eBusiness Weekly
Kudzanai Sharara
The United States central bank, the Federal Reserve, this week put up interest rates by 25 basis points to a new range of 2 to 2,25 percent, a move analysts say may complicate Zimbabwe’s continued use of the multicurrency system that is currently anchored on the American dollar.
Analysts and other market players including Zimbabwe’s Finance and Economic Development Minister Mthuli Ncube believe the rate hike is likely to see the US dollar (US$) strengthening, putting a dent on economic growth and development for most emerging and frontier markets.
A strong dollar, analysts believe, will also weaken regional currencies as well as international commodity prices, with gold which is often regarded as a store of value and safe haven, the biggest casualty.
Gold is sensitive to higher interest rates because they tend to boost the dollar, making gold more expensive for buyers with other currencies. The commodity has fallen more than 12 percent from an April high as a vibrant U.S. economy, expectations of higher U.S. interest rates and fears of a global trade war have caused the dollar to rally. Zimbabwe is banking on more gold exports for its economic revival and has invested millions in incentives in an effort to boost output.
These developments come at a time, the Zimbabwean Government has promised the world and potential investors that it will stick to the multicurrency system for another five or so years. Its delegation to the United Nations General Assembly (UNGA), led by President Mnangagwa used the multicurrency system as a selling point to investors at the Zimbabwe Investor Forum held on the side-lines of UNGA.
Strong dollar will complicate things for Zimbabwe
Minister Ncube is, however, aware of the vagaries of the country’s continued use of the US$. Appearing on Bloomberg this week, Prof Ncube said a strengthening dollar will hurt “our competitiveness as a country in terms of exports receipts. So, a stronger dollar actually in a way is not good for Zimbabwe”.
Minister Ncube said a strategy is being mapped to ensure the country, going forward, goes back to using a domestic currency and counter the negative effects of using a strong US$ as the major currency of trade.
This plan, which he said needs to be implemented “sooner rather than later,” might however take between two to five years according to RBZ Governor Dr John Mangudya.
US$ not necessarily a problem
Analysts, however, believe Zimbabwe can still use the US$ with success even if it continues to strengthen.
The strengthening US$ is only a problem for Zimbabwe because our production efficiency is too low for the costs we have imposed on ourselves, said economist John Robertson.
“We — or the Government — have the ability to reduce costs by reducing the costs of doing business. They can do this by removing completely the unnecessary permit and license fees, cancelling the levies, reducing taxes and royalties and changing the labour laws so that companies do not have to make provision for retrenchment packages when staff changes become essential,” he said.
Robertson said with better business conditions, investors would be much quicker to respond to technological changes that require retooling or modernisation exercises. As they have not been able to respond to such changes for many years, many factories are now using obsolete machinery, with which their employees cannot make competitive products.”
He also spoke against adopting the rand, saying people have been misinformed about the importance of the rand.
“Almost all of Zimbabwe’s exports are commodities and for these we are paid in US$. Converting these strong US$ into weakening rand would make no sense. We do import a lot from South Africa, but we can pay for these goods more easily with strong US$ than with rand that is falling in value.
Author and expert in trade and international finance Dr Gift Mugano said although there are many short term measures that can be implemented the bottom line is that the country has to be productive.
“Use of the dollar is really not an issue because America is the world’s biggest exporter but is using the same US$. So the issue really is about increasing production competitively. If companies focus on increasing production, then the cost of production per unit is reduced, making our products competitive,” he said.
Dr Mugano, however, said short term measures which can be implemented include but are not limited to internal devaluation which mainly involves cutting the cost of production, for both public and private sector.
“Government must also work on reducing the fiscal deficit as it also has a negative impact on the cost of money, further eroding our competitiveness,” said Dr Mugano.
He said retailers will also have to be responsible with their pricing, as what is happening now is more of a zero sum game, “a vicious circle.”
Dr Mugano said while retailers can put up prices, it will still come back to “bite everyone.”
Limited options, but let’s work with what we have
An analyst at Trigrams Investment is also of the view that Zimbabwe has little room to manoeuvre and should find ways of making the most of a strong US$.
“We have very little time to respond and very little policy room to operate in so we should work with what we have. Although effectively, a strong US$ means our exports will become uncompetitive, it will give us greater purchasing power when we seek to import. We have two options as a country, to either shift our policies in tandem and restructure our trade priorities or seek to implement counter measures to ensure that our desired outcomes are achieved,” said Mandeya.
“Our view is that we should shift our policies to take greater advantage of the purchasing power of the US$. While we might not have adequate reserves, we should immediately shift and import as many capital items as possible with the little we have. This will bolster our productive capacity,” he said.
