Zimbabwe’s bid to grow exports is under threat from a strong dollar which makes exports uncompetitive.
BY TATIRA ZWINOIRA
The threat comes after International Monetary Fund (IMF) boss, Christine Lagarde warned that the continued rise in American interest rates would challenge global trade.
Lagarde made the comments in response to questions of the viability of the United States president Donald Trump’s policies at the ongoing World Government Summit 2017. The summit started on Sunday and ends today.
She said the increase would lead to “tightening that is going to be difficult on the global economy”.
“United States President Trump taking office is likely good for the economy in the short term though rising American interest rates and a strengthening dollar will challenge global trade,” she said.
Rising interest rates leads to a strengthening of the dollar as the process involves American depository institutions such as banks and credit unions lending reserve balances to other depository institutions overnight, on an uncollateralised basis. The strengthening of the dollar makes other currencies weaker, a bad omen for Zimbabwe, which does most of its trade with South Africa.
Confederation of Zimbabwe Industries deputy president, Sifelani Jabangwe said a strengthened dollar means prices in regional countries come down on the back of weakened currencies, whereas in Zimbabwe they do not due to the usage of the dollar.
“We need to have internal devaluation though the method is a challenge because we definitely need to lower our costs. Maybe we peg our own internal value of the US onto another currency, maybe the South African rand and make that our trading currency. Using the US dollar is tricky because we converted at the wrong rate in 2009, which is why our costs are high,” he said.
A strengthened dollar negatively affects commodities on the back of the currencies in which those commodities are from ending up weaker to the dollar. As such, Zimbabwe, being a commodity-based market and using the United States dollar as a trade currency, would make the country’s exports more uncompetitive in region.
It also comes at a time when there is a renewed push to grow the export sector and generate more foreign currency for the economy. The central bank has come up with a 5% export incentive under the $200 million facility guaranteed by the African Export-Import Bank to grow the country’s exports. In addition, the bank has come up with a priority list in the allocation of foreign currency, in a bid to cut on unnecessary imports and grow local industries.
The Reserve Bank of Zimbabwe reported a decline in commodity prices a week before the United States Federal Reserve bank hiked interest rate prices in December 2016 by 0,25 basis points to a range of between 0,5% and 0,75%. The decline was as a result of the looming interest rate hike, further compounded when it went up.
However, companies managed to avoid the full shocks, as they were better prepared for the hike.
Economist, Kipson Gundani said the implication for Zimbabwe was it would make the dollar more expensive.
“Looking at a country like Zimbabwe, which trades in the United States dollar, it will further deteriorate our competitiveness. Already we are crying that the dollar is too tough vis-à-vis our other trading currencies and with this development it will make the dollar tougher or stronger than trading currencies,” he said.
“This gives rise to that debate people have always had that is it not high time we re-base our economy to South African rand as a trading currency.”