The Rand currency monetary area : an option for de-dollarisation in Zimbabwe

Abstract

Dollarization has been put forward by some as the possible solution to institutional weaknesses in the developing world. Zimbabwe dollarized in 2009 by legalising the use of a basket of currencies, of which the United States Dollar (US Dollar) has emerged as the principal currency in use. Dollarization in Zimbabwe initially resulted in a period of significant growth, this has however slowed, and dollarization seems to be amplifying institutional weaknesses in the banking sector, with various challenges being faced including cash shortages and foreign payment restrictions. The purpose of this study was to utilise qualitative methods to gain insights into the viability of Zimbabwe joining the South African Rand Common Monetary Area, as a means to transition out of utilising the US Dollar is the primary currency in use in the country. The choice of the South African Rand was based on South Africa being Zimbabwe's largest trading partner, and therefore the possibility of forming an optimal currency area where Zimbabwe would benefit from the reduction of transaction costs and liquidity support. The results of the study showed that joining the Common Monetary Area would improve the competitiveness of Zimbabwe's industries, strengthen the institutions, improve monetary policy and fiscal discipline, which would also lead to the government regaining the trust and confidence of the public. Joining the Common Monetary Area would however also have its shortcomings, the main ones being the loss of monetary policy autonomy.