The Theory of Optimum Currency Areas and the Rand

Abstract

At the present moment, the Rand Currency area (composed of Botswana, Lesotho, Swaziland and South Africa) is under serious review by its members. The fact that the present arrangements are being re-examined suggests that improvements of one kind or another are being sought. In fact, there have been two commissions of enquiry on behalf of Botswana, Lesotho and Swaziland into the pros and cons of maintenance of the status quo. Since Botswana, Lesotho and Swaziland are politically independent, it is quite normal for these countries to wish to have their own currencies instead of the Rand. Indeed, monetary-fiscal independence (though it may be limited) is an important attribute and parameter of national sovereignty. The purpose of this short paper is to examine the Rand Currency arrangements in terms of the “Theory of Optimum Currency Areas”. My hope is that this exercise will throw additional light on the functioning of the present currency and monetary arrangements. It is also hoped that this paper will help in the shaping of future relationships.