'Zimbabwe must hand control to South Africa'

Johannesburg – Adopting South Africa's rand to rescue Zimbabwe from hyperinflation and a near worthless currency will fail unless Harare cedes control of economic policy to its big neighbour, something it would probably reject.

South African President Kgalema Motlanthe said on Sunday that Zimbabwe could adopt the rand, without giving any details.

Zimbabwe’s economy is in freefall and its dollar virtually worthless, leading the government to allow the use of the US dollar, the rand and other currencies. Hyperinflation and shortages have forced many Zimbabweans to buy basic goods in South Africa, the continent’s biggest economy.

Analysts say it would take more than formally adopting the rand to fix Zimbabwe’s economy. They doubted that the Harare government would be prepared to give up the political power, and tolerate the damage to its image, that this would entail.

"It would mean that Zimbabwe would have to follow very different policies than what they’ve followed up to now," said Rudolph Gouws, chief economist at Rand Merchant Bank.

"It would impose severe discipline on them; they would have to follow monetary policy set by South Africa. It would take a political decision on their part, but I have no idea if that would happen."

A new power-sharing government, sealed by the swearing-in of Morgan Tsvangirai as prime minister on Wednesday, has shifted focus to the economy. Tsvangirai said state employees would be paid in foreign exchange, without saying which currency or how the money could be secured.

Azar Jammine, senior economist at Econometrix, said that adopting the rand would have to come with a dilution of political power. This would be unattractive to both the old leadership and a new government trying to prove itself.

"It would not work unless Zimbabwe accepted that South Africa would control its economy which would make it virtually a province of South Africa. That would probably be unacceptable to (President Robert) Mugabe’s regime."

Mugabe has repeatedly said no regional or Western countries had the right to interfere with Zimbabwe’s internal affairs, even as the economy moved closer to collapse.

Zimbabwe’s central bank Governor Gideon Gono told the state-run Herald newspaper this week that he welcomes the idea of adopting the rand as an anchor for the Zimbabwe dollar.

The mechanics of how the arrangement will work are still not clear. However, South Africa’s neighbours Swaziland, Lesotho and Namibia currently price their currencies on a par with the rand, and allow it to be used as legal tender.

Zimbabwe’s economic woes pose challenges, though, and South Africa’s central bank has dismissed the idea in the past, particularly given the dire economic indicators. Inflation has not been officially calculated since July last year, when it stood at 231m percent.

South Africa’s Reserve Bank said on Thursday it has not been formally approached about the proposal and declined to comment.

Negative sentiment

Thabo Masebe, spokesperson for Motlanthe, said Zimbabwe’s economic recovery plan was a matter for the regional body, the Southern African Development Community (SADC), as a whole.

But rifts appeared within SADC over how to deal with Zimbabwe’s long political deadlock, raising questions on whether member countries can now coordinate an economic rescue plan.

"As South Africa, we can put together our own plan, but it’s always better to work as a region, so it will be within SADC," said Masebe. The decision on adopting the rand was up to South Africa’s central bank, not the presidency, he added.

If Zimbabwe does not turn to South Africa, it could be more dependent on financial aid and investment from Western states, which have made it clear their money will start flowing only once a democratic government and economic reforms are in place.

Critics say Mugabe’s reckless policies have destroyed the economy. The Zimbabwean leader, in power since 1980, says Western governments and their sanctions brought financial ruin.

Zimbabwe’s troubles are cited by analysts as one of the negative factors affecting investor sentiment towards the rand.

Jammine said using the rand in Zimbabwe would not hurt the currency. "It should not affect the rand. Zimbabwe is such a small country relative to South Africa and if South Africa had all the control, it would control how many rand it creates."

International ratings agencies Standard & Poor’s and Fitch said on Thursday that any adoption by Zimbabwe of the rand would not hurt South Africa’s rating.

– Reuters