The Rand has been falling for several months now. In January, it was at 8.46 to the greenback and went down to 9.79 in May.
South Africa is our biggest trading partner, in terms of both imports and exports. Although Zimbabwe is using a basket of currencies, the US dollar is the widely used one.
The revaluation of the dollar, against the Rand, is therefore an issue of particular concern as it suppresses exports.
For example, a local exporter who was exporting goods worth R1 million in January, would get $118,203 after converting at the exchange rate of $1:R8.46. He now gets a reduced amount of $102,145 because the dollar has strengthened to $1:R9.79. This represents a significant revenue loss of some $16,000.
It’s a pity that we lost the devaluation tool when we abandoned the Zimbabwe dollar. Devaluation would have allowed us to relatively weaken our currency, thereby giving exporters more return for their exports. However, as we have no control over the monetary policy of the US, we cannot devaluate the Dollar.
If the dollar continues to strengthen it will be more worthwhile for exporters to sell their products locally rather than exporting them. This will increase the trade deficit, as has been the case since January.
Exports declined by 10 percent in three months to March this year to $689 million compared to $768.2 million for the same period in 2012. Imports for January to March this year stood at S$1.7 billion, representing a 14 percent increase from last year’s figure of $1.5 billion. This represents a deficit of $1 billion.
The weakening Rand means that local importers can now get more Rands when they convert their Dollar and that they can now buy more products from South Africa than before. A trader who was importing goods worth R20,000 from South Africa, in January, needed to have $2,364. However, he now needs only $2,042 to import the same goods.
This might appear as good news to local consumers and traders, in the short run. However, it will result in negative consequences to the economy in the medium to long term. As cheaper imports proliferate, local industry will be unable to compete – as is the case already. Some manufacturers, will be forced to shut down, with others downsizing – resulting in many jobs being lost. It will also reduce capacity utilization in the manufacturing sector –which will push prices up.
The revenue collected by Zimra will therefore be forced downwards, leaving us with even more budget deficit headaches.
We need to move towards “internal devaluation” to enhance and encourage export competitiveness, in the face of the strengthening Dollar. Internal devaluation has nothing to do with weakening the currency in use, but it will achieve the intended results of currency devaluation.
Post published in: Business