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

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.