Zimbabwe’s regional peers’ currencies have recently appreciated significantly partially reversing earlier losses against the US dollar. Weak regional currencies have long been touted as the contributing factor to loss in competitiveness and the recent rally brings a new twist to the Zimbabwe currency debate.

Financial matters with Tinashe Kaduwo

Zimbabwe’s major trading partners’ South Africa, Mozambique and Zambia’s currencies have been appreciating against the US dollar. These 3 economies are Zimbabwe’s largest trading partners by value enjoying a combined share of more than 70%. As at 14 July 2017, the South Africa’s rand was up 3.5% on a year to date basis against the dollar whilst Zambia’s kwacha and Mozambique’s meticals were up 10.3% and 14.2% respectively. Although registering positive gains on a year to date basis, the rand has been broadly more volatile due its wider exposure to global economic developments. Heightened global geopolitical risks, elections in Europe (French and UK), UK’s Brexit negotiations, developments in Middle East and slowing China’s economic growth together with domestic economic and political concerns including rating downgrade impacted the rand. However, the currency is on an upward trend against the US dollar and has since reversed some of its earlier losses. Slower than anticipated interest rate hike in the US has resulted in the greenback remaining in the back foot against most currencies. Firming commodity prices have been the linchpin of rand recovery, particularly in gold.

The Zambian kwacha has been appreciating despite the country’s domestic political concerns. The Zambian economy largely relies on copper exports and the commodity’s price has been appreciating having gained by % year on year.  Detention and treason charges on main opposition leader Hakainde Hichilema, who narrowly lost to President Lungu in a bruising election last year highlights some political frailties in the country that was considered as a model democracy in Africa. Mozambique’s meticals similarly gained despite concerns about undisclosed debts. A damning external audit of US$2 billion of controversial borrowing by companies controlled by the nation's intelligence services could have grossly dented the currency but it has remained resilient. In Mozambique, Credit Suisse, Switzerland's 2^nd-biggest bank, and Russian lender VTB have come under scrutiny for their roles in negotiating Mozambique’s loans, one of which was a US$500million Eurobond issued ostensibly to build a state tuna-fishing fleet which turned to be a disaster. All these negative news softly affected the metical which is now up 14.2% since the beginning of the year.

Regional currency movements, in the context an open economy like Zimbabwe, is of great importance as it affects competiveness of both local products on the local market and its exports. An appreciation of Zimbabwe’s major trading partners’ currencies is considered ideal to restore competitiveness especially in the manufacturing sector given our dollarized economy. Strong regional currencies makes Zimbabwe’s exports cheaper and at the same time reduces the appetite for imports, which will in turn reduce competition to local production. However, given structural challenges particularly in the manufacturing sector, the economy may fail to enjoy benefits of strengthening regional currencies as they exert pressure on the average cost of goods imported. Given the economy’s over-reliance on imports for capital goods, key raw materials and domestic consumption, strengthening regional currencies may imply more costs build up which may put more pressure on the forex position as the country will have to pay more for the same quantum of imports.

Regulation including SI64 and import restrictions have failed to significantly reduce the appetite for imports highlighting deep structural challenges in the productive sectors. In the manufacturing sector,SI64 resulted in increased capacity utilisation for local firms that produce for the local market. These include subsectors such as milling and baking, food, fruits and vegetables processing, battery manufacturing, packaging, and furniture manufacturing. The wider benefits are yet to be enjoyed as the expansion of firms benefiting from import protection is restricted to the size of the domestic market given competiveness limitations. On the balance, the short-term benefit of SI64 was more than offset by continued closures of some firms whilst exporting firms that could boost long-term growth lost competitiveness due to structural challenges.

Given these structural challenges, strengthening regional currencies may just add inflationary pressures rather than prop up production capacity. A combination of structural reforms and large scale investments is needed to lift the economy as Zimbabwe’s challenges are more of exchange rate neutral.