Is the dollar revaluation a blessing in disguise?

No Zimbabwean economist has so far been kind enough to give adequate justice to the issue of the revaluation of the dollar against the rand and other major currencies. Virtually all economic analysts have sad stories about the dollar appreciation. In fact it is almost unpatriotic to say the dollar appreciation may have remarkable merits for the economy to tap into.

The fundamental argument of most analysts is that the strengthening dollar makes Zimbabwe’s exports more expensive abroad, causing foreign buyers to seek alternative market sources.

The above argument is very convincing, albeit very general and sometimes untrue. It is true that the appreciation of the dollar will make Zimbabwe’s exports expensive, but it should be noted that there is more to price than meets the naked eye. In fact, price is not the only factor that influences demand for our exports. Demand is also a function of other influential factors such as addiction, tastes and preferences. For instance, a smoker may not suddenly switch from smoking Newbury to Pacific simply because the price of Newbury has gone up by ten cents.

To be more precise, the impact of an appreciation is largely dependent on the price elasticity of demand for exports. In the event of inelastic demand, where price increases result in unchanged demand, exports earnings will actually rise, resulting in improved liquidity in the economy.

The impact of the appreciating dollar on Zimbabwe’s exports also depends on economic growth patterns in our export markets. If our export market economies are experiencing growth, apparently as is the current case, then they will be more likely to keep buying our exports, even though they are relatively expensive.

The appreciation of the dollar is a provocation for local manufacturers to be innovative and is somehow a necessary evil for industrialisation. With export prices more expensive, manufacturers find the underlying need to cut costs to remain competitive.

The International Monetary Fund has actually realised that appreciation in currency movements might actually result in competitiveness of some sort. Thus it has a charter that directs policymakers to avoid “manipulating exchange rates… to gain an unfair competitive advantage over other members”.

Although in our case we happen to be beneficiaries or victims of circumstances, since we have no control over the dollar exchange rate movements, the competitive advantage mentioned by the IMF doesn’t vanish.

The justification in the minds of those against dollar revaluation is that it increases our level of imports, since imports become cheaper, and therefore results in a widening balance of payment deficit.

However it should be noted that a BOP deficit per se may not necessarily be a bad thing as widely believed. We have to look at the composition of the rising exports and analyse the dynamics.

To many manufacturers, the appreciation of the dollar presents an opportunity for them to import essential raw materials and other semi-finished goods more cheaply than before. Surely that could also result in reduced production costs and therefore reduced prices for manufactured exports.

We have many local manufacturers who are importing raw materials, either because they are not found in Zimbabwe or to blend them with locally sourced ones. The appreciation of the dollar is therefore an opportunity for local manufacturers to tap in.

The Confederation of Zimbabwe Industries can confess that one of the greatest constraints of capacity utilisation is the use of antiquated and obsolete machinery by local manufacturers. The appreciating dollar can encourage them to cheaply acquire new machinery to replace their obsolete ones. It also gives the chance to order new parts from abroad to repair and optimize the operations of their plants.

The good thing is that all this is taking place amid calls by Zim-Asset for the government to scrap duty on importation of raw materials and capital goods.

This will surely incentivise local manufacturers to tackle fundamental issues underpinning the competitiveness and efficiency of their plants.

The appreciation of the dollar also makes foreign services cheap, which means we can benefit by engaging specialist consultants from abroad to analyse the set-up of some companies and advise on reorganising them profitably.

I am not implying that the appreciation of the dollar is the best thing for Zimbabwe. The point here is that we should not throw out the baby with the bathwater. We rather should turn the spotlight towards the opportunities presented by the dollar appreciation and profit from them.

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