Zimbabwe is a landlocked country in Southern Africa that has faced many economic and political challenges since its independence in 1980. One of the major challenges has been the volatility of its exchange rate, which has affected its trade performance and competitiveness.
The exchange rate is the price of one currency in terms of another. It reflects the demand and supply of foreign currency in the market, as well as the expectations and confidence of the economic agents. The exchange rate can be influenced by various factors, such as inflation, interest rates, fiscal and monetary policies, external shocks, political instability, etc.
The volatility of the exchange rate is the degree of variation or fluctuation of the exchange rate over time. It measures the uncertainty and risk associated with the exchange rate movements. The volatility of the exchange rate can have positive or negative effects on trade, depending on the nature and extent of the volatility, as well as the characteristics and responses of the traders.
On the one hand, a moderate and predictable volatility of the exchange rate can have positive effects on trade, such as:
- Enhancing the competitiveness and profitability of exporters by allowing them to adjust their prices and costs according to the exchange rate movements.
- Encouraging diversification and innovation of export products and markets by creating opportunities for exploiting comparative advantages and niche segments.
- Stimulating foreign direct investment (FDI) inflows by attracting investors who seek higher returns and lower risks in a dynamic and flexible environment.
- Promoting economic growth and development by increasing export revenues, creating employment, improving productivity, and fostering technological transfer.
On the other hand, a high and unpredictable volatility of the exchange rate can have negative effects on trade, such as:
- Reducing the competitiveness and profitability of exporters by increasing their uncertainty and risk exposure to exchange rate fluctuations.
- Discouraging diversification and innovation of export products and markets by creating barriers for entry and exit, increasing transaction costs, and reducing market access.
- Deterring foreign direct investment (FDI) inflows by repelling investors who fear losses and instability in a volatile and uncertain environment.
- Hampering economic growth and development by decreasing export revenues, destroying employment, lowering productivity, and hindering technological transfer.
Zimbabwe has experienced both moderate and high volatility of its exchange rate over time. The country has adopted different exchange rate regimes since its independence, ranging from fixed to floating, with various degrees of intervention and adjustment. The country has also faced several episodes of currency crisis, hyperinflation, devaluation, dollarization, demonetization, etc.
The volatility of the exchange rate in Zimbabwe has had mixed effects on its trade performance and competitiveness. According to some studies (e.g., Brixiova & Ncube, 2014; Alzyadat et al., 2021), Zimbabwe’s real exchange rate experienced periods of sizeable overvaluation relative to its main trading partner South Africa both prior to the 2008 economic collapse and under the current multicurrency regime. This overvaluation reduced Zimbabwe’s export competitiveness and contributed to its declining share in world exports. Moreover, Zimbabwe’s stock market volatility increased during the COVID-19 pandemic period (Bonga et al., 2021), reflecting the uncertainty and risk associated with the exchange rate movements.
However, according to other studies (e.g., Chikoko et al., 2019; Moyo & Khobai, 2018), Zimbabwe’s real effective exchange rate was not significantly misaligned from its equilibrium level during most periods under review. This suggests that Zimbabwe’s export performance was not mainly affected by the exchange rate volatility but rather by other factors such as infrastructure constraints, policy inconsistency, institutional weakness, corruption, etc.
Therefore, it can be concluded that the volatility of the exchange rate in Zimbabwe has had both positive and negative effects on its trade performance and competitiveness depending on the context and circumstances. To enhance its trade potential and resilience, Zimbabwe needs to adopt a stable and flexible exchange rate regime that can accommodate external shocks and internal adjustments. It also needs to implement sound macroeconomic policies that can maintain low inflation, fiscal discipline, monetary stability, debt sustainability, etc. Furthermore, it needs to improve its business environment that can foster trade facilitation, investment promotion, diversification enhancement, innovation stimulation, etc.
References:
- Brixiova Z. & Ncube M. (2014). The Real Exchange Rate and Growth in Zimbabwe: Does the Currency Regime Matter? Working Paper No. 210 African Development Bank.
- Alzyadat J., Abuhommous A., Alqaralleh H., & Bonga W.G. (2021). Stock Exchange Fungibility and Exchange Rate Volatility in Zimbabwe. International Journal of Economics & Business Administration.
- Bonga W.G., Chimwai L., Siyakiya P., & Choga I. (2021). Stock Market Volatility in Zimbabwe Stock Exchange during Pandemic Period. Dynamic Research Review.
- Chikoko L., Mlilo M., & Kapingura F.M. (2019). Exchange Rate Misalignment and Economic Growth: Empirical Evidence from Zimbabwe. International Journal of Economics and Financial Issues.
- Moyo C. & Khobai H. (2018). The Relationship between Trade Openness and Economic Growth: The Case of Ghana and Nigeria. International Journal of Economics and Financial Issues.
