OPEN ECONOMY: Solutions in the wrong context

17 Jan, 2016 - 00:01 0 Views
OPEN ECONOMY: Solutions in the wrong context

The Sunday Mail

I suspect that as an economy that went through the shock of hyperinflation, eventually losing our Zimbabwean dollar, we have become highly sensitised to exchange rates.

A conversation without context is meaningless.
This applies generally in social interaction.
However, it is particularly important to emphasise context when constructing economic discourse.
In Zimbabwe, a fault that many business agents frequently expose themselves to is that of advancing vehement arguments whilst ignoring the accuracy of their context.
For instance, it was only a few months ago that a strong US dollar had been identified by many, including prominent industrialists, as an insurmountable impediment to economic growth.
By late last year, talk of internal devaluation had for a moment won supreme space on our economic agenda.
All the dismay in a strong US dollar had been kept within the context of exchange rates hindering our growth prospects.
That context was inaccurate!
Hopefully, over the last few weeks, proponents of this one sided view of a strong US dollar have seen persuasive evidence to the contrary.
The South African rand which was being touted as our next currency of choice has fallen against the further strengthening US dollar.
Irony shouldn’t be missed here. On the very strength of the US dollar, opportunities emerge for Zimbabwean industry to acquire cheaper set up infrastructure, shelf stock and capital equipment of varying industries (well done Minister Chinamasa for that rebate in capital equipment in your budget!).
The lower input costs credited to the strong US dollar can hopefully now be passed along to the consumer too.
In commuter omnibuses nationwide, Governor Mangudya has acquired the status of a prophet as he supposedly had foresight on the falling rand.
So within the context of exchange rates,a strong US dollar can be seen for the time as benefiting both the supply and demand side of the economy, thus stimulating growth.
I suspect that as an economy that went through the shock of hyperinflation, eventually losing our Zimbabwean dollar, we have become highly sensitised to exchange rates.
We now place an over emphasis on exchange rates alone in our economic analyses.
But it must be remembered that currency exchange rates are often relative and largely secondary in influence to other more important macroeconomic fundamentals!
For instance, while the South African Rand is around 1:18 to the dollar, the Japanese Yen has been over 1:100 for more than three years.
This information alone does not give any guidance on their respective economic circumstances nor does it suggest how either country should stimulate growth.
There are more relevant economic fundamentals of greater consequence. Our monetary authorities should be implored to do more to emphasize this comprehension in Zimbabwe.
The RBZ can have a better role in communicating how we should perceive exchange rates in as far they explain our economic circumstance.
The RBZ should step forward and foster an appreciation of economic fundamentals that supersede exchange rates.
As for the aforementioned internal devaluation discussion, it is not entirely misled but it risks being engaged within the same inadequate context.
Rather than focus on exchange rates, internal devaluation should interrogate the structural deficiencies in our economy that hinder internal competitiveness.
When those are attended to, cost and price competitiveness will then improve.
Consistent with finding accurate context,more optimistic light should be shown on our re-engagement with the IMF and World Bank.
It is important to clarify that while the re-engagement with the IMF and World Bank through the Staff Monitored Program has been rightfully criticised for being hasty in contractionary action without offering immediate stimulus for the pain, it can be hailed for its initiatives towards public institution reforms.
Zimbabwe is in need of expedient institutional capacity building. Capacity building is basically modernizing existing institutions and supporting them in forming efficient and competent organizational structures, as well as designing effective methods of management and financial control.
If we are to see economic growth, it has to be facilitated by such institutions.
For instance, for drone technology to enter commercial and recreational sectors, the Civil Aviation Authority of Zimbabwe has to understand the technology, consult informed expert opinion and then craft regulatory frameworks for this product. But they have been slow.
These are the instances when economic growth potential is lost because the respective institutions in charge retain financial, technical and infrastructural deficiencies.
There is significant economic consequence.
Recently, Nigeria became Africa’s biggest economy. In just ten years since 2005, Nigeria’s entertainment industry has grown to account for about five percent of GDP from a situation where it was unaccountable before.
Nigerian institutions did not have mechanisms to efficiently regulate and support the growth of that industry, hence Nigeria was losing out on both tax revenue and formal job creation.
Our public institutions should avoid such occurrence as we urgently need to formalize economic activity and create pension contributing jobs.
This will only occur if respective institutions are equipped with the financial, infrastructural and human resource capacity.
Thus, the re-engagement with the IMF and World Bank under the Zimbabwe Reform Fund is a welcome event with significant economic implications.

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