where they might be more gainfully deployed. Some Chinese and Indian business people running retail shops in the country have been accused of not banking their money, further raising suspicions of where the money is going.

Economists point to a steep imbalance of imports over exports, which means more cash is exiting the country than entering it.

Part of the idea with the bond notes is that as they would be legal tender only in Zimbabwe, people would not be able to funnel them abroad. But that remains tricky as people can still exchange the bond notes for hard currency, and then do with it as they wish.

For years now, the strength of the US dollar has been strangling Zimbabwe’s economy. Take tourism as an example. About 70 per cent of tourists to Zimbabwe come via South Africa. But the rand has been falling while the dollar has been gaining. From $1 to 8 rands in 2010, the exchange rose to $1 to 18 rands this January. It is now far more expensive for tourists from South Africa, Zimbabwe’s biggest trading partner, to visit the country.

In 2010, a tourist visiting Zimbabwe from South Africa with 10,000 rand would change it to $1,250. Now they get $556. They cannot maintain the level of consumption they enjoyed in Zimbabwe in 2010, maybe when they visited the Victoria Falls, the world’s seventh wonder. They have an option of seeing it from Zambia for much less. After all, Zambia’s currency (the kwacha) is weaker.

The US dollar has also quashed Zimbabwe’s exports, the very exports that are its main source of liquidity. As 71 per cent of Zimbabwe’s exports go to South Africa, the falling rand makes it very expensive for Zimbabwean companies to sell there. Imports from South Africa are becoming cheaper, and they are heavily competing with locally made products, resulting in a further haemorrhage of Zimbabwe’s manufacturing sector. Industrial capacity utilisation is now at its lowest, 34 per cent, since 2011.

The muscular greenback is not a challenge for Zimbabwe alone. Other countries, like those in the GCC for instance, that have linked their currencies to the dollar will also feel the effects of its rise.

The problem in Zimbabwe is that even as the economy suffers from the rise of the dollar, no one in the corridors of power is rethinking the matter to the extent of totally discontinuing it. A recent announcement by the central bank said that, with effect from this past Thursday, 40 per cent of all new US dollar foreign exchange receipts from export of goods and services shall be converted to rand and 10 per cent to euros, to try to spread the demand for cash among a wide range of currencies, and to mitigate against concentration risk. It remains to be seen whether people will actually do this, or whether it will drive dollars further underground.

Why the Chinese yuan is not mentioned in all these developments boggles the mind. Back in December, many had thought Zimbabwe was taking a bold step eastwards when the finance minister Patrick Chinamasa told a local paper that the central bank “has opened negotiations with the People’s Bank of China … to see whether we can enhance the use of the renminbi in Zimbabwe”. But the greenback is still the king of the jungle, with about $7 billion also said to be flowing in the arteries of Zimbabwe’s informal sector, which employs 94 per cent of the country’s labour force.

The central bank indicated in January that the US dollar will continue to operate as a settlement currency, while other currencies in the basket (including, since 2014, the yuan) will operate as trading currencies.

The idea of putting the yuan ahead of the dollar is slowly getting its day in the courts of public opinion in Zimbabwe, despite all the apparent neglect by the government.

The yuan seems to have characteristics that Zimbabwe needs right now. The currency is not as strong as the greenback and most of Zimbabwe’s loans for capital development are coming from China. The yuan joined the IMF’s Special Drawing Rights basket last year, which houses currencies that the IMF uses as its unit of account.

Zimbabwe trades more with China than it does with America. Zimbabwe surely can take its chances with the yuan.

Politically, Zimbabwe calls China its “all-weather friend” and America is bluntly called the “enemy”. Whoever is seen by the ruling party dining with American diplomats is treated with suspicion or called a sell-out. But when it comes to the use of currencies, the enemy’s currency is rather a darling while the all-weather friend’s is apparently otherwise. Perhaps Sun Tzu’s saying is still true after all – keep your friends close and your enemies closer.

Clemence Machadu is an economics writer based in Harare, Zimbabwe.


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