HomeBusiness DigestOvervalued exchange rate hurts economy: Report

Overvalued exchange rate hurts economy: Report

Zimbabwe’s use of a stronger currency at a time when global commodity prices are plunging in the international markets and its main trading partner South Africa’s unit is depreciating will further slow down the already marginal economic growth, a new report says.

Staff Writer

The World Economic Forum’s latest Global Competitiveness Index report says Zimbabwe needs no quick fix to its economic problems. “With a 45% overvalued exchange rate, Zimbabwe is going to find it very difficult to accelerate economic growth especially given the make-up of its export portfolio at a time of depressed commodity prices,” the report says.

The weakening of the South African rand is putting local manufacturing companies in the corner in competitive terms.

The movement of funds from commodities and the economic slow down in China have hit hard African economies because of their reliance on commodities for foreign exchange.

Economists fear some firms could fold as cheap imports flood the market, pushing out locally-manufactured goods.

The troubled southern African country relies heavily on South African products after industry collapsed owing to more than a decade of economic malaise. “The belief that growth will be reignited by foreign capital — FDI, diaspora inflows and offshore credit lines — is naïve. It is clear from the Global Competitiveness Report that the country needs far-reaching structural and institutional reforms, allied with much higher levels of investment, especially in infrastructure, than in the last 25 years. This is not quick-fix territory, but structural reform and transformation,” the report says.

The report says Zimbabwe needs deep-seated and structural reforms. Zimbabwe situation has been worsened by the fact that it does not the monetary policy instruments need to respond to a weak or stronger currency. Central banks tend to intervene through either lower interest rates to stimulate the economy or devaluing its currency to make exports more competitive.

Zimbabwe on the other hand does not have a currency of its own, a development that has opened up the economy to the vagaries of exogenous shocks and risks associated with the use of another country’s currency. Because the country is not in a monetary union with the US, Washington DC’s Federal Reserve system generally pursues policies that benefit its own economy.

Lack of monetary sovereignty has seen Zimbabwe landing the US dollar at a premium. In order to lend it in the country, Zimbabwean banks have to pay freight and insurance costs, an expensive route.

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