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IMF researcher warns Zim over overvalued currency
The Zimbabwe Independent
Febraury 10, 2006

http://www.theindependent.co.zw/news/2006/February/Friday10/4163.html

AN International Monetary Fund (IMF) researcher has made a poignant warning to Zimbabwe against an overvalued currency, saying this had eroded the competitiveness of the country's exports and propelled the parallel foreign currency market.

The warning, contained in a working paper titled Zimbabwe's Export Performance: The Impact of the Parallel Market and Governance Factors by the IMF Africa Department's Sònia Muñoz, said Zimbabwe's exports had been affected by the overvalued exchange rate.

Zimbabwe, which late last year made significant moves to liberalise the exchange rate by re-introducing the interbank market, moved to curtail currency movement on the official market by ordering that any value losses be volume-based.

This has hamstrung movement of the currency on the official market, whose trade volumes have failed to surpass $1 million daily ever since an announcement of the volume-based currency adjustments, in the process pushing parallel market rates up.

"The evidence gathered in this paper suggests that the overvaluation of the official exchange rate has had a cost for Zimbabwe in terms of competitiveness," Muñoz said in the report. "Exports, in particular, have been affected by the overvaluation of the exchange rate. The most interesting result of this study is the negative relationship found between the parallel market rate depreciation and the value of legal exports."

Muñoz said policies that gave rise to a widening of the parallel market premium (such as maintaining an overvalued exchange rate and lax monetary and fiscal policies) would, other things being equal, adversely affect the performance of "official exports".

"Conversely, exchange rate unification and tight macroeconomic policies can be expected to improve export performance," Muñoz said.

Muñoz said export performance was crucial to the Zimbabwean economy since trade constituted a substantial share of GDP and exports were the main source of foreign exchange for the economy.

In particular, agricultural exports, which had declined dramatically in recent years, had been an important driver of growth in the Zimbabwean economy, given the sector's extensive backward and forward linkages.

The forced expropriation of white-owned farms to landless blacks had therefore affected agricultural production, in the process affecting exports.

The growth rate of total exports was high in the second half of the 1990s, but then turned negative since the early 2000s when Zimbabwe embarked on the policy of forced land seizures. - Staff Writer.

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