HARARE: Zimbabwe is failing to generate reasonable export earnings due to competitive issues arising from the use of a multicurrency regime, a leading research firm has said.
In a note to investors, MMC Capital said while the introduction of the multi-currency regime in 2009 was lauded as positive, the system has brought with it some challenges of its own. The basket of currencies used in Zimbabwe has the US dollar, South African rand, Botswana pula and British pound.
“The South African rand is among the basket of currencies adopted as legal tender in Zimbabwe and given that about 60% of the total imports come from South Africa, the local economy is bound to catch a cold when the South African economy sneezes,” it said.
MMC said the rand has been under pressure since 2012, “giving a compelling case for a Zimbabwean consumer to increase imports given that the products have become more affordable”.
“The major detrimental effect on the local economy, however, is that locally produced goods have become very uncompetitive in terms of pricing relative to regional peers, considering that the US dollar continues to strengthen. This is exerting intense pressure on the local producers’ profit margins,” MMC said.
“The majority of goods in Zimbabwe are priced in US dollars, making it a lucrative market place for South African goods and our view is that if this trend continues a lot of the remaining few producers in the country will be forced to close shop.”
In his mid-term monetary policy statement, Reserve Bank of Zimbabwe governor John Mangudya said the country should consider fiscal and internal devaluation to promote export competiveness in the absence of its ability to effect nominal exchange rate adjustments.
Mangudya said fiscal and internal devaluation were viable options after the loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness.
Internal devaluation, Mangudya said, entailed that a country which cannot devalue its nominal exchange rate can gain competitiveness and promote export performance through streamlining domestic costs of production.
He said measures to enhance competitiveness through reduction in production costs amounted to depreciation in the real exchange rate in a manner that was promotive of exports.
“This is particularly important as Zimbabwe’s implied real effective exchange rate is currently overvalued by an estimated 45%. This largely reflects the progressive appreciation in the US$ underpinned by strong economic recovery in the US and accommodative monetary policy measures adopted in most Euro zone countries,” he said.
He said under the fiscal devaluation, value-added tax could be imposed on selected imports that had close local substitutes. Simultaneously, an equivalent reduction would be effected on payroll taxes such as employers’ social contributions, Mangudya said.
Mangudya said other than fiscal devaluation, complementary “internal devaluation” measures targeted at reducing the cost of doing business, boosting competitiveness, increasing productivity and fostering confidence in the economy could also be pursued.
