eBusiness Weekly
Kudzanai Sharara
The US dollar index (which measures how the dollar is doing against a basket of the currencies of its trading partners), has been rallying in recent days. By the numbers, the dollar index has risen close to 7 percent since the middle of April and doesn’t seem to be stopping. It hovered near an 11-month high against a basket of currencies on Thursday. Its highest level since mid-July 2017.
This is the currency, that the country’s financial system is running on. In fact, the dollar is the world’s reserve currency and the world’s financial system runs on it. In short the dollar is the most important currency in the world and of course even more important in Zimbabwe, where the bulk of financial transactions are conducted in United States dollars (US$).
Zimbabwe has been using a multi-currency system since 2009 with the rand and the dollar the dominant ones in the basket of currencies that also included the Chinese renminbi. The system seemed to be working since its introduction in 2006 until early 2016 when banks witnessed increased pressure on their nostro accounts because of the widespread importation of goods and services into the country, against a declining exports revenue and other forex inflows sources.
Double whammy
The shortage of foreign currency is however a story for another day, the latest challenge which is becoming a bit of a headache for exporters is the double whammy caused by the strengthening dollar in one hand and a weakening rand in another. As stated earlier, the US$ has been strengthening against other currencies with the US economy, the Federal Reserve (Fed), and of course US President Donald Trump behind the rally. The US economy is strong, the Fed is raising interest rates and Donald Trump is reportedly playing 3D chess with the US’s trading partners. All three indicate potentially higher returns on US investments and thus act as an attraction for money.
A stronger US$ also undermine the attraction of riskier emerging markets as well as international commodity prices (including gold). Although they don’t always move in tandem, a stronger dollar tends to mean lower commodity prices and the price of gold has been speaking to that of late. For several weeks, money has poured out of developing nations and into the US, causing the dollar to rise in value and the currencies of emerging markets to hit new lows. As of Thursday morning, the US$ was trading at a ratio of $1 to R13,73. In the past four months, the rand has weakened by about 16 percent against the US$.
Falling rand good for Zimbabwe but …
According to economist John Robertson, one of the more important effects of this fall in the rand value is that imports from South Africa will cost less. The US$ would also go further when it is being spent on imports from the other countries that make up the US dollar index.
“It will be noted that since March this year, all five currencies weakened against the US dollar,” said Robertson.
Under normal circumstances this would have offered some relief to businesses looking at retooling and traders who import from countries such as China and South Africa whose currencies have significantly weakened against the dollar. It would also have been a relief to traders who are paying a higher premium to convert local bank balances into foreign exchange. At least the rand now has a higher purchasing power than before.
Robertson however notes that currency constraints as well as the premium being paid to buy US$ will probably keep this increase fairly small.
Currency shortage keeps local demand high
“Zimbabwean manufacturers who are trying to recover their local markets from South African competitors will be disappointed to see South African goods arriving at lower prices, but the shortage of foreign exchange is likely to continue offering most Zimbabwean producers a decisive advantage,” he noted.
“This advantage is likely to strengthen for the manufacturers who are most successfully winning back their reputations as dependable suppliers of good quality products.”
However, on the flip side, exporters are most likely to be hurt by the strengthening US$. When the dollar is strong, Zimbabwean exports are effectively getting expensive.
Tourism to feel pinch
While most of the country’s exports are commodities, the tourism sector is likely to feel the pinch as the country becomes an expensive destination for those coming from countries that have felt the impact of the strong dollar. The rand’s movements are more pronounced, so tourist from South Africa are likely to find Zimbabwe expensive to visit. In turn, that hurts workers and businesses connected to tourism.
When a South African has to decide whether to visit Victoria Falls through Zimbabwe or Zambia, it is easy to see how a strong dollar can persuade them to go through Livingstone. It is also easy to see how that can hurt our economy at a time when the country is open for business.
South Africa is also the biggest source of remittances for the country with FinMark Trust putting remittances from that country into Zimbabwe at R10 billion or 13 percent of the economy. A weakening rand, coupled with a weak South African economy will dampen prospects of increased remittances.
