Zimbabwe government announced to adopt the Chinese Yuan as a legal tender in domestic market. The move came in backdrop of cancellation of $ 40 million debt maturing this year. Several questions arise because of this move like why Zimbabwe officially declared Yuan to be legal tender in spite of the fact that it has been already a part of Zimbabwe’s multi currency basket? Is it a real or perception influence of growing Chinese dominance? What may be the implications of this on Zimbabwe & other countries facing similar situations?
To ponder on the answer of these questions we first need to know what factors led the Zimbabwe to such situation. The economy of Zimbabwe shrank significantly after 2000 resulting in widespread poverty & unemployment. One of the leading factors of this was participation of Zimbabwe in Congo war from 1998 to 2002. Millions of dollars were drained in it. Country trapped in the hyperinflation since 2002 to 2009. Inflation was estimated to 500 billion percent which forced the government to ditch its own currency i.e. Zimbabwean dollar. It then started using a slew of foreign currencies, including the US Dollar and the South African Rand. The Yuan was later added to the basket of the foreign currencies. This multi currency basket also includes Indian Rupees, Japanese Yen and Australian Dollar.
Factors behind adoption of Yuan & its implications
Analysis of factors behind such move throws light on answers of above questions. The European Union and USA have criticised the Government of Zimbabwe over its alleged poor record in maintaining human rights in the country. China has since long been investing in Zimbabwe as western countries have remained aloof thus China has become the largest investor in Zimbabwe. In the last five years, Zimbabwe has received more than one billion dollars in low interest loans from China. China also emerged as Harare's second largest trading partner after South Africa.
After 2009, Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis while continuous firming of Yuan provided an opportunity for the country to consolidate its look East Policy. Zimbabwe government is also looking Chinese currency as an alternative in a bid to get around U.S. sanctions
Further China decided to reciprocate Zimbabwe's diplomatic overtures; it did so by announcing plan to set up a modern high-tech military base in Zimbabwe's diamond-rich Marange fields. This agreement to set up the first Chinese military airbase in Africa comes amid increasing bilateral cooperation between Zimbabwe and China – notably in mining, agriculture and preferential trade.
By this China could be positioning itself for future “gunboat diplomacy” where its military presence would give it bargaining power against superpowers like the US. It would also be safeguarding its significant economic interests in Zimbabwe and the rest of Africa
The move also carries important symbolic weight in China. In recent years, the Beijing has pushed to internationalize its currency. The success achieved when The International Monetary Fund last month admitted the Yuan into its benchmark currency basket, recognition of Beijing as a global economic power
Another factor for closeness between China & Mugabe government is that it is suspected that China had played a central role in retaining President Robert Mugabe in the country's most recent elections.
Challenges in successful adoption of Yuan
However African analysts called it just a publicity stunt as Yuan was already a part of multi currency basket & there would be no real consequence on the ground. Majority of public transactions are in US dollars or South African Rand. People want payment to be made in dollars as opposed to Yuan which is damaging for china’s interest. However China wants the local government to encourage wider use of Yuan, and might even offer fresh loan to facilitate the process.
Implications on other countries
This year, several key African currencies have taken a significant hit, as economic growth slows, and falling prices for major export commodities reduce the flow of dollars into the continent & hence oil exporters have found themselves in a state of petrodollar collapse. As the central banks of countries from Nigeria, to Angola, to Ethiopia, to Mozambique scramble to defend their currencies and avoid hyperinflation, they have restricted the access of US dollars in their economies. This restriction is creating the serious challenges for importers to pay in dollars for necessary imports which may further devalue the local currencies & may lead to faster economic collapse.
For India which itself in need of outside investment restrict its ability to support African countries in crisis in financial terms. This may create difficulty to access of energy and mineral resources in Africa. However India should use its soft power to maintain a healthy relation.
In such situation China which is already aggressive in investment in energy & mineral resources in African countries may offer the same deal to these countries & Yuan may emerge as an alternative to US dollar. This would further strengthen the economic influence of china & Yuan may become a truly international currency. This will also secure the future energy resources for the country.