The Sunday News
Economic Focus with Dr Bongani Ngwenya
ZIMBABWE has been hamstrung by its lack of monetary policy sovereignty for too long, that is, lack of the ability to gauge the value of a domestic currency, that is, either devalue or revalue the currency depending on the prevailing economic condition. Our central bank can no longer adjust the nominal exchange rate for example.
A devaluation of a domestic currency would ensure exports competitiveness in the global market. The central bank can no longer buy Government debt by printing the domestic currency on the other hand (conduct seigniorage). In adopting the multi-currency regime, the Reserve Bank of Zimbabwe ceded control of its monetary policy, particularly the control of the supply side of money in the economy.
This problem has caused the liquidity crisis among other factors such as externalisation of the foreign currency. Our central bank is just as good as a lame duck devoid of money supply control and power, evidenced by all the monetary policy statements issued subsequent to adoption of the multi-currency regime. This includes the mid-term monetary policy review issued by the central bank last week.
Unpacking the monetary Policy Statement Review-September 2016:
Since the adoption of multi-currency regime Zimbabwe has been issuing monetary policy statements that are devoid of monetary policy sovereignty. There are strong suggestions for internal devaluation by up to 45 percent over a three-year period. The monetary policy review is advocating for a reduction in wages and salaries which would then be accompanied by a similar reduction in the cost of finance and utility charges. It is acknowledged that the cost of production in Zimbabwe is too high. Something has to be done certainly.
However, what worries me is that we seem not to appreciate that the adoption of the multi-currency regime after abandoning our domestic currency rendered us a high cost country over night, compared to the regional trading partners that maintained their sovereign currencies. Yes, we had no choice. In the prevailing circumstances by then, abandoning the Zimbabwe dollar was the best decision ever taken. We missed the opportunity at that time.
That was the most appropriate time to determine a comparator to benchmark with, to ensure that costs would not increase without being checked. The firming of the US dollar against the South African Rand for example explains my line of thinking. If we still had a domestic currency, I have no doubt at all that an internal devaluation would work. There is no way we can talk of an internal devaluation in our situation and want to pretend that the multi-currency regime does not have any impact. It cannot remain a constant.
The deflationary situation in our economy that has run for the past two years now is a serious phenomenon that cannot be down played or under estimated. The state of our economy does not need policies and actions that would lead to any further reduction in aggregate demand, depression and recession. Counter-productive measures cannot be the best at this stage. Yes, costs are too high, however, they may not be addressed by an internal devaluation in the absence of a domestic currency that can be adjusted and manipulated as a structural economic tool. T
he monetary policy review reiterates that the economic fundamentals on the ground are not yet ripe for the return of a domestic currency. The central bank governor, Dr John Mangudya, has on several occasions and painstakingly tried to assure the nation in that regard. It is my take that we should instead be concentrating on creating an environment that would build up the economic fundamentals suitable for the return of a sovereign currency.
Dr Mangudya has outlined in the review policy statement critical and fundamental measures that need to be implemented. Among the measures proffered, I will concentrate on the most critical for future return of the Zimbabwe’s domestic currency.
These are stimulating economic activity by putting in place an attractive investment climate to generate investment-led growth. Fast-tracking re-engagement with the rest of the world will pave way for sustained growth and development in Zimbabwe. Zimbabwe needs to immediately put measures that will enhance production to increase employment, widen the fiscal space, increased export earnings to build forex reserves that would support and back up the re-floatation of the domestic currency, experiencing real economic growth and reduce import dependence through prudent management of the trade deficit, and ultimate poverty reduction.
The proposed measure of dealing with the current account deficit through internal devaluation can only be a very temporary measure if it can work. It is only realistic to boost export earnings generation through domestic production. Zimbabwe needs to regain trust and confidence. It is ironic that we do not have confidence of, even the nations whose currencies we are currently using in our economy.
The other critical measure that Dr Mangudya proffers is the acceleration of the reform and reorganisation of State Owned Enterprises (SOEs) including disposal through joint ventures and/or outright sale of some of the non-core SOEs to raise capital for development and to close the fiscal deficit. Additionally, production can be enhanced by granting investors contracts under long lease-back, build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) agreements. A point of caution has to be raised here. Zimbabwe has in the past engaged in these similar agreements. The challenge has always been that the agreements have not been mutually beneficiary to Zimbabwe. M
ost of them have always been skewed in favour of the potential outside or internal investor, and very little of benefit to the Zimbabwean economy. We need to ensure that the future agreements are wholly and mutually beneficiary to the country. Reorganisation and reform of SOEs is long overdue. Most of these have been a liability and a burden to the economy of this country — that is, nothing but conduits for stinking corruption and rot. SOEs reform is critical to dealing with fiscal deficit in a sustainable manner that will promote real economic growth.
In conclusion, Zimbabwe would have to make a choice one day, either to follow those countries that have dollarised also, and have found it difficult thereafter, to wholly revert to sovereign currency, but allowed their currencies to circulate in conjunction with the US dollar. By doing so, retaining some degree of monetary policy sovereignty, or we alternatively wholly revert to a Zimbabwean currency and retain full monetary policy sovereignty. Under either of the two options, an internal devaluation can work.
Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. mailto:[email protected]/[email protected]
