The logic behind adopting the Rand


Following on the article titled; USD or ZAR? What makes sense? (https://piggybankadvisor.com/2020/07/06/usd-or-zar/) Piggy would like to re-iterate that randisation cements the case for regional cooperation and integration in the broader Southern African Development Community (SADC) region.   The SADC was founded in 1992 and aims to achieve development and economic growth through cooperation of member states.  While creating a regional currency is not one of the immediate objectives of the SADC, it is to be expected that more attention will be given to the possibility of pursuing monetary integration. Joining the Common Monetary Area (CMA) has been put forward among a range of options available to solve the currency crisis in Zimbabwe, which worsened when the country moved from a multi to a mono-currency regime. For a developing economy like Zimbabwe the benefit is that the development of sound financial structures will go a long way in driving macroeconomic development. However, to gain admission to the CMA, a member country must mobilise sufficient reserves equivalent to its issued local currency, backed by prescribed assets in rand or US dollar terms so as to conform to the fixed exchange rate of 1:1 with the rand. In addition, member states are also bound to contain sovereign debt within an agreed debt-to-GDP ratio and have consultations with the South African Reserve Bank (SARB) on monetary policy alignment as well as inflation targets. 

Piggy notes that the present close monetary cooperation between South Africa, Lesotho, Namibia and Eswatini is based on the Multilateral Monetary Agreement (MMA) creating a common monetary area between these countries. This agreement has had a long historical development which started even before the Union of South Africa was formed in 1910. After the establishment of the SARB in 1921, the South African pound became the sole circulating medium and legal tender in the geographical area that is today called the CMA but including Botswana. In this article, Piggy focuses on some of the important features of the CMA;

  • The CMA is to a large extent dominated by South Africa owing to the size of its economy and its sophisticated financial system. While the South African rand is legal tender in all states, the other member states issue their own currencies. However, these are exchanged at par with the rand and serve as legal tender only in the issuing country;
  • Owing to the parity maintained against the rand by currencies of other contracting parties, all countries in the CMA have the same exchange rate against outside currencies. The main disadvantage is that the South African rand has been very volatile in the international currency markets for a number of years. As a result, smaller member states have automatically been exposed to this volatility;
  • All member countries have their own central banks and are responsible for monetary policy. While some deviations in interest rates and inflation rates are possible, however, the SARB effectively formulates monetary policy for the CMA;
  • Foreign exchange regulations and monetary policy throughout the CMA continue to reflect the influence of the SARB;
  • The contracting parties hold regular consultations to facilitate and ensure continued compliance with the MMA and reconcile different interests in the formulation and implementation of monetary and foreign exchange policies for the CMA;
  • There are no restrictions on the transfer of funds between the areas of the contracting parties. The free movement of capital within the CMA is potentially one of the major benefits that the smaller states can derive from membership. It means that there is no restriction on cross-border investments from South Africa and so contributes to economic development and economic integration; and
  • Institutions in the public and private sector in member states, subject to relevant financial laws and policies applicable to counterparts in South Africa, have the right of access to the South African capital and money markets.

Regional Economic Communities in Africa

Source: ecdpm.org

All in all, it would appear that joining the CMA could be a more complicated process for a new member country like Zimbabwe. In addition, the macro-economic instability in the country has raised concerns amongst member states such as Namibia, Eswatini and Lesotho that this might have spill-over effects in the region. However, the CMA has been characterised by flexibility to accommodate the changing needs of the contracting parties. Various bilateral agreements have been entered into overtime, mostly between South Africa and one of the other member states. Further, the coexistence of bilateral and multilateral arrangements is an important aspect of the CMA and this could be a big advantage. For example, monetary arrangements have been flexible enough to allow Eswatini to change its relationship with the CMA over the years.  There lies an opportunity for Zimbabwe to negotiate a middle-of-the-road arrangement where a multi-currency regime is restored but anchored by the South African rand. This, in our view, will be key in terms of boosting confidence in the broader monetary system while at the same time fostering cooperation and alignment within the region.

Get started today and trade instruments such as forex, indices, cryptocurrencies, commodities and global equities.

Learn more about trading and investing in shares and forex by being part of the Green Piggy Bank on your Cell-phone Campaign;

piggybankadvisor.com is an educational platform that empowers individuals, households and small businesses through educational and insightful articles and blogs. Topics covered include economics, stocks, budgeting, retirement & risk planning, wealth management tips and financial product reviews.

Previous Get out of Tourism Stocks!
Next The Headline Effect

No Comment

Leave a reply

Your email address will not be published. Required fields are marked *