The Sunday Mail
Dr Ranganai Gwati
Below is the third and final instalment of academic Dr Ranganai Gwati’s argument on why Zimbabwe should exclusively adopt the South African rand.
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The Government of Zimbabwe can structurally devalue the Civil Service wage bill by converting US dollar-denominated pay into rands at a rate much lower than the current market rate.
For example, a conversion at USD1 to R10 or thereabouts should be plausible, saving Government about R5 at the current exchange rate.
This devaluation is possible because though the rand has lost over 50 percent of its value over the past 12 months, prices and labour costs in the rand monetised area have barely moved.
This structural devaluation will force the private sector to follow with wage adjustments as Government is the biggest employer in the country.
We have already witnessed Econet – one of the biggest and most successful private sector employers — implementing this wage reduction which resulted in better profits and less labour cuts.
Resetting wage rates is critical for the new Rand economy to be regionally competitive.
Ideally, Government would want wage rates in Zimbabwe to be lower than the regional averages to give Zimbabwe’s industry room to grow and catch up.
The country is awash with university graduates, and finding reasonably cheap labour should be possible.
Hypothetically, wage rates that are 75 percent to 85 percent of regional averages should be optimal to maintain reasonably sophisticated labour that can give Zimbabwean industry the impetus it needs to be competitive (that is, wage rates should be lower than South Africa, but high enough to stop the brain drain.
Few people are willing to leave their country for 15-25 percent pay increase in a foreign country. Once that premium goes above 50 percent, the decision to migrate becomes much easier).
The same structural devaluation should be applied to Government-offered services like electricity, water, council rates, vehicle registration, school fees, police fines etc.
The cascading effect of these lower rates will help drive consumption as households will have more disposable income, some of which will be coming via Diaspora remittances.
From multi-currency to rand
Resetting prices and wages alone cannot work if Government does not enact policies that help industry to recapitalise, restructure and become regionally competitive.
Such Government policy can come in the form of:
(i) energy procurement and subsidy guarantees during a ramp up period (transition to rand) that can run from 12 to 36 months depending on the industries;
(ii) temporary tariffs on imports to protect vulnerable industries as they adjust structurally during the ramp up period; and
(iii) temporary tax breaks.
Such tariffs, taxes and subsidies need to be carefully crafted and enforced so that the benefit to the consumer can be measured over time and players that abuse the facilities can be weeded out.
It becomes a waste of resources for Government to protect industries that are unwilling to adapt and be competitive.
Such subsidies to uncompetitive industries are as good as taking money from the consumer’s pocket and giving it to capitalists, shareholders and industry managers.
When thinking about temporary subsidies to local firms, it is worth noting that protecting local industries can potentially create a huge moral problem.
“Infant” industries protected from foreign competition by tariffs with the noble goal of allowing them to find their feet are less likely to have the incentive to figure out ways to be efficient and be internationally competitive and, hence, might remain in the infantile state forever.
Infant industries should be willing to absorb some initial losses in the short run, with the goal of attaining long run profits.
Government should focus more on investing its scarce resources in training the labour force and improving the institutions and structures that strengthen the international competitiveness of local industries and promote ventures that add the highest value to the Zimbabwean economy.
During the transition period, it is expected that Government will run budget deficits as resources are directed to implement policies mentioned above.
This deficit should be temporary, as the rand economy will give authorities a bigger taxation base from improved consumption and a broader formal sector.
Government can work with international organisations and South Africa to help manage the transition and implementation of the Rand economy through temporary budget support.
Building USD reserves
Swapping the USD for the rand will give Government room to start building USD reserves from Diaspora remittances.
Under the current multi-currency regime, USD remittances are passed directly to the recipients, and used in an economy where the real value is undermined, thereby having a reduced impact on the economy.
Rand remittances from the Rand Common Monetary Area (South Africa, Namibia, Lesotho and Swaziland) are used to buy USD in order to pay for local services, thereby devaluing their real value.
Rands earned by Government from customs and trade are used by Treasury to buy USD to meet the USD denominated civil service wage bill, which also results in value loss due to falling exchange rate and general devaluation of the USD in the Zimbabwean economy.
As I argued previously, a Rand economy will force Zimbabwean prices to converge to regional averages, giving Rands remittance greater value and impact on the economy as the Rands can buy more goods.
The use of the rand would also mean Government can reduce wastages from Rand revenues from customs and trade as they will be used to meet Government rand expenditures.
Excess rand revenues can be used to buy USD remittances, allowing authorities to naturally build on USD reserves from these remittances.
Soft landing
I should emphasise that dollarisation is like taking a bitter pill with serious side effects. It’s hard to swallow (giving up your own currency), but it’s the only viable cure for the disease (hyperinflation) and it’s side effects (deflation, loss of monetary policy etc) if not managed well, could also be fatal.
Dollarisation should thus be viewed as a temporary, costly and easy fix to a long-term problem.
Government should be thinking of the long-term end game to this national scourge.
And as it works to get the economy up and running again, policy should be focused on how it plans to restore confidence and shake off the stigma and shame of dollarisation.
No country can realise its full potential under the shackles of dollarisation.
Economic targets must be established at which point a soft reintroduction of the Zimbabwe dollar can be initiated.
For example, targets may include lowering the unemployment rate, increasing factory utilisation, budget deficit and foreign currency reserves.
Once these targets are met, the approach will be to reintroduce the Zimbabwe dollar pegged to the rand, and allow the two currencies to be used freely side-by-side until consumers have gained enough confidence, at which point Government can slowly mop up rands from circulation, leaving the Zimbabwe dollar to stand on its own.
Zimbabwe’s proximity to South Africa, coupled with huge trade, and synchronised economic cycles, makes the rand the perfect choice for effective dollarisation, with the long term view of a soft landing back to a Zimbabwe dollar.
The landing period can be as long as five years or more depending on the choice and strength of policies applied.
While hitting the economic targets may take fiscal discipline and cooperation from foreign governments and international institutions, restoring confidence should be relatively cheap and 100 percent homegrown.
A starting point will be for the governing party to clearly spell out and adhere to policy doctrines regarding hot issues like indigenisation and land ownership which can allow for economic stakeholders to make meaningful long term planning and risk assessment.
Conclusion
I have used basic economic analysis to argue that Zimbabwe would be better off officially abandoning the multi-currency exchange regime.
I further argued that the currency that Zimbabwe should adopt is the Rand. My approach emphasises “general equilibrium-type” analysis in which I take into account important characteristics of the Zimbabwean economy.
The main characteristics I consider are Zimbabwe’s huge informal sector and a large dependence on remittance inflows, especially from South Africa.
Adopting another country’s currency and a huge informal sector combine to make monetary and fiscal policy inaccessible as policy tools to the Government of Zimbabwe.
The loss of these two tools makes it even more important that Zimbabwe chooses the optimal anchor currency.
It also makes it equally important that Government implements policies that encourage investment, as those are now the only tools available to stimulating the Zimbabwean economy.
One of the most popular introductory economics textbooks is by N Gregory Mankiw.
The book starts with a discussion on the “10 principles of economics” which provide a unifying framework for economic analysis.
Three of these principles are:
◆ The cost of something is what you give up to get it
◆ People respond to incentives
◆ A country’s standard of living depends on its ability to produce goods and services.
These principles accurately summarise my major points in this article. If there is no production of goods and services in Zimbabwe, the current economic quagmire will persist.
Government policies should be carefully designed so that economic agents are given the incentives to invest in Zimbabwe, work in Zimbabwe, buy Zimbabwean-produced goods, send remittances to Zimbabwe, and join the formal sector, among other things.
Finally, policy makers should carefully evaluate the potential costs and benefits of their policies. All potential sources of dead-weight loss should be carefully considered.
Dr Ranganai Gwati is Assistant Professor of Economics at Benedict College (South Carolina). He holds a BA in Mathematics & Economics from Reed College (Oregon) where he got the Meier Award for “distinction in the Reed undergraduate economics curriculum”, and Master’s and PhD degrees in Economics from the University of Washington (Seattle), specialising in International Finance. At UW, he also obtained a Graduate Certificate in Computational Finance. Dr Gwati acknowledges contributions from FS Nyangore (Rugoyi, Rusape).
