The Sunday Mail
THERE seems to be consensus among policymakers, the IMF and World Bank, and market watchers on the need to internally devalue the US dollar to boost competitiveness.
Proponents of internal devaluation also tend to hold similar views about its key tenets.
To them internal devaluation involves the reduction in general price levels across the whole economy, starting with the cost of production to the price of the final products and services.
IMF estimates that the US dollar is about 45 percent overvalued in Zimbabwe, which makes it a high-cost economy.
It is also believes that, because of the overvalued US dollar, labour, together with other factors of production is overvalued in Zimbabwe compared to the region.
Given the dollar’s dominance in Zimbabwe, this has had negative ramifications on the country’s international competitiveness, which weighs down on its efforts to rebalance the economy towards more exports and reduced dependence on imports.
Before dollarisation, Zimbabwe could restore competitiveness through currency devaluation.
By devaluing its currency, Zimbabwe could make its exports cheaper relative to the world and, concomitantly, support its export drive.
This option is no longer available in the post dollarisation era; thus, the need to internally devalue the US dollar.
In a dollarised economy, sustainable growth will be externally driven mainly through higher levels of exports and inflows of international capital.
Likewise, such an economy’s liquidity situation largely depends on its external position, mainly the trade balance.
Zimbabwe’s current liquidity challenges are mainly a result of negative trade balance necessitated by huge dependence on imports against an unsupportive export base.
However, the fact that Zimbabwe, which is ranked number 124 out of 185 countries on the Global Competitive Index, uses the same currency as the US, which is ranked third, demonstrate the urgency of working on the country’s competitiveness.
This situation is exacerbated by the fact that the US dollar, which has been in the throes of a bull run since 2012/13, continue to strengthen against a basket of other international currencies.
This, coupled with the fact that South Africa, which is Zimbabwe’s major trading partner, is currently facing currency rout — similar to a number of emerging countries’ currencies – may last for a long time, makes internal devaluation more urgent than ever.
However, it seems that the touted approach to internal devaluation is too simplistic, too mechanical and thus divorced from the workings of price mechanisms in Zimbabwe.
Reducing the country’s cost structures and prices there from is not as mechanical as some policymakers and analysts tend to suggest.
Others groups like the CZI have taken the simplistic view that Government should legislate a 30 percent reduction in wages across the whole economy so as to reduce the cost of production and thus increase the country’s competitiveness.
In proposing a 30 percent reduction in wages, the assumption is that this would translate in a commensurate reduction in the general price levels in the country.
This may not be the case because there are other key factors which influence the country’s price outcomes, some of which are outside a business’ control.
In my view, suggested price reduction should not be selective to one factor of production only. There is need to review the prices of all factors production and lobby instead for a reduction of the same.
There is also need to take into account some qualitative issues that go into the country’s pricing outcome, which are difficult to place a monetary value on.
Consideration should be made on both qualitative and quantitative issues, which affect the country’s pricing models.
In an ideal world scenario pricing largely depends on the cost of factors of production, mainly land, capital, raw materials, technology, public utilities such as electricity and water and the state of technology.
Cost-based pricing, which involves levying a mark-up on the cost out-turn from these factors of production, is the dominant pricing approach in Zimbabwe.
In most cases, wage demand, rentals and interest rates are based on need and not productivity. This is not the best pricing approach in a competitive global economy.
The country needs to move towards productivity-based pricing where factors of production are rewarded according to the output produced.
This is arguably the thrust of internal devaluation.
Whilst the prescriptions of internal devaluation may be mechanically sound, they seem to take less consideration on important qualitative issues that are weighing down the country’s pricing at the moment.
These include the corruption, corporate governance deficiencies, misappropriation of funds among other economic vices that have become rampant in the business world.
Whilst it may be difficult to quantify the monetary effects of these economic vices, they have remained a significant contributor to the cost of doing business in Zimbabwe and hence the country’s competitiveness.
Unfortunately, efforts to claim down on such damaging activities have not been successful as yet.
This is why even the locals are externalising money (about US$2 billion in 2105) out of the country and not investing in Zimbabwe.
It may not be surprising that the wave of labour rationalisation, which was necessitated by the July 17, 2015 Supreme Court ruling, may not have resulted in significant gain in competitiveness. Arguably so, because, as highlighted earlier, there are several factors influencing Zimbabwe’s competitiveness.
Key among them is the poor state of the country’s infrastructure, exorbitant costs of utilities and obsolete technology, all of which continue to weigh down on the cost of production.
There is, therefore, need to seriously deal with these economic vices.
Like in China, a serious reform programme to rebalance the economy towards more production and exports whilst dealing with economic adversaries such as corruption may be the starting point. Without this we can change our currency systems hundred times without any success.
It is time to act on competitiveness and everyone should pitch in and play ball.
Persistence Gwanyanya is an economist, banker, and member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691
