Overvalued US$ hits Zim exports

via Overvalued US$ hits Zim exports – NewsDay November 4, 2015

The US dollar in Zimbabwe is overvalued by 45% thereby affecting export competitiveness, the Reserve Bank of Zimbabwe (RBZ) has said.

BY BUSINESS REPORTER

The country has been using the multi-currency regime, which has the South African rand, US dollar, Botswana pula and British pound as currencies, since 2009 after discarding the local unit. The Zimbabwean dollar was recently decommissioned from the formal system.

In a working paper, Assessing the Impact of the Real Effective Exchange Rate on Competitiveness in Zimbabwe, RBZ said the country’s real effective exchange rate has been overvalued since the adoption of multi-currency regime in 2009.

It said the magnitude of the overvaluation, however, increased significantly starting in 2011.

“The results show the real effective exchange rate gap of about 45% by end of 2014, implying that the currency is overvalued to that extent. The overvalued exchange rate has been hurting export competitiveness, with exports remaining subdued against a huge import bill,” RBZ said.

It said the absence of an exchange rate policy to deal with the overvalued real effective exchange rate implies that the country has to undertake fiscal and internal devaluation to eliminate the disparity between the current account norm and the underlying current account deficit.

A fiscal devaluation aims primarily at influencing the competitiveness of a country in the short-term by mimicking the effects of nominal currency devaluation.

“The standard fiscal devaluation takes the form of a reduction in taxation of labour, financed by an increase in VAT. Fiscal devaluation can be undertaken through a revenue-neutral shift from taxes on labour to taxes on consumption. By reducing the tax burden on exports and raising that on imports, this policy can help to restore competitiveness,” RBZ said.

RBZ said the government can increase value added tax (VAT) on imported finished products by the magnitude of the real exchange rate overvaluation. This, RBZ said, will result in levelling of the playing field on price competitiveness between the country and its trading partners.

South Africa is Zimbabwe’s largest trading partner and the depreciating rand has made exports to South Africa expensive compared to those coming from other regional countries such as Zambia.

RBZ said government can simultaneously reduce taxes on labour, particularly low income earners, by the same potential revenue gain from increases in VAT in a way that ensures a
revenue-neutral shift. The broad objective of a revenue-neutral shift, RBZ said, was to boost domestic demand thereby promoting long-term growth and employment creation.

“Fiscal devaluation measures can be boosted by ensuring availability of affordable credit facilities for financing the companies producing the targeted import-substituting products. Cheaper financing from the banking sector would lower the cost of production for domestic producers, improve their competitiveness, and enable them to expand production, increase employment and lower prices,” RBZ said.

“Moreover, increased consumption of domestically-produced goods has further downstream benefits for the economy, including increased output, employment opportunities and additional future tax revenues for government.”

The use of the multi-currency regime since 2009 has created headaches for the economy, with monetary authorities moaning over the loss of their ability to manage the exchange rate for export competitiveness purposes.

In January, RBZ governor John Mangudya said fiscal and internal devaluation were viable options after the loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness.

COMMENTS

WORDPRESS: 2
  • comment-avatar
    tapiwa 5 years ago

    I don’t remember hearing the American saying its overvalued and I am sure if it was overvalued according to the owners of the currency they would have intervened. Who is Mangudya to tell the US that their currency is overvalued, why don’t they use their own Zim dollar. Anyway I haven’t hear other countries whose currencies Zimbabwe is using complaining. Kana zvarwadza siyanayi nayo US dollar yacho

  • comment-avatar
    Lone Elk 5 years ago

    Tapiwa reread the article.