It’s Time for Local Devaluation of the US Dollar
30 March 2016
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By Suitable Kajau|Zimbabwe should consider effecting fiscal and internal devaluation of the US dollar to promote competiveness of exports in the absence of its ability to effect nominal exchange rate adjustments.
The inception of the multicurrency regime since 2009 created some economic challenges which continue to bedevil the economy as monetary authorities are grappling over the loss of their ability to manage the exchange rate for export competitiveness purposes.
Recently, the Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mangudya sounded that fiscal and internal devaluation were viable options after the loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness in the region and beyond.
Devaluation has numerous benefits which can be enjoyed in the local economy. A devaluation of the exchange rate will make Zimbabwean exports more competitive and cheaper to foreigners.
This will increase demand for local exports. Meanwhile, local products are more expensive as compared to imports due to the skewed cost of production owing to the current value of the US dollar on the local market. In principle, the local consumers would automatically go for substitute products which are affordable and cheaper.
In the same vein, devaluation means imports will become more expensive and this has a direct effect of reducing the
demand for imports which at the moment are flooding the local market enjoying a monopoly.
Devalued currency makes an economy’s exports more favourable. This is because their currency has become cheaper than other countries, increasing the demand from exporters. As well as reducing the purchasing power of citizens abroad, for instance, it would be more expensive to go on holiday abroad and/or purchase goods in neighbouring countries like South Africa and Zambia.
Reduced imports leads to an increase in the demand for domestic goods. This increases the domestic supply of goods in an economy, and which in turn increases economic activities that require manpower; leading to increased employment rate and reducing unemployment rates.
In reality, devaluation could cause higher economic growth as higher exports and lower imports should lead to higher rates of economic growth. Therefore, this provides a boost for domestic demand, and could lead to job creation in the export sector and the down-stream industries.
Higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.
Devalued currency makes an economy’s exports more favourable. This is because their currency has becomes cheaper than other countries, increasing the demand from exporters.
Zimbabwe should take a leaf from the recent Chinese devaluation of the Yuan against the US dollar. The move made Chinese goods cheaper after 8, 3% fall in exports in July 2015.
RBZ Governor, Dr Mangudya says a country which cannot devalue its nominal exchange rate, can gain competitiveness and promote export performance through streamlining domestic costs of production. He further asserts that measures to enhance competitiveness through reduction in production costs amounted to depreciation in the real exchange rate in a manner that was promotive of exports.
This is particularly important as Zimbabwe’s implied real effective exchange rate is currently over-valued by an estimated 45%. This largely reflects the progressive appreciation in the US$ underpinned by strong economic recovery in the US and accommodative monetary policy measures adopted in most Euro zone countries.
Dr Mangudya claims that the nominal appreciation of the US$ against major currencies has had concomitant effects on the real effective exchange rate, a development that has continued to undermine the country’s export competitiveness. He said under the fiscal devaluation, value added tax could be imposed on selected imports that had close local substitutes. As well as application of other than fiscal devaluation, complementary “internal devaluation” measures targeted at reducing the cost of doing business, boosting competitiveness, increasing productivity and fostering confidence in the economy could also be pursued.
At the moment the major cost drivers identified in Zimbabwe include labour, power, water, finance, transport and logistics, tariffs and trade taxes, taxation and information technology costs. In tandem with the prime aim to increase competitiveness of local goods, it is imperative to have the working combination of lower unit labour costs and higher consumption tax decreases the price of exported goods and increases the after-tax relative price of the imported good.

6 Replies to “It’s Time for Local Devaluation of the US Dollar”

  1. Spot on Muzimbabwean. Suitable keeps referring to Zimbabwean exports without telling us what those are. The country has serious supply-side constraints and the huge deficit suggests the country is exporting very little, if anything. Too much theory unsuitable to the Zimbabwean reality, Suitable.

  2. Spot on Muzimbabwean. Suitable keeps referring to Zimbabwean exports without telling us what those are. The country has serious supply-side constraints and the huge deficit suggests the country is exporting very little, if anything. Too much theory unsuitable to the Zimbabwean reality, Suitable.

  3. Lets do simple Mathematics here.Current rate US 1= R15. If you devalue to US 1= R10 , this is what will happen.
    A person will come from South Africa with R10000 and change it to US 1000. The same person will go to South Africa where exchange controls are market based and then sell the US 1000 and get RI5000. Are we together?
    The basic economics is that you do not devalue someone else’s currency.This is because you have no central role in its value.Uku ndokunonzi kushaiwa manje, I think just resign than to drive state Mercedes Benz , four by fours and then think like this.

  4. Hey Zimbos wake up mhani! Why do you apply economic theory in a country that has abnormal structures? Who does not know where the problem lies in Zim? You want to tinker with the periphery when you know that the central issue is misgovernance? Patrick Zhuwawo is fighting hard to drive out investors and you are not bringing him to order as monetary authorities! Zanu pf is at war with itself and the citizenry and you are doing absolutely nothing to bring this to the party’s attention. What investor comes into a country that does not have political stability? Manufacturing is almost non-existent in Zimbabwe and you want to promote exports??? Tipei maserious mhani vana John. Munoda kudonhedza mari yevamwe kuti zvadiiko muchitadza kugadzirisa chaita kuti musoro uteme. Experience shows kuti currency devaluation in a non-productive economy only serves to make life difficult for ordinary citizens. Imports will continue to flow in because hamuna chenyu. And the imports simply become expensive! Tiitirei zviro kwazvo mhani varume imi. Kana magumirwa simply pack your bags moenda kumunda wamakatora.

  5. Hey Zimbos wake up mhani! Why do you apply economic theory in a country that has abnormal structures? Who does not know where the problem lies in Zim? You want to tinker with the periphery when you know that the central issue is misgovernance? Patrick Zhuwawo is fighting hard to drive out investors and you are not bringing him to order as monetary authorities! Zanu pf is at war with itself and the citizenry and you are doing absolutely nothing to bring this to the party’s attention. What investor comes into a country that does not have political stability? Manufacturing is almost non-existent in Zimbabwe and you want to promote exports??? Tipei maserious mhani vana John. Munoda kudonhedza mari yevamwe kuti zvadiiko muchitadza kugadzirisa chaita kuti musoro uteme. Experience shows kuti currency devaluation in a non-productive economy only serves to make life difficult for ordinary citizens. Imports will continue to flow in because hamuna chenyu. And the imports simply become expensive! Tiitirei zviro kwazvo mhani varume imi. Kana magumirwa simply pack your bags moenda kumunda wamakatora.

  6. You do not have your own currency so this does not work.You are so full of it Kajau. You think after I send my US$ to my mother you are free to devalue it? And you expect that I will send you that dollar . Send a good dollar to zimbabwe to be turned into kwacha? You are advocating for the sending of money to zimbabwe via other countries if you do not. see it. Nobody in their right mind will send their money to be stolen by the govt

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