malvernmugadzikwa
Munyaradzi Hwengwere
WE are surely caught between a rock and a hard place.
The growing use of the United States dollar in the economy is likely to return Zimbabwe to full dollarisation, while depreciation of the Zimbabwe dollar may precipitate a total collapse of the local currency.
Both options seem detrimental to Zimbabwe’s developmental aspirations.
Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya says 70 percent of the total deposits in local banks are in US dollars. This connotes preference for the American dollar as a store of value.
The RBZ believes Zimbabweans are so afraid of reliving the experiences of the 2008 hyperinflation era that any slight movement in the exchange rate immediately drives them to ditch the local unit.
Sadly, all indications are that Zimbabwe is not prepared for full dollarisation, nor total abandonment of the local unit.
The reason is simple — We have been there and it did not work, and it will not work again.
Numbers do not lie.
Our trade balance is still in favour of imports. Over the past 10 years, we have accumulated a trade deficit of above US$7 billion. The previous 10 years, we had a deficit of above US$10 billion.
In the first four months of 2023, we were past US$700 million in the negative on imports. In present-day Zimbabwe, our imports are higher than exports.
Put differently, we are currently spending more than we are earning.
Were we a business, we would have been put into liquidation or care and maintenance. In soccer, anyone who concedes more goals than the opposition loses the game.
We are chasing the game.
Full dollarisation is akin to throwing every player upfront when you should be defending your goal. Prudence may be boring but it surely protects one’s interests.
The Zimbabwe dollar depreciated from US$1:$6 in 2021 to US$1 to $5 200 by the second week of June 2023 on the official market.
This has understandably resulted in calls for the abandonment of the Zimbabwe dollar in favour of the more stable greenback.
Wages and salaries have been eroded as inflation goes up.
Companies are finding it difficult to operate in a fast-changing currency terrain and have resorted to an even dangerous practice of forward pricing, which has only worked to further fuel inflation, create mistrust with consumers and widen fissures with Government.
In the growing sentimental yearning for the US dollar, what is forgotten is that its use has been experimented with before and failed. Over 70 percent of Zimbabwe’s foreign currency earnings are from mining.
Of these earnings, over 50 percent are from three mines — Zimplats, Unki and Mimosa.
Only 12 percent of the mining order book, estimated at above US$3 billion, remains in Zimbabwe. The manufacturing sector’s share of exports has dwindled to below 5 percent. Outside mining, the only other notable export sectors are tobacco, horticulture and tourism. Notably, most of the foreign currency emanates from the primary production sector, where businesses are price-takers, costs are high and margins are low.
As a result, the foreign currency earned is largely transitory, and once converted into day-to-day use, it will prove inadequate to meet the country’s needs.
This model can only work if there is collective agreement for low wages and low costs across sectors.
The previous experience with foreign currency suggests this is unlikely to be so.
Strong local content
There is urgent need to work on an industrialisation programme anchored in strong local content. Four years ago, Cabinet unveiled a Local Content Policy, which was to be implemented across key national value chains. The goal was to ensure that all economic sectors attain a minimum of 50 percent local content.
The implementation of the Local Content Policy has been left to the whims of the private sector. Both Government and business are agreed on the need to increase local content, but without a strong governance framework to institutionalise this arrangement, very little has been achieved.
Arguments pertaining to the need to avoid interfering with business and World Trade Organisation (WTO) trade protocols have been advanced.
A look at South Africa, China, the United States and a host of countries across the world indicates that strong local content rules are critical to ensuring sustainable economic growth. Despite the lopsided trade balance, Zimbabwe has been on a positive growth path for the past five years.
Capacity utilisation in the manufacturing sector has grown to 77,7 percent.
Mining earnings increased from below US$3 billion five years ago to US$5,6 billion by the end of 2022.
The agriculture sector has also been on a growth path, as evidenced by surplus wheat and maize production in 2022.
The challenge, thus, is not about economic performance per se.
Rather, with trade restrictions in place, we have had to finance our growth using the local currency.
In hindsight, choosing such a path for development must have been accompanied by strong support for the local productive sectors.
Recovery of the local economy and increase in the shelf space occupied by locally produced goods in retail outlets has not translated into significantly higher levels of local content.
We have had a growing percentage of locally produced goods, but have continued to rely in many areas on imported goods.
This was partly necessitated by the need to retool, given the massive de-industrialisation that spanned over two decades.
The Public Procurement Act has been amended to favour locals. However, without local content thresholds, this has also served as a means of increasing pressure on the Zimbabwe dollar, as the same contractors seek to secure foreign currency to import much-needed materials for their projects.
There are some who believe the solution must lie in giving contractors their money in foreign currency.
Again, this will only serve to divert much-needed foreign currency from areas where the local industry must be active.
While the mining sector has grown, Mines and Mining Development Minister Winston Chitando has noted that the growth must be supported by increased local content.
The solution to Zimbabwe’s present economic challenges is primarily of a monetary nature and a symptom of a growing economy, which has not taken time to ensure that a full value chain growth is realised.
Walking the talk
Treasury must strive to put in place concrete incentives and disincentives for business on local content.
Each of the previous budgets has spoken eloquently on the need to do so, but there has been little movement in that regard.
Tax breaks for companies that demonstrate reduced appetite for imports are now urgently desired.
Equally, we need strong penalties for businesses that continue to rely on imported commodities.
Buy Zimbabwe — working with the Standards Association of Zimbabwe and the Zimbabwe Quality Assurance Institute — has put in place a credible local content rating programme.
These parties are ready to ensure that we can scientifically measure the quantum of local raw materials and value in each product and company.
The ball is now firmly in Treasury’s court to institutionalise measures on local content.
Government has repeatedly shown that it can swiftly respond to emerging challenges.
The same must be shown with the local content institutionalisation process.
We all yearn for a more resilient Zimbabwe dollar, better use of foreign currency, stability in wages and salaries, growth of the manufacturing sector and increased high-earning exports.
* Munyaradzi Hwengwere is an entrepreneur and chairperson of Buy Zimbabwe, an organisation that promotes production and consumption of locally produced goods and services. WhatsApp: +263 772 869 195.
Online Reporter