Latest News Editor's Choice


Opinion / Columnist

Depreciation of the rand: Impact on Zimbabwe business

02 Sep 2015 at 08:19hrs | Views

PURSUANT to the abolition of the dual exchange rate system, that is unification of the financial and the commercial rand) on March 10 1995 the unified rand was stable at around R3,60 to the US dollar for a period of up to one year from the date of abolition. In general and over the long term thereafter, the rand has moved in one direction in favour of depreciation against the US dollar.

The depreciation process has followed a so-called "staircase" process, with a periodic run down a flight of stairs to a new level to be followed by a rather steep downward adjustment over a short period of time to a new depreciated level. This one directional movement of the rand in favour of weakness has earned the South African currency the unenviable epithet of being called a one-way-bet against the US dollar.

There are of course numerous factors that have generally caused the rand to weaken and its current depreciation must be seen against the backdrop of the foregoing. By way of an example, in 2001 the rand depreciated from R7,60 to the US dollar in January 2001 to R13,84 in December 2001. So there is precedence to the current depreciation.

The rand's latest record low of about R14 to the US dollar is of course worrisome to the Zimbabwean financial markets in general and consumers in particular. But are their worries founded? The answer is a big no.

The multicurrency system is well positioned to cushion and insulate Zimbabwean consumers against the adverse movements of the rand. For the Zimbabwean consumers it is a win-win situation. A case of one's proverbial bread being buttered on both sides.

Firstly, because Zimbabwe prices its goods in US dollars, then Zimbabwe's position is similar to that of the US as regards the Rand depreciation. A business in Zimbabwe is similar to a business in New York insofar as the rand and the US dollar is concerned. Consequently, Zimbabweans are having a bonanza whenever they happen to convert their US dollar assets or cash into rand. Where a few weeks ago a Zimbabwean businessperson could have converted US$1 million and got R12 million, today the same businessman can convert the same US1 million and get R14 million.

One does not need to be an economic genius to figure out that there has been a real exchange rate gain of R2 million for the businessperson. Now, a R2 million still buys you a mansion in Sandton, South Africa. This is not magic. This is what has happened in real terms over the past two weeks.

Secondly, one may argue and say, yes that may be true of a single businessperson but what about other businesses and consumers in the street? Is this not an economic fallacy of composition where what is true of one is not necessarily true of the whole? The hard and incontrovertible fact is that the same methodology can be replicated by Zimbabweans of different economic stripes from as little as US$1 transactions to millions. So contrary to the dictum of the fallacy of composition, this is a process that can benefit everyone.

Thirdly, since Zimbabwean goods at shop-floors are priced in US dollars the depreciation of the rand is of minimal impact to their pricing, in fact, it can be beneficial to consumers in the form of cheaper imported goods hence signs of deflation within the Zimbabwean economy. The deflation must be seen as a function of exchange rates movements that are favouring Zimbabwean consumers, and it has nothing to do with economic stagnation of the country.

The sector that is alleged to have been adversely affected by the rand's depreciation is specifically the tourism and hospitality industry which relies heavily on South African visitors who now find Zimbabwe an expensive destination.

If this sector suffers as a result of the rand depreciation, then this would be a result of this industry's own hubris. The country has a multicurrency system. What stops hotels and resorts from specifically charging South African tourists in rands rather than in US dollars? If they do charge South African tourists without taking the depreciation of the rand into account, then suddenly Zimbabwean hotels will be directly competing with South Africa's own internal hotels and resorts on the basis of rand priced packages.

Former South African Reserve Bank Governor Gill Marcus shows off South Africa's new banknotes, which features an image of former president Nelson Mandela on the front and images of the country's "Big Five" wild animals on the reverse, before conducting the first transaction in Pretoria, November 6, 2012. REUTERS/Siphiwe Sibeko

Since all other international tourist destinations are now closed for South African visitors because of the oppressive and treacherous exchange rate between the US dollar and the Rand (other countries do not have the multicurrency system so they are forced to charge in US dollars), Zimbabwe becomes the only available option open to South Africans where they can enjoy paying in rands. The volumes and numbers of tourists visiting Zimbabwe could push arrivals to an all-time high with the multiplier effect feeding into the airline industry, inter alia. Some ill-informed economist out there may argue and say but such a pricing will prejudice Zim hotels when they convert their revenues to US dollars.

But such an argument will be a hard-sell because there is no obligation on Zimbabwe's hotels to convert their rand cash resources to US dollars. That is the beauty of the multicurrency system. These rand cash resources can be used for importation of goods and other services from South Africa without having to go through an exchange control mechanism. Again Zimbabwe has no exchange controls so no one will be criminalised for transacting in any currency of their choice.

Zimbabwean banks as usual are always caught on the wrong side of currency movements. On the back of the country's multicurrency system the banks should have made it a point that they allow consumers to open rand denominated bank accounts rather than the existing ones where consumers who deposit money in rands still have to suffer the adverse impact of exchange rate movements when their rands are cross-exchanged to the US dollar thereby prejudicing them.

As a result of lack of rand-denominated accounts within Zimbabwe's banks, consumers currently shy away from depositing their rands for fear of being prejudiced by currency depreciation between the US dollar and the rand. This of course immediately creates self-inflicted illiquidity for the country's banks.

With the huge coterie of Zimbabwe's diaspora out there in South Africa, suddenly parents in Harare and Bulawayo or Tsholotsho start instructing their children in Johannesburg to rather buy groceries for them there and send it with cross-border transporters. Consumers start banking their money in South Africa and prefer to go and withdraw in Musina banks, do their groceries there and come back.

Of course the negative impact of this is company closures in Zimbabwe and retrenchments.

Notwithstanding the foregoing, some economists have alleged that on the question of competitiveness, Zimbabwean companies tend to be disadvantaged by the fact that their production costs are priced in US dollars where as their competitors in South Africa have production costs priced in rands.

This argument is not sustainable because Zimbabwe is a multicurrency economy. Again the big question is: what stops the Zimbabwean companies from pricing their production costs in rand terms since the rand is a legal tender in Zimbabwe?. Why do they choose to pay for their costs in US dollar? Why don't they insist to their subcontractors and suppliers of raw materials that they prefer to pay for these input costs in rands. Of course it is hubris that prevents them from doing that. In most cases, even in areas where Zimbabwe companies should outsmart their foreign competitors, they deliberately choose not to do so. By way of yet another example: why is imported bread priced the same as the locally produced bread at local super markets? A consumer of Castle Lite beer priced at par with for an imported one will naturally prefer the imported version. Consumers in Zimbabwe seem to prefer imports for price and quality reasons. The lesson here is that local companies need to manage their costs and price their goods to crowd out imports. This is an age-old trading strategy.

--------
Ndlovu is a South African-based independent financial analyst and risk consultant. He writes in his personal capacity.



Source - Colls Ndlovu
All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24's community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.

Subscribe

Email: