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Dr Bongani, Ngwenya
Preamble
OF late there have been suggestions that Government and the business community should urgently come up with a bold once off mechanism to reduce production costs as part of measures to stimulate economic growth and enhance domestic product competitiveness.
The latest to say that is the Confederation of Zimbabwe Industries president Mr Busisa Moyo.
The CZI president laments that, given suppressed economic growth due to high costs of production and difficulties in accessing long term borrowing for recapitalisation, the country has no option but to swallow a bitter pill of cutting down costs if it is to survive.
Yes, the CZI president’s proposal is in line with the internal devaluation economic and social policy measure, which is premised on restoration of international competitiveness of a country through lowering production costs without reducing the value of the exchange rate.
His proposal is coming in the light of the fact that the projected 2,7 percent growth rate for 2016 seems quite unattainable or unlikely due to the biting effect of drought (El Nino) already, which has crippled the expected performance of the agriculture sector.
It is clear that the country is going to record a poor harvest this season.
On the other hand, declining international market commodity prices have worsened.
This has impacted negatively on export drivers mainly in the extractive industries, that is, mining.
Internal devaluation as socio-economic policy
Internal devaluation is an economic and social policy measure and a potential option whose main aim is to restore the international competitiveness of a country that has lost that international competitiveness, mainly by reducing the cost of labour, direct or indirect. Literature suggests that the concept of internal devaluation was first muted in the early 1990s, by Finland and Sweden when they were considering the opportunity of joining the Euro Union.
A number of European countries such as Lativa, Ireland, Greece and Lithuania adopted internal devaluation policies, albeit with mixed results. The policy did not work for most of these countries. In addition to cutting cost of production, internal devaluation can be applied as remedy for a country in financial trouble, that is, in liquidity crisis, like Zimbabwe. Internal devaluation is also meant to boost the competitiveness of a country’s exports and at the same time curtail imports by rendering them costlier.
The net effect is that, the higher exports and the reduced imports bills would generate some of the financial resources (liquidity) needed to help the country get out of the economic trouble.
For countries such as Lesotho, Namibia and Swaziland that belong to a Customs Union with South Africa, where the South African rand operates as a “currency union”, with a superior monetary policy sovereignty, internal devaluation is not an option. Internal devaluation was employed by several Euro Area Economies at the onset of the global financial crisis — when capital had been flowing into these economies prior to the global financial crisis but a serious capital flight was then experienced during the period of the financial crisis.
Zimbabwe, although not belonging to any currency union, and adopted the multi-currency regime in 2009, apparently is experiencing a similar challenge of financial problems.
Can internal devaluation policy work for Zimbabwe? — a million-dollar question. The challenge is that Government can not influence overall prices and can only rely on substantial restructuring and reduction of civil servants’ salaries bill and voluntary cut on the private sector’s salaries and wages, and eventually a cut on overall producer prices.
In addition, an attempt to reduce the cost of utilities, such as power would be difficult to contend with given the power crisis the country is experiencing.
Such an option could possibly be considered in situation of full capacity power generation and supply.
Companies like Econet for example cut salaries for all employees across the board by 20 percent last year and there are a number of companies operating on flexible working policies in order to cut costs in Zimbabwe. Such tinkering here and there is the only feasible option at the moment, merely as self-correcting measures to manage costs within the depressed or deflationary economic environment.
This is just a measure by Econet and other companies to bring their salaries and wages costs to sustainable levels.
It can not be anything more than that.
The potential limitations of internal devaluation in the Zimbabwean situation
In the absence of a real exchange rate as a result of the absence of a sovereign currency (Zim-dollar) there is a structural problem. The real exchange rate is the vital cog in the internal devaluation engine and machinery that is structurally missing.
Dollarisation or multi-currency regime resulted in an implied exchange rate (theoretical) in Zimbabwe which is currently over-valued by an estimated 45 percent against other major currencies in the global market, and particularly against the South African rand, Zimbabwe`s largest trading partner in the SADC region.
Of late there has been a progressive appreciation in the US dollar underpinned by strong economic recovery in the United States of America, with accommodative monetary policy measures adopted by most of the Euro zone countries.
This current nominal appreciation of the US dollar against major Currencies-Chinese, United Kingdom, Japanese, etc. brings with it a multifaceted effect on the implied exchange rate (trickling to Zimbabwe), a phenomenon that continues to negatively impact on Zimbabwe`s export competitiveness, which is largely commodities driven.
In addition to the absence of the real exchange rate, Zimbabwe lost monetary policy sovereignty by adopting multi-currency regime, as a result levers or gears such as “quantitative easing” are an opportunity cost of lack of a sovereign currency — the Zimbabwe dollar.
Surprisingly Zimbabwe has been the only country with a persistent or recurring negative inflation from the time the country adopted multi-currencies or dollarisation.
This development is a deflationary scenario-which could also be expected to obtain by employing the internal devaluation policy or strategy or option suggested by the CZI president.
What it means is that deflation would come natural as a result of internal devaluation policy to decrease production costs.
The million-dollar question is, is the deflation (negative inflation) not the natural internal devaluation that is obtaining as a self correcting mechanism?
What the Zimbabwean situation is requiring
What Zimbabwe needs right now are policies that will not depress aggregate demand any further than it is right now because of the deflationary phenomenon obtaining in the economy, like internal devaluation would naturally do, but stimulate aggregate demand.
The economy needs to move away from or come out of the deflationary situation. A drastic reduction of the civil servants’ salaries for example can certainly minimise current Government expenditure and even improve the fiscal deficit.
However, it has a potential of depressing and suppressing the much-needed aggregate demand in our economy and in turn would further lower the GDP.
The Government needs to institute policies and find ways that would stimulate demand to offset the slack that has been created by deflationary phenomenon-synonymous to a natural internal devaluation.
There is need to implement structural economic reforms such as requisite changes to economic and investment policies to stimulate growth.
It is my strong conviction that without policy reforms, especially investment and economic policy reforms that will attract FDI as well, internal devaluation, I am afraid may not work for Zimbabwe.
In conclusion, internal devaluation so far doesn’t have convincing success stories. Countries that have tried the policy, ie several European countries, non of them can be a living testimony of the merits of the internal devaluation policy.
There are more of structural economic problems bedeviling our economy, at the moment, than the then financial crisis that was experienced by European countries that tried to internally devalue.
This renders the policy almost not an option for Zimbabwe at the moment. It has also a potential of being a political misfit.
Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business [email protected] or [email protected]
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