By Respect Gwenzi
Export data published by Zimbabwe’s statistical office shows rising exports and within the export figures is a surging manufactured goods value.
Internally, data such as capacity utilisation in the manufacturing data also shows a rising trend, attesting to rebounding domestic production. The production rebound is supported by two factors: resurgence in aggregate demand as inflation cools off and national production ticking on the backdrop of a good agriculture season.
On the other hand (exogenously), goods produced in Zimbabwe have increased their price competitiveness in the region supported by currency devaluations. Currency devaluation refers to the loss of value for one currency when compared to another.
The Zimdollar weakened by over 80% in 2019 and 2020 respectively against year opening levels, resulting in it becoming one of the worst performing currencies globally. It also resulted in the currency becoming cheaper compared to other regional currencies. By virtue of their currency firmness, goods imported from Zimbabwe became comparatively cheaper.
As a result, Zimbabwe has posited this as an economic success turnaround story and a validation for the reintroduction of the Zimdollar, the local currency. The government points at the revived industry and their growing production, some of which is targeted for the regional market, as a sign of positive economic repositioning.
Economic theory highlights that once a currency becomes too cheap, goods produced in the host country also become relatively cheaper. It is a simple economic principle.
However as highlighted earlier, this phenomenon is not as a result of positive fundamentals such as improving production efficiencies and cost streamlining, but as a result of currency devaluation. Currency devaluation on its own has the power to make goods produced in the respective country cheaper against regional peers.
But the question goes further: is the devaluation of a currency a positive thing when looked at from a holistic bird’s eye view of the economy? Before exports grow, currency devaluation has the implication of dampening aggregate demand within an economy.
Producers reprice their goods upwards to maintain value parity, thus marginalising some consumers whose disposable incomes are not adjusting at an equivalent pace.
The reason why producers raise their local price is to maintain value parity to the foreign currency equivalent previously earned. This is rampant in an economy which has a dual currency system such as Zimbabwe’s.
It is also high for countries with higher raw imports feeding into the manufacturing sector, a factor which is also true for Zimbabwe. Once a devaluation occurs in real terms, the price of goods should therefore naturally follow the same route with prices rerating upwards, impacting local demand. At the same time, demand for the same goods should increase in the export markets as prices become cheaper.
The Zimbabwe phenomena (for the first scenario) has been that while prices have moved upwards, the rise has not been commensurate with the currency depreciation, thus demand has remained relatively positive. This has further been supported by an over-arching economic boost driven by a positive agriculture season.
By smoothening the outcome for these outlying factors, which are unlikely to recur on the outlook, the path of price surges and demand declines would become evident.
In short, the devaluation of the Zimbabwean dollar between 2019 and 2020 has been severe and has grossly undercut economic activity and demand. Its impact is reflected in the adverse economic growth experienced in the respective years, averaging about 10% per year.
The positive growth experienced through exports has therefore been overlapped by a decline in economic growth. This year the trend will be altered.
Exports are showing a positive performance while the economy will also show a similar positive growth.
It has to be noted that this positive economic growth is coming from a very low base, even as the net GDP outcome for the year will be over 30% below an all-time high achieved in 2018. The growth is also supported by the previously mentioned agricultural outperformance outlier.
More importantly, this growth is anchored on a faulty currency stability only induced through the national government’s hand in the market. The lower interbank rate has helped stabilise the currency and the inflation, going on to support production growth. This, in our view, is not sustainable and therefore discredits the underlying policy.
On the outlook, a currency floating under the current economic situation will result in a sharp contraction in production as demand dithers and forex availability reduces.
Our view of the government, particularly the RBZ, influencing the market is supported by the surrender clause which enables the bank to control the forex supply side and thus influence the weighted average exchange rate. The wider variance between the interbank and the parallel market highlights the fissures. Going forward, exporters in their broad spectrum are discouraged from producing more in such an environment as earnings are undercut by a low surrender rate. In conclusion, our view is that currency devaluation does more harm than good to the economy.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com