ZIMBABWE faces growth and external competitiveness challenges, as indicated by its low growth and investment trend, declining share in world exports, high current account deficits and external debt.
Zimbabwe Independent Comment
The country’s ranking in the Global Competitiveness Index (GCI), compiled by the World Economic Forum, declined one place to 125th out of 140 countries. In the 2015/16 report published recently, Zimbabwe is ranked 15 from the bottom — the lowest since 2012/13 when it was 12 places from bottom.
While the most serious barriers to doing business in Zimbabwe over the past three years include access to finance, which remains by far the main problem, followed by policy instability and restrictive labour regulations, the overvalued exchange is also a serious issue.
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 GCI report says.
“The belief that growth will be re-ignited by foreign direct investment, diaspora inflows and offshore credit lines is naïve.”
The need to address the currency issue suggests several options. One option is the current multi-currency system or dollarisation which is difficult to sustain in the absence of a direct formal arrangement between the United States Federal Reserve and the Reserve Bank of Zimbabwe.
Another option is joining the South African Customs Union which means using the South African rand. This option is problematic given the volatile and depreciating trend of the rand in view of the slowdown in the country’s and Chinese economy. Internal devaluation of the US dollar is another option.
A research paper, titled The Real Exchange Rate and Growth in Zimbabwe: Does Currency Regime Matter?, authored by Professor Mthuli Ncube and Zuzana Brixiova, on whether currency overvaluation prevailed under the multi-currency regime introduced in 2009 and if it may have contributed to the Zimbabwe’s long-term weak external and growth performance, sheds light on this issue.
“While overvaluation hampers GDP growth, as well as growth and employment in export sectors, we have not found that undervaluation would raise growth. Replacing the multi-currency regime anchored in the US dollar by the South African rand as the sole transaction currency would help reduce overvaluation and stimulate exports and growth,” the research paper says. “Under any currency regime, Zimbabwe needs to adhere to sound macro-economic policies, avoid overspending on public wages, and create an environment conducive for investment. With South Africa as the largest trading partner, Zimbabwe would benefit from implementing internal devaluation (and in particular contain wage cost) and accelerating structural reforms to correct the current overvaluation of bilateral real exchange rate with South Africa. Policymakers should also consider replacing the multi-currency regime with the South African rand.”
Whatever option authorities decide to take, it is imperative that the issue of currency is resolved effectively and timeously.