Govt urged to adjust domestic prices

Livingstone Marufu
Reserve Bank of Zimbabwe Governor Dr John Mangudya has urged the public and private sectors to continue reducing prices to enhance local competitiveness.
The consumer price index, which measures the price level of consumer goods and services purchased by households, first recorded negative growth in February 2014 when the country’s annualised inflation slid to -0,49 percent from 0,41 percent a month earlier. August’s figure was recorded at -2,77 percent.
The RBZ insists that Zimbabwe is not going through deflation but rather disinflation, a phenomenon where prices are self-correcting. In a speech read on his behalf at the inaugural Zimbabwe Economic Review and National Competitiveness Conference in Harare last week, Dr Mangudya said there was need for further fiscal and internal devaluation for the economy to be competitive.
“The only recourse to improve competitiveness in the country is to implement what can be referred to as ‘fiscal and internal devaluation’, which is an alternative mechanism to mimic the effects of nominal exchange rate devaluation,” he said.
Fiscal devaluation involves reducing income taxes, increasing value added tax on imports, increasing efficiency in Government operations, and other fiscal austerity measures.
“Increase in VAT on selected imports is done to discourage consumption of imported products while encouraging production and consumption of local goods. Countries faced with the same scenario such as Lativia, Argentina, Greece and others have managed to restore competitiveness through a number of fiscal austerity measures.
“The case of Greece is particularly incisive in the sense that the country, like Zimbabwe, is using the euro and has no option to use the exchange rate mechanisms to address the domestic imbalances.
“The country has therefore focused more on internal devaluation measures as a means of restoring competitiveness,” he said.
Internal devaluation involves reducing the cost of doing business to improve productivity and competitiveness.
“A recent study commissioned by Government has identified major cost drivers in the economy, including labour costs; power charges and shortages; high costs of funds, taxation, trade tariffs, and high transport costs among others. Government is already addressing some of the high costs emanating from the public sector.
“Some of these measures include a comprehensive review of the labour legislation; lowering of electricity tariffs for selected producers such as chrome miners; and is embarking on a wide ranging fiscal reform measures under the Staff Monitored Programme.
“Government is also implementing a number of energy infrastructure projects, aimed at increasing electricity generation, improving energy efficiencies and better manages utilisation and distribution. Government has also allowed more independent power producers (IPPs) to invest in the energy sector, as well as in alternative sources of energy such as solar and wind,” explained Dr Mangudya.
The RBZ is advocating differential interest rates, with lower rates applying to productive borrowers. The central bank is also urging financial institutions to allocate more credit to productive economic sectors to boost production, reduce the need for imports and enhance competitiveness.