Editorial Comment: Time for internal devaluation of greenback

THE introduction of the multi-currency regime in 2009 breathed a new lease of life into the economy after the ravages of hyperinflation, but the economy is now seriously struggling to register fast growth.

While the greenback is generally already the most used stable global currency, it has continued to gain value in the last few years. It is estimated the dollar is now about 45 percent stronger than when Zimbabwe adopted the multi-currency system in 2009.

The stability and strength of the currency, which laid the foundation for growth in 2009, is now actually part of the problem now besetting the country due to the state of the economy.

Industry is producing at low capacity of about 34 percent, saddled by high costs of production including labour and high cost of funding, which is also predominantly short term in nature.

Economists have said the economic challenges facing the country are largely due to the “use of a strong currency in a weak economy” and are lobbying for an internal devaluation to allow the country to compete on an even footing with its trading partners. Given that Zimbabwe has been using the US dollar, the country became a magnet for imports from the whole region and beyond, resulting in reduced productivity and exports as companies failed to produce competitively.

This has created significantly unbalanced trade statistics with South Africa, the biggest trading partner, which uses a weaker currency. As such, internal devaluation is critical to make locally produced goods competitive, that way increasing demand and stimulating industrial activity requiring manpower, meaning more jobs.

Notably, conventional devaluation of the currency is not possible in Zimbabwe, as the country scrapped its inflation-ravaged currency in 2009 and in the process lost most of its monetary tools.

Reserve Bank of Zimbabwe Governor Dr John Mangudya is also on record saying internal devaluation by trimming down cost of production is critical for a country that has lost monetary autonomy and exchange rate control to enhance competitiveness of local producers. Internal devaluation, even if some economists have reservations about its effectiveness as a macro-economic policy to turn around the economy through enhanced competitiveness of locally produced goods, it remains one of the most potentially viable and appealing options available for a country in Zimbabwe’s situation.

So, internal devaluation may entail reducing the cost of labour in public and private sectors and engendering high efficiency levels in production across all sectors of the economy to make local goods affordable and preferable to imports for quality and price.

However, cutting public spending and putting pressure on private sector to follow suit is not exactly easy; it can take long to regain competitiveness through the reduction of salaries and wages.

Further, there could be resistance from labour, as this would seriously affect the earnings for low-income earners, reducing their buying power, which could also lead to lower demand for goods.

The process of internal devaluation should therefore have in-built measures to neutralise the numerous potential negative effect of this exercise, but must address factors of cost build-up such as high cost of labour, power, utilities, transport and energy. Advocates of “internal devaluation” recently pointed to Latvia as an example of successful macro-economic policy to turn around the economy, although other observers contradict the notion that the country is a success story of internal devaluation.

In 2007, the UK achieved a significant depreciation in the exchange rate. This helped to restore competitiveness in the UK economy.

However, by comparison, Spain was in the Eurozone and could not devalue, yet the European country was battling uncompetitive wage costs. To restore competitiveness, Spain went through a prolonged period of internal devaluation, accompanied by negative growth and unemployment, a painful way to reduce labour costs.

You Might Also Like

Comments

Take our Survey

We value your opinion! Take a moment to complete our survey