The Sunday News
Dr Bongani Ngwenya
THIS instalment is a continuation of last Sunday’s article that was titled, “Rising from the quagmire of development trap key to vision 2030”. The argument is that there is a lot that Zimbabwe needs to experience or achieve economic wise before rising to middle income status.
So much structural economic reform and transformation needs to take place towards achieving middle-income status. In last Sunday’s article, I raised the structural economic problem of the ‘‘twin deficit’’ of fiscal and current account. The unsustainable trade imbalance or current account deficit is a result of imports that are running above exports, causing a persistent current account deficit, which has been a burden to economic growth for a very long time now.
The correction of this trend will require massive focus and attention to domestic production not only in terms of capacity utilisation to meet domestic demand but also in terms of domestic product competitiveness to meet export quality and competitiveness.
In order to facilitate domestic product competitiveness there were suggestions in 2016 for example, that Government and the business community come up with bold once-off mechanisms to reduce production costs as measures to stimulate economic growth and enhance domestic product competitiveness. Such suggestions came from the Confederation of the Zimbabwe Industries (CZI).
The CZI lamented the suppression of the economic growth due to high costs of production and challenges in accessing long term financing for recapitalisation and re-tooling of the industry. The CZI proposed the direction of internal devaluation, which in its opinion was a worthy bitter pill to swallow.
The strategy of internal devaluation is an economic and social policy measure 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, directly or indirectly. I remember arguing in one of my articles in 2016 that internal devaluation would not work in the Zimbabwean situation, for several reasons.
Zimbabwe’s economic situation, instead demanded the opposite, that is internal valuation and rebasing that would have been supported by huge capital injection either in the form of FDI or increased volumes of export revenue earnings from the mining and agricultural sectors of the economy.
While it may be true that cost of production is a challenge in the Zimbabwean economy, the fundamentals on the ground do not favour the direction of the solution of an internal devaluation. Internal devaluation could have caused serious deflation in the economy. In addition to cutting costs of production, internal devaluation can be applied as a remedy for a country in financial trouble, that is, in liquidity crisis, such as Zimbabwe.
However, the challenge with the Zimbabwean situation is productive capacity or industrial capacity utilisation that does not meet the domestic production demand, not because of high costs of production, but because of low economic activity (deindustrialisation) and persistent economic fundamentals that are not conducive for meaningful economic growth.
Zimbabwe requires economic stimulation that will ensure full domestic productivity and full employment. The country used to fulfil domestic demand for beef for example and at the same time able to meet its export quota of the beef to the European Union and earned foreign currency. I remember Zimbabwe used to manufacture building materials such as door frames and export them to Botswana and other neighbouring countries.
These are just a few examples that quickly come into my mind. In other words my argument is that the country’s primary and secondary industries were foreign currency generators through export earnings of high quality domestic products that were highly competitive in the international market.
Almost 100 percent of domestic demand for goods and services used to be met by local production and excess being exported to earn the country foreign currency that backed the country’s sovereign currency the Zimbabwe dollar. Why am I raising all these things?
I am raising them because I want us to understand that twelve years that we have set for the country to transform into a middle-income economy could be short to achieve that level of development given the current state of the economy, unless we move with speed and implement key reforms. Middle-income economies are self-sustaining in terms of production and employment.
There are plans to set the country among the fast growing economies in the continent within the next two years. At the centre of all these targets, lies sustained domestic product competitiveness and economic growth.
As I have indicated already, the European Union used to be quite happy with the quality of our beef for example. Many of the country’s manufactured products used to be competitive in terms of quality and prices.
Yes, agriculture remained the back bone and the primary foreign currency earner, but the manufacturing industry and sector of the economy complemented the primary industries quite well and significantly, especially in ensuring that domestic demand for basic commodities was fully met.
For the country to attain middle-income status it would need to function like a normal economy once again and then move forward and surpass its trading partners in terms of development and growth to attain the status of middle income.
There is need to implement structural economic reforms such as requisite changes to economic and investment policies to stimulate growth. The country cannot ignore currency reforms in this matrix. In my opinion, I doubt how feasible the middle-income status can be achieved without reverting to a sovereign currency at some point in time during the planning and implementation of the transition from the current economic poor and lower income status to middle-income status.
The current currency reform configuration or mix is causing pricing distortions that is affecting the costing for production as well. It is my strong conviction that without policy reforms, especially investment and economic policy reforms that will attract FDI channelled towards a sustained private sector driven economic development and domestic product competitiveness as well, achieving middle-income status is difficult.
In conclusion, there are more structural economic problems bedevilling the economy, that need to be tackled with prudence and the political will they deserve so that domestic product competitiveness can be effectively leveraged to transform the economy into middle-income status by 2030.
– Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at [email protected]