ECONOMIES and currencies do not like uncertainly, they both lose direction and can fluctuate wildly.
The current post Brexit vote uncertainty in the UK economy can be compared to Zimbabwe’s post 2013 elections. The election results came as a shock to the extent that the victors did prepare for post-election responsibilities.
For the UK, it feels like the Brexiteers did not expect to win. It seems as if they had not thought about what they would do if they won. As a result, the post-Brexit vote UK economy is in limbo; the new government has no idea where the economy is going to land and the falling value of the pound sterling is reflecting the uncertainty.
For a long time, the UK pound sterling has been a symbol of economic stability. A lot of people considered a strong pound as one of the main positives of the UK as a destination to migrate to.
In recent times the strength of the Sterling has only been surpassed by the Kuwaiti Dinar, Bahraini Dinar and the Omani Rial. This position is now at risk because Brexit vote uncertainty has caused the pound to tumble to levels not seen in recent times. The value of the pound Sterling against the US dollar is at its lowest since the 1980s.
As the Sterling value has dropped, Zimbabwe’s UK based diaspora has been hit hard too, unless if they had hedged (bought exchange rate insurance) their Sterling. A fluctuating currency affects the costs of imports and exports in opposite ways.
A local currency whose value is falling against other currencies favours exporters as they get more foreign money for their exports and makes it more expensive to import because one needs more of the local currency to purchase the same goods.
On the other hand, a strengthening currency makes imports cheaper and exports expensive to countries that they are selling to. While UK exporters are laughing all the way to the bank celebrating the weak Sterling dividend, Diaspora remittances to Zimbabwe that need the pound to buy dollars have become much more expensive.
The value of the pound sterling has dropped by about 25% since December 2015 and this means that Zimbabweans who have a commitment to send a set amount of US dollar to Zimbabwe need a lot more pounds to transfer the same amount of dollars as they did in December.Advertisement
In December 2015, one would have needed about £66 to transfer US$100, today someone needs £82 to transfer the same US$100, an increase of £16 in less than a year. The chart below shows the monthly average pound sterling one needs to purchase $100 since December 2015.
What makes the sterling itch worse is that there is no sign yet that policymakers are anywhere close to deciding what post-Brexit UK look like. The currency pain caused by the aftershocks of the post-Brexit vote ensue.
Unfortunately, the softening pound is also bad news for tourists from the UK planning to visit Zimbabwe. The soft pound makes US dollar based Zimbabwe a very expensive destination.
UK based Zimbabweans planning to go home for Christmas will feel the pain as the sterling will not stretch as far as it used to. Some forecasts are suggesting that the ongoing post-Brexit vote uncertainty means that sterling is likely to drop further possibly to one pound for one dollar.
David Mutori (FCCA MBA MSc) is a Zimbabwean based in the UK. He writes in his personal capacity and can be contacted on firstname.lastname@example.org.