Zimbabwe: Can an Undervalued Currency Boost Zim Exports

Bond notes.
30 September 2019
guest column

The Zimbabwean Dollar was re-introduced on the 24th of June 2019 through the gazetting of Statutory Instrument (SI) 142 of 2019. The law outlawed the use and indexing of multiple currencies for local goods and services in the economy. The multiple currency regime had been in official existence since 2009 when the local currency first collapsed at the height of hyperinflation. The Zim Dollar was introduced at a rate of 2.5 to 1 United States Dollar in February, but has weakened to more than 15 on the interbank market within the last 6 months.

The need to boost exports through a weaker domestic currency has been touted as the key motivation for re-introducing the local currency. Zimbabwe's export receipts grew from US$2.84 billion in 2016 to US$4.23 billion in 2018 largely due to the introduction of the export incentive scheme by the Reserve Bank of Zimbabwe (RBZ) in September 2016. The central bank introduced the scheme at 5% of gross export receipts in order to boost production of minerals and tobacco. The scheme was later reviewed upwards of 10% and widened to include diaspora remittances, manufacturing sector and all other export based industries in the economy. Buoyed by the general production stability witnessed in 2016, 2017 and 2018 where the country had uninterrupted power and fuel supplies, exports grew significantly. This was despite the fact that the United States Dollar was the official currency in Zimbabwe in those three years. This year, exports have declined by 7.5% to US$1.9 billion for the first half of 2019 as compared to the same period in 2018.

There are a plethora of reasons why export receipts are declining in 2019 and these include resentment by exporters (especially small-scale Gold producers and tobacco farmers) over the low export retention thresholds, delays in payment by the apex bank and weakening exchange rate for the local currency used to compensate them for retained export receipts. Other reasons include fuel shortages, power cuts and increase in the cost of production on the local market. It would have been expected (if the assertion was true) that with the loss of value in the Zimbabwean Dollar since February 2019, exports would grow exponentially with the rate or at least gradually with more appetite from Zimbabwe's key export markets. The lessons from the first half of 2019, the export incentive scheme and the 2006-2009 period when the value of the Zimbabwean Dollar plunged to record lows is that growth in exports has very little to do with an undervalued local currency, but more to do with supply side incentives.

Zimbabwe's export receipts are heavily biased towards raw commodities from mining and agriculture and these have been the mainstay of the country's export performance since the turn of the decade. Mining and agriculture commodities make up 92% of Zimbabwe's formal export receipts and their prices on the world market are marked in the United States Dollar (not the local currency). However producers have got a production cost component calculated in the local currency which benefits them more if the local currency depreciates in value against the US Dollar. It is worth pointing that a very large portion of precious metals and other minerals are smuggled out of the country or under invoiced, hence they are not accurately accounted for on export receipts. Potentially Zimbabwe's export revenues from mining could be over US$5.5 billion per year. Manufactured exports (which are largely dependent on the value of the local currency) make up an average of 5% of export receipts in the past 5 years. Manufactured exports are informed by productivity in Agriculture and their value declined significantly after the Land Reform Programme of 2000 and subsequent decay of production equipment. Therefore the country has to focus on the factors that boost export oriented production utilizing core competences in mining and agriculture. These factors include:

Enhancing production capacity

The most important factor in export growth is optimal production capacity, which is essentially measured using output per hour. Major export oriented economies in the world such as China, South Korea, Singapore, Germany and South Africa closer home; focus on boosting production capacity through supply side incentives, technology development and retooling of production equipment which benefit them through economies of scale, better than smaller economies. The quality of merchandise is directly related to the price to be paid by the importer. Zimbabwe needs to focus on boosting production capacity in mining, agriculture and manufacturing industries first before the value of the local currency can be touted as a boost. There is no benefit in having a weaker currency in an economy which fails to grow its production capacity. Supply side incentives range from tax cuts, production subsidies, government sponsored export development and export finance among others.

Zimbabwe focused on production subsidies in the past 4 years, only that the subsidies could not be sustained as they did not benefit genuine exporters in the economy and were funded through excessive money printing which was not backed by GDP growth. Zimbabwe's manufacturing sector requires retooling while agriculture requires finality to land tenure issues that hinder investment.

Competitive export retention thresholds

The drop in production of Gold from 17.3 tonnes in H1 2018 to 12.3 tonnes in H1 2019 and Tobacco among other key export earners is largely attributed to resentment over low export retention thresholds. The central bank needs to increase export retention thresholds while creating a conducive environment for exporters to liquidate their proceeds on the interbank market. The liquidation aspect is correlated to the level of confidence that the exporters have in the economy and the value of the local currency. However, higher retention thresholds boost confidence, improve production capacity and allow free movement of capital in and out of the country. They also reduce the levels of smuggling for precious minerals and under invoicing of exports in general.

Value addition and beneficiation

Zimbabwe has not been able to significantly grow its export revenues due to limited value addition and beneficiation on the local market. The country misses billions of potential foreign currency earnings through exports of raw or semi processed commodities such as tobacco, chrome, precious metals and other mineral ores. These exports are value added in China, United Arab Emirates (UAE) and South Africa earning those countries billions in export revenues. It is not surprising that China is the biggest producer of Ferro-chrome yet they do not mine the mineral and UAE exports over US$4.5 billion of cigarettes yet they barely grow tobacco. Value addition on the local market will guarantee Zimbabwe more export revenues which are less susceptible to commodity price movements as well. Value addition has ripple effects to manufacturing and service industries as well.

A weaker currency is a boost to countries that can produce optimally and take advantage of their undervalued currencies to export more units. A weaker Zimbabwean Dollar has limited contribution to the local economy considering the fact that the local economy is extractive in nature and there is little value addition applied to bulk of the country's exports. Zimbabwe is a net importer from South Africa, Singapore and the United Kingdom despite the fact that their currencies are valued higher than the Zimbabwean Dollar. Commodities traded on the world market are indexed in US Dollar values and success or failure rests on production capacity, economies of scale and incentives given to exporters to produce more.

Victor Bhoroma is economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.

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