Falling SA rand hammers ailing Zimbabwe

Falling SA rand hammers ailing Zimbabwe
Published: 15 June 2018
THE alarming fall of the South African rand against major currencies - over the past few months - is likely to hit Zimbabwe's ailing economy hard.

Although Harare continues to resist local industry's impassioned pleas to adopt Pretoria's medium of exchange as the country's primary currency, its performance has always had a bearing on the local economy as well as region.

The rand fell to a fresh six-month low against the American dollar - at R13-plus last Friday and at the end of another bruising week for South Africa (SA)'s stuttering economy - and thus triggering widespread concern about the health of Africa's economic powerhouse and its currency going into the future.

Analysts polled by The Financial Gazette this week said the sagging rand would - among other things - have a negative impact on diaspora remittances from across the Limpopo, local prices, Zimbabwean exports and market liquidity, which would adversely affect aggregate demand and the country's economic recovery.

Economist John Robertson said Zimbabwe's current economic fundamentals only served to exacerbate the negative effects of the rand's fall on the economy.

"Ordinarily, the volatility of the rand should have been a welcome development… However, and with the present fundamentals, this has only worsened the situation as Zimbabwe's spending to SA, mostly in imports, is also taking a knock," he said.

"For starters, look at the number of Zimbabweans working in SA and sending money home. The volatility of the rand means that they will be sending less than they usually do, which affects local Zimbabweans and many organisations," Robertson said.

"Apart from this, the southward trend … also affects Zimbabwean exports to SA, as they now appear comparatively pricier, while also skewing the local market dynamics in favour of South African products, thereby disadvantaging locally manufactured goods," the veteran commentator said.

Indeed, remittances from SA have proven to be a major source of foreign cash for the local economy - by far dwarfing remittances from other countries where Zimbabweans have moved to in large numbers after fleeing political and economic mayhem back home. Reserve Bank of Zimbabwe governor John Mangudya has readily admitted in the past that a depreciation of the rand against the greenback in particular meant a reduction in the amount of money South African exiles are able to send back home in United States dollar terms.

Vince Musewe, an economist and researcher, said the weakening of the rand would lead to imported inflation for Zimbabwe.

"A weakening rand means that we get less products for more money because of imported inflation … for example, our major import is fuel, and an increase in fuel prices affects everyone negatively," he said.

Cade Zvavanjanja said those who stored value in rand terms were doomed.

"It all depends in which base currency one is storing value. For those who are storing in American dollars, the more the rand weakens… the more value they gain trading in rands, hence cheaper imports," he said.

"For those who store in rands, they lose value. At the national level, the movements will have a negligible impact in the medium to long term due to our current foreign currency challenges. Zimbabwe needs to produce and export more, while reducing imports," Zvavanjanja said.

The sharp decline of the rand has coincided with the collapse of SA's first quarter gross domestic product (GDP) growth - with Pretoria's economy shrinking at an annualised pace of 2,2 percent, when markets had expected only a 0,5 percent contraction.

This left South African economic growth at just 0,8 percent for the year to end March, far beneath the market consensus for a reading of 1,9 percent. And Investec, a South African bank, says the rand could actually be at 17 to the dollar were it not for Cyril Ramaphosa's election.

However, another economist, Brains Muchemwa, said the rand's depreciation would have an inconsequential impact on Zimbabwe at the moment.

"The marginal depreciation… is inconsequential to the terms of trade between Zimbabwe and SA. Zimbabwe is currently experiencing the worst shortages of foreign currency since 2009, with its pricing on the parallel market inefficient and speculative," he said, adding the development would also not ease the country's foreign exchange shortages.

"The thinking, and an erroneous one for that matter, that the rand depreciation will ease demand for foreign currency fails to understand that Zimbabwe no longer uses the American dollar per se as its currency, but rather has huge non-convertible real time gross settlement balances that mimic the dollar," Muchemwa said.

"The huge outstanding backlog of foreign payments, compounded by our net foreign asset deficit at about $1,3 billion, means we have no basis whatsoever to refer to the US dollar as our ‘base' currency. Therefore, these… movements do not… impact on the majority of Zimbabweans serve for the very few that are privileged to convert their bank balances at one to one..," the Oxlink Capital managing director said.

Meanwhile, Zimbabwe National Chamber of Commerce (ZNCC) chief executive Christopher Mugaga says the South African currency's present volatility would dampen debate about the need to adopt the trans-Limpopo notes, and coins.

"As a country, we always felt it could not be used as a reference currency - worse still with the political outlook that SA is facing with the 2019 elections on the horizon. The rand's volatility also symbolises why it has disappeared in the basket of currencies within the multiple-currency regime in Zimbabwe," he said.

"The depreciation of the rand will continue giving SA a competitive edge over Zimbabwe, which will therefore threaten the growth numbers in terms of GDP," Mugaga said, adding this would worsen the country's desired growth targets and trade deficit.

"…might also confirm why we should postpone the decision to ratify the African Continental Free Trade Area, as opening our borders to Africa will spell doom for us, worse still given the absence of a domestic currency," the ZNCC boss said.

"The rand's fall is also likely to be worsened by the trade wars between the USA on one hand, and Canada, EU and Mexico on the other - as this will have the impact of strengthening the US dollar once these countries retaliate by closing their borders to US goods, leading to a strengthening of the US current account through protectionism," Mugaga added.

Amid consensus that a weakening rand would also affect the competitiveness of local products in SA, as Zimbabwean exports would be more expensive than goods coming from the other end, these distortions and mismatches could also mean domestic products are commercially unviable, while South African ones enjoy an even higher pricing edge.

So severe has been the impact of the collapsing rand on the local economy over the years that ex-Tourism Minister Walter Mzembi once called for players in the hospitality industry to quote their prices in the SA currency in order to remain competitive.

- fingaz
Tags: Rand,


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