Reversing legacy under investment key to Zimbabwe economic growth

by Sunday News Online | Sunday, Aug 19, 2018 | 276 views

Photo illustration of South African bank notes displayed next to the American dollar notes in Johannesburg

Bongani Ngwenya
AS I have said in my past articles that Zimbabwe has in the past demonstrated it’s potential for economic growth, all what is needed is to reverse the legacy of under-investment that has continued to constrain the country’s economic growth.

To achieve that, we need to transform our political economy to a political economy that is grounded on favourable domestic and foreign investment environment. We need to deal with our politics, and get the political and economic fundamentals right in order to unlock the foreign direct investment that the country requires.

The country needs to take advantage of the goodwill and warming up gestures by the international community so far. We can not afford to remain in yesterday’s political economic trajectory.

A trajectory of failure that has created a legacy of under-investment and stunted growth reminiscent of a child suffering from severe kwashiorkor.

While the usage of the multi-currency is envisaged to continue into the foreseeable future, it has been rightfully suggested in the past its long-term sustainability has proven to be a myth because of the structural challenges that are inherent and embedded in its usage notwithstanding the significant benefits that its adoption brought into the country’s economy such as remonetisation of the economy and financial reintermediation, helping the enforcement of fiscal discipline by precluding inflationary financing of the national budget, and brought greater transparency in pricing and accounting after a long period of hyper-inflation.

As a result, the price levels in US dollars declined during 2009, while the economy started to recover from hyperinflation. The multi-currency regime has posed a number of challenges as well, such as loss of monetary independence and the denomination of prices and wages in US dollars, has caused these variables to be costly for the country’s regional trading partners such as South Africa, whose rand has seen the severe battering from the rising US exchange rate.

Movements in the US dollar/ rand exchange rate therefore, have caused considerable effects on Zimbabwe’s competitiveness and international investment position.

Zimbabwe now needs a monetary regime that provides an appropriate and credible nominal anchor that reduces the risk of exchange rate movements between the South African rand and the US dollar in particular. In addition, the monetary regime that would create an attractive investment environment for both domestic investors and potential foreign investors.

These requirements are particularly important for Zimbabwe now, in order to strengthen the country’s monetary and fiscal institutions that have suffered from a negative perception of low credibility due to a long history of poor governance, and weak macro-economic management. My argument is that Zimbabwe can fast-track the reversal of its legacy of under-investment that has undermined the growth of the economy for too long by working towards introducing the soft currency peg as soon as possible.

The hard pegs are naturally meant to stabilise the economy and tame the negative fundamentals such as high inflation for example, but in my opinion that cannot be sustainable in the long term. In fact, they can only temporarily work on lowering inflation, deepen financial intermediation, and ultimately better growth performance, depending on the availability of certain credibility-enhancing institutional conditions.

These include strong fiscal and monetary institutions that deliver fiscal discipline, and flexible goods and labour markets as I have indicated above.

The argument is that in the long run the costs of hard pegs (multi-currency), which include the loss of an autonomous monetary policy, possibly unfavourable exchange rate movements, and the limited ability for the Reserve Bank of Zimbabwe to act as lender of last resort, outweigh the benefits of use of hard pegs; hence, the need to work on the fundamentals that would enable the introduction of the soft pegs (domestic currency).

The attempt to bring in a soft peg in the form of bond notes has proven to be not working. Potential foreign investors would normally regard the case for the existence of an exchange rate preferable, especially if the exchange rate is in their favour, that is if the domestic currency’s exchange rate with their home currency is lower.

This scenario creates a low cost of doing business and investment environment for the potential foreign investor, while for the domestic investor; the prices of the locally produced products become competitively cheaper and thus attractive for export.

At the same time, the monetary authority has the ability to conduct a full monetary policy, such as increasing the supply of liquidity in the economy to meet the productive demand.

The Reserve Bank’s ability to act as lender of last resort and extend emergency liquidity assistance to the banking system is enhanced in the presence of a soft peg, as there is no pressure to be subordinate to the primary objective of keeping the hard peg, but only manage inflation for example.

There are more long-term investments benefits to having own currency than continued usage of the multi-currency regime. At some point, we all got carried away in the hope that the adoption of the multi-currencies, especially the US dollar was going to attract a lot of foreign direct investment into the country. Instead, it attracted its leakages from the formal financial system into the informal sector and externalisation, causing a serious liquidity crisis in the economy.

The hard pegs would continue making the domestic investment environment costly and adding up to the cost of doing business challenges that the country is facing. In conclusion, as the foreign currencies continue to be scarce, and the inability of the Reserve Bank to control the supply of these currencies persist, it means that both domestic and foreign investment remains curtailed in the absence of the domestic currency. This structural challenge needs to be addressed in order for the country to start realising meaning full growth.

 Dr Bongani Ngwenya is based at UKZN as a post-doctoral research fellow and can be contacted at

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