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Zimbabwe set to gain from depreciating currency

by Staff reporter
27 Oct 2019 at 09:52hrs | Views
Zimbabwe may have to roll up its sleeve with regards to the newly-established single continental market for goods and services, the African Continental Free Trade Area (AfCFTA).

AfCFTA will open the largest free trade zone in the world since the creation of the World Trade Organisation in 1994, with a market of more than 1,2 billion people and collective gross domestic product of over $3 trillion.

Zimbabwe's depreciating currency can give local exporters a comparative advantage.

Market analysts at Morgan & Co say a comparably weaker Zimbabwe dollar can make the country's exports into the single market relatively cheaper and therefore, more competitive.

"The weaker Zimbabwe dollar poses several implications for Zimbabwe, chief among them being a possible advantage in the region. The AfCFTA that was signed in 2017 by 54 African countries opens Zimbabwe to a US$3,4 trillion market on the continent.

"Further, South Africa is Zimbabwe's major trade partner. The weaker currency will make Zimbabwe's goods cheaper and push demand for its goods in South Africa and other regional economies with stronger currencies," they said.

The agreement establishing the AfCFTA entered into force on May 30 after 24 countries ratified it, with 22 ratifications required for it to start having legal effect. Zimbabwe signed the Agreement in March last year in Rwanda and Parliament ratified it in March this year.

"We opine that the currency depreciation is set to create a competitive advantage for exporting companies in Zimbabwe. Exporters that we have identified on the Zimbabwe Stock Exchange include Padenga and Ariston.

"We are also bullish on companies with a regional presence such as Seed-Co International, Delta and Simbisa Brands."

The local currency has been depreciating since the monetary authorities removed its 1:1 peg with the United States dollar and introduction of the foreign currency interbank market earlier in February. Some observers have argued that the process of seeking out the local currency's effective level should not be open-ended. Says businessman and investor George Manyere:

"What are you referencing your currency to? If you are referencing it to the US dollar then it was going to be a process for us to discover the proper exchange rate between our local currency and the US dollar, and that is what we have been going through.

"And this has caused significant pain because mentally, you are moving from 1:1 exchange rate and we are now at 1:15, you can imagine the amount of value destruction that has been caused.

"And yes, it is a necessary pain, but when you make it an open-ended affair, it becomes extremely painful and you might never recover from such a policy.

"We are at a stage where we have a unique opportunity at this particular point in time where our Zimbabwe dollar at the interbank rate is trading at the same level as the South African Rand. I strongly believe that there is a serious opportunity that as a country, both private sector and Government must seriously engage and evaluate this reality and re-assess whether this is not an opportunity for us to bring stability in the economy through referencing our Zimbabwe dollar to the South African Rand, and I think there is a lot of justification for such a position.

"And if we don't do that, I think we are likely to see a continued runaway falling currency."

The analysts, however, conjecture that notwithstanding the advantages that the weaker currency will proffer for local exporters, the country needs to improve its macroeconomic fundamentals.

"That said, Zimbabwe has been struggling to increase industrial output because of recurrent failures to resuscitate key entities such as the National Railways of Zimbabwe and ZiscoSteel; poor inflows of foreign direct investment; a debt overhang; inconsistent power supply, and key risks such as foreign currency, liquidity and repatriation risks.

"These factors have subdued capacity utilisation across Zimbabwe's industrial sectors to levels below 40 percent  this year and subsequently constrained capacity to supply to regional markets," said Morgan & Co.

Source - sundaymail

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