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AT the height of Zimbabwe’s economic crisis, five years ago, the country adopted the multi-currency regime anchored on the US dollar. The objective was to stabilise the economy and establish a credible nominal anchor in low inflation conditions. The replacement of the Zimbabwean dollar by the multi-currency system brought hyperinflation and the currency devaluation to a halt, laying the foundation for economic recovery.
The average annual inflation between 2009 and 2013 was 3,3 percent, while the real gross domestic product grew on average of 8 percent a year.
While it may be tempting to consider these outcomes a success, a closer look at the overall economic performance reveals a number of challenges.
One of them is external competitiveness and the extent to which an overvalued currency has contributed to the sluggish growth. Concerns about the limited external competitiveness have prevailed for some time, given the country’s declining global exports, widening trade deficits, and high concentration of exports to South Africa.
According to the Reserve Bank of Zimbabwe’s monetary policy statement valuable lessons from Greece and other Euro-zone countries that have been struggling with debt obligations on account of loss of external competitiveness, are instructive to the country. In particular, loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness has brought to the fore the need for fiscal and internal devaluation as viable policy options.
Broadly, internal devaluation entails that a country that cannot devalue its nominal exchange rate like Zimbabwe, can gain competitiveness and promote export performance through streamlining domestic costs of production. Measures to enhance competitiveness through reduction in production costs amount to a depreciation in the real exchange rate in a manner that is promotive of exports.
This is particularly important as Zimbabwe’s implied real effective exchange rate is currently over-valued by an estimated 45 percent. This largely reflects on the progressive appreciation in the US dollar underpinned by strong economic recovery in the US and accommodative monetary policy measures adopted in most Euro-zone countries. As such, the nominal appreciation of the US dollar against major currencies has had concomitant effects on the real effective exchange rate, a development that has continued to undermine the country’s export competitiveness.
Under the multiple currency system, Zimbabwe cannot effect nominal exchange rate adjustments to promote export competitiveness. In this regard, fiscal and internal devaluation become potent tools at the authorities’ disposal to influence export competitiveness.
With South Africa being the largest trading partner, Zimbabwe could benefit from implementing internal devaluation (and in particular contain wage costs) and accelerate structural reforms to correct current overvaluation of bilateral real exchange rate with South Africa. Some analysts have suggested that Government should consider replacing the multi-currency regime (anchored on US dollar) with the South African rand. Such reforms would help prevent major future real exchange rate overvaluations, reduce transaction costs, improve price transparency, and stimulate growth and the agricultural sector.
Introducing the South African rand could generate benefits in terms of transaction costs, credibility of monetary policy, regional integration and the exchange rate broadly aligned with its equilibrium value.
Given the absence of devaluation of the exchange rate as a policy tool, the country would also need to rely more on ‘internal devaluation’ through containing the wage bill to maintain real exchange rate competitiveness. Putting in place an enabling investment framework to support competitiveness and job creation is also critical.
From the fiscal policy viewpoint, ‘internal devaluation’ measures have already been hinted by the Minister of Finance and Economic Development in the recent fiscal policy review.
The minister hinted that his ministry would work to reduce the civil service wage bill from 83 percent of total budget to around 40 percent. From the monetary policy point of view, the call by the monetary authorities for reduction of interest rates is again a good step in the right direction.
Government is also addressing the investment environment and cost of doing business through the development of the National Competitiveness Report and the establishment of the national competitiveness commission. The National Competitiveness Commission will be responsible for undertaking comprehensive research and benchmarking the country’s competitiveness with other countries as well as coming up with recommendations aimed at addressing the high cost of doing business.
The national competitiveness report will provide a national benchmark of competitiveness with respect to its peers in the region and global partners thereby opening a window for debate on areas which must be addressed in order to improve national competitiveness. The Zimbabwe national competitiveness report, the first of its kind is expected to be launched in October this year.
Online Reporter