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Manufacturing Sector Hit Hard By Strong Dollar

July 14, 2014

Zimbabwe's manufacturing sector has been hit hard by the sharp appreciation of the US dollar, the main currency in use, with the International Monetary Fund estimating an over-valuation of the country's exchange rate of between 17 percent and 24 percent. This according to the IMF makes the economy highly uncompetitive against imports.

According to the full IMF Article IV Concluding Report, the CPI-based real effective exchange rate appreciated by 9 percent between June 2012 and December 2013.

"The depreciation of the rand has been the main contributor to the appreciation of Zimbabwe's REER (with additional pressure coming from the depreciation of the kwacha in early 2014). This has brought pressure on import-competing businesses, adding to the difficult environment."

South Africa accounts for around 42 percent of Zimbabwe's imports and 76 percent of exports. Generally, Zimbabwean manufactured products endure high production costs, rendering them poor in terms of price competitiveness against imports. According to a previous study, the cost of raw materials and labour accounts for 60 percent of total production costs.

As a result of the appreciation in the REER, the Ministry of Finance in its first quarter report warned that the current deflationary environment will persist.

Overall IMF is now projecting GDP growth of 3 percent for Zimbabwe, down from the initial projection of 4 percent made in November 2013. Generally economic activity in the country sprang back strongly, and the economy averaged 10,5 percent growth during 2009-2012.

However, the financial system over-expanded during the rebound, developing fragilities that now represent a drag on the economy. Moreover, the rebound phase has ended, and the IMF said Zimbabwe now needs to find durable drivers of growth.

The IMF said there was need for Government to fully implement their revised fiscal plan for 2014. Government has identified revenue measures and expenditure cuts, and plans to roll over a fraction of domestic maturities falling due. If fully implemented, these measures could result in a budget surplus of approximately 1 percent of GDP in 2014.

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Source: AllAfrica

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