Strengthening dollar spells tough times for Industry

The strengthening greenback is likely to open local industry to increased competition from cheap imports, industrialists and analysts have warned.

The United States dollar has been bolstered by various global crises and money is flooding into US markets resulting in a strengthening dollar, with the currency now at a 20-year high against a basket of currencies.

Since the Russia-Ukraine conflict began in February, the US dollar has risen by 10 percent against the Chinese yuan and same percentage points against the South African Rand.

The context for the dollar’s strengthening position is a global inflationary crisis and rising interest rates which have prompted the US Federal Reserve to increase interest rates.

The move to hike interest rates has reassured investors to convert their money US dollars for US dollar assets and further inflating the price of the greenback.

While this is good news for the country’s importers of raw materials and equipment it comes with increased competition from imports of finished goods.

According to United Refineries Limited (URL) chief executive officer, Busisa Moyo (pictured right), a strong currency encourages imports while a weaker currency encourages exports.

“When you are surrounded by weaker regional currencies and you are operating with a strong dollar your exports potentially become more expensive and your neighbours then can really out-compete you on price because they have a softer currency.

There is, however, a flip side as a stronger currency than trading partners will help import capital equipment much cheaper.

On Tuesday this week, the Rand was 17.58 to the dollar while the Kwacha was at 15.58 to the greenback. The Chinese yuan for the first time in years touched 7.10 to the dollar. This means imports from these countries would be cheaper.

“If you wanted to take a holiday for a US$1,000 a month ago you would have needed more USD than you do today because a Rand is that much weaker so you will start to see tourism in SA.

The hotels will be much cheaper than the ones in Zimbabwe which we are already seeing like in the falls (Victoria Falls) if we compare the rate. So tourism is one sector that always feels the brand almost immediately,” said Moyo.

Ëconomic analyst, Dr Alfred Mthimkhulu, agreed and said a stronger dollar hurts exports.

“In our case it’s worse because it makes us less competitive because we become an expensive place for industry,” he said.

He said if one’s salary is in US dollars it is now more in Rand and firms will have to reflect on whether to operate in Zimbabwe or in a cheaper place, “South Africa in this case”.

“This is exactly why dollarisation is not in our interest at all. We have zero control on the behaviour of the US dollar and yet its impact is significant,” said Dr Mthimkhulu.

Economic analyst Victor Bhoroma, however, sees things differently.

He says since the US dollar dominates international transactions and Zimbabwe is a price taker on international trade, “a stronger US dollar makes imports more expensive, thus inducing imported inflation”.

“Secondly, it (strengthening dollar) makes repayments for arrears or dollar-denominated debts contracted by Zimbabwe more expensive to service. Thus increasing the risk of default.”

Zimbabwe has a huge debt overhang running into billions of US dollars.

“Lastly, foreign investment values and capital can be marginally affected as investors find it hard to raise the greenback or to repay higher interest rates on the Dollar,” Bhoroma said.

A strong US dollar is also usually not good news for commodities like gold that are priced in dollars, because a stronger dollar means that commodities become relatively more expensive everywhere outside of Zimbabwe.

Zimbabwe’s single biggest export is gold.-ebusinessweekly