Weak rand causes havoc in Zimbabwe economy

Harare – The Zimbabwean government might have resisted several calls to adopt the rand as its primary currency, but figures from the latest mid-term monetary policy statement show the rand continues to cause havoc in the country’s economy.

Pitted against a strengthening US dollar, the currency used to make up more than 90% of transactions in Zimbabwe, the often weakening South African unit has made life difficult for most businesses and individuals in Zimbabwe.

South Africa is Zimbabwe’s major trading partner, and any changes in its currency in relation to the US$ is quickly felt in Zimbabwe.

One of the areas where Zimbabwe has felt the pain of a weakening rand is in remittances.

According to the policy statement presented by Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya on Thursday, the continued appreciation of the dollar against regional currencies has also affected the dollar-denominated value of remittance inflows.

He singled out remittances from South Africa, “which have over the years been a significant source of foreign currency in the country”.

“The weakening of the South African rand against the US dollar, implies that Zimbabweans who are in South Africa are no longer in a position to send the same amount of money in US dollar they used to remit back home,” Mangudya said, adding that the rand value remittances have gone down in US$ terms.

“This is evident from the decline in Diaspora remittances of 13% from US$457.9m for the period January to June 2015 to US$397.3m in the corresponding period in 2016.”

Mangudya said the development has in this way affected general market liquidity in the economy, with an adverse effect on aggregate demand and sustained economic recovery.

Another area where Zimbabwe has felt the impact of a weakening rand battling a strengthening dollar is in the competitiveness of its products. A falling rand makes Zimbabwean exports more expensive against competing products in South Africa.

The competition is, unfortunately for Zimbabwe, not restricted to its exports but also to its local shelves where South African products with lower prices have all but muscled out locally made products.

“With South Africa being Zimbabwe’s main trading partner – accounting for around 50% of total trade – where the rand depreciated against the US dollar, competitiveness has also been severely eroded,” said Mangudya.

The impact of cheap South African products has been reflected in Zimbabwe’s annual headline inflation figures which have remained in negative territory, albeit accelerating from -2.19% in January 2016 to -1.4% in June 2016.

Mangudya said the “continued decline in prices in 2016 was driven by both food and non-food inflation, underpinned by the sustained depreciation of the South African rand”.

Rand-based pricing system

“Inflation is expected to remain broadly subdued in 2016. On the one hand, the persistent weakening of the South African rand against major currencies, coupled with the low aggregate demand, is likely to continue exerting further downward pressure on domestic prices,” he said.

The impact of the weakening rand has been so bad that the Zimbabwean government recently urged players in the tourism sector to adopt a rand-based pricing system to cushion their businesses from the prevailing cash crisis.

The government also assured players in the tourism sector that it will protect them from foreign exchange losses incurred as a result of trading in rands. Tourism Minister Walter Mzembi said he has also secured a commitment from the central bank that 15% VAT on accommodation will be waived on foreign bookings if hoteliers agree to transact in the South African unit.

In an effort to lure those in the diaspora to remit funds to Zimbabwe through formal channels, the RBZ has since extended an export incentive scheme at a level of 2.5% to 5% to diaspora remittances.

It is against this background that economists and other stakeholders have called on the Zimbabwean government to adopt the rand. The appeal has, however, found no takers with Finance Minister Patrick Chinamasa at one time saying Zimbabwe will not join the rand union, on grounds that the country’s primary objective is to have its own currency in the long term and control its own destiny.

“For me it is not even under consideration. I would not go along with that. Like I told you, we are in this problem because the US dollar is appreciating and we have no control over it. We cannot have a system where we are beholden to currencies over which we have no control,” he said at the time.

“We cannot just be victims and remain victims. If we go with the rand, what would we do if it continues to depreciate? -Fin24

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