The Real Exchange Rate and Growth in Emerging Markets: The Case of Zimbabwe

• Author: Zuzana Brixiová,Mthuli Ncube,Zorobabel Bicaba
• DOI: http://doi.org/10.1111/rode.12167
• Published date: 01 August 2015
• Date: 01 August 2015

The Real Exchange Rate and Growth in Emerging

Markets: The Case of Zimbabwe

Zuzana Brixiová, Mthuli Ncube, and Zorobabel Bicaba*

Abstract

Zimbabwe has been facing growth and external competitiveness challenges, as shown by declining shares in

global exports, high current account deficits, external debt and a widening productivity gap with South

Africa. Estimates of the real equilibrium exchange rate reveal periods of sizeable misalignment, both prior

to 2008 and under the current multicurrency regime. Misalignment has an asymmetric impact on growth.

While overvaluation hampers growth, we have not found robust evidence that undervaluation would raise

it. Replacing the multicurrency regime anchored in the US dollar by the South African rand would help

reduce overvaluation and stimulate exports and growth. Under any currency regime, Zimbabwe needs to

implement sound macroeconomic policies and an environment conducive to investment.

1. Introduction

Despite growth acceleration during 2009–2012, Zimbabwe has been among the

slowest growing economies in Africa since 2000. Unclear property rights, a rigid busi-

ness environment, limited access to credit, low capacity utilization, irregular supply of

energy and high electricity tariffs, shortages of skilled labor, infrastructure deficits and

weak governance are key factors constraining growth. This paper examines the role of

another, often overlooked factor, namely the misaligned real exchange rate (RER). It

also discusses the currency regime’s role in bringing the economy on a high and sus-

tainable growth path.

After its economy collapsed in 2008, Zimbabwe opted for a multicurrency regime

anchored de facto in the US dollar. This stopped the hyperinflation and the currency

devaluation spiral, laying foundations for economic recovery. Recently, some analysts

have even proclaimed that Zimbabwe is back on the emerging market investment

map (d’Huart, 2014). Still, a closer look at the economic performance reveals chal-

lenges and open issues.

A key issue is whether the overvalued currency has hampered external competi-

tiveness and growth. Concerns about external competitiveness have emerged given

the country’s declining global export shares, trade deficits and concentration of

exports to South Africa. The role of RER misalignment in the 2008 currency crisis

was also underscored in Ndlela (2012) and Masunda (2011).

This paper examines (i) the extent of currency misalignment, including after 2008,

and (ii) its impact on Zimbabwe’s growth. The RER does not feature in most growth

* Brixiová: African Development Bank, International d’Abidjan CCIA, Avenue Jean-Paul II, 01 BP 1387,

Abidjan 01, Côte d’Ivoire. E-mail: z.brixiova@afdb.org. Ncube: Blavatnik School of Government, Univer-

sity of Oxford, Oxford, OX1 4JJ, UK. Bicaba: African Development Bank, International d’Abidjan

CCIA, Abidjan 01, Côte d’Ivoire. The authors thank Steve Kayizzi-Mugerwa, Mateus Magala,

Mary Monyau, Jan Babecky, Daniel Gurara, Basil Jones, Pietro Toigo and Erik Klok for helpful comments

and discussions. The views expressed are those of the authors and do not necessarily reflect those of the

African Development Bank.

Review of Development Economics, 19(3), 564–576, 2015

DOI:10.1111/rode.12167

© 2015 John Wiley & Sons Ltd