‘Production crisis, not currency crisis’

13 Aug, 2017 - 00:08 0 Views
‘Production crisis, not currency crisis’

The Sunday Mail

Tawanda Musarurwa
With the manufacturing hamstrung by antiquated machinery, inadequate infrastructure and high borrowing costs, among other impediments, University of Zimbabwe Economics lecturer Dr Pheneas Kadenge says the country is facing a “crisis of production”, which may fuel inflation.

“The issue we have here is not a currency crisis, but a production crisis. Let me illustrate this: money does not make us richer by having more money, especially when it’s domestic money, because what money does is it entitles you to goods and services.

“So if you increase your entitlement to something that is falling – production is falling – you are increasing your entitlement to it. What will eventually happen is that prices will rise and you end up with high inflation,” he said.

And this might lead to demand-pull inflation – a trend where rising aggregate demand outstrips aggregate supply.

Zimbabwe National Statistics Agency figures show that while year-on-year inflation topped 0,75 percent in May, it slipped to 0,31 percent in June.

The Reserve Bank of Zimbabwe forecasts average annual inflation will rise to between two and three percent by the end of 2017.

“As central bank governors in the (Sadc) region, we have agreed that the range of conversion should be between three and seven percent. If you are below that, you cannot grow. Zimbabwe is still within the Sadc benchmark,” explained RBZ chief Dr John Mangudya at a business symposium in Harare on July 12.

Though Zimbabwe tamed hyperinflation in 2009 when it switched to the multi-currency system, Dr Mangudya says the trend was never going to be sustainable.

“The problem started when we dollarised … the foundation wasn’t strong enough. We built dollarisation on a very weak foundation. The structure wasn’t right. We opened up the economy in total as if this economy was also opening up for foreign finance in total – it was a contradiction

“But it’s now water under the bridge. But as a policy analyst, the critical question is to ask is how do we reduce imports and increase exports?” he posed.

Dr Kadenge says Zimbabwe could have benefited from “full dollarisation” in 2009.

“Full dollarisation would have its advantages in the sense that with full dollarisation Zimbabwe would benefit from what is called seigniorage, the resources that are derived by the monetary authorities from printing money we would get a share of it, which we are missing now because we do not have a formal agreement, we are just using their currency.”

But fully adopting the US dollar would necessarily involve a formal relationship between the RBZ and the US Federal Reserve – something unlikely considering that Washington imposed illegal sanctions on Zimbabwe more than a decade ago.

And even if the economy where to fully dollarise, productive capacity would still need to grow.

To put Zimbabwe on a sustainable growth path, the RBZ is pushing for a cash-lite society, promoting export of goods and services, increasing production and productivity, and promoting financial inclusion and fiscal consolidation. Monetary authorities are also pushing for the re-organisation of State enterprises and parastatals.

But Dr Nyasha Kaseke, lecturer in the UZ Department of Commerce, opines that adoption of South Africa’s rand will improve the currency situation.

“Industry has been calling for the adoption of the South African rand, but no one has suggested invoicing in rands. They should just invoice in rands and they will see how the market will react.

“It is a mathematical argument which will not yield any positive spin-off as long as we are coming from a low production base and high cost drivers background.

“For example, assuming we have commodity X going for US$10 and switch to the rand today at a rate of US$1:R13, 20, our new price for commodity X would be R132. In reality, we would not have changed anything to our favour.

“What it means is that South Africans will still see Zimbabwe’s products as very expensive regardless of the fact that we are using the rand or dollar,” said Dr Kaseke.

“We now have to look at the strategic industries, for example, CSC, Zisco. For instance, the removal of Zisco from normal production system resulted in Hwange (Colliery Company) going down, and even the reinforcement steel that we are currently using, we are importing.

“Another key area to focus on is on productivity in US dollar terms, comparing with our regional peers.”

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