It’s time for local devaluation of the USD

31 Mar, 2016 - 00:03 0 Views
It’s time for local devaluation of the USD

The Herald

US DOOLLARSSuitable Kajau Correspondent
Zimbabwe should consider effecting fiscal and internal devaluation of the US dollar to promote competiveness of exports in the absence of capacity to effect nominal exchange rate adjustments.

The inception of the multi-currency regime in 2009 created economic challenges which continue to bedevil the economy as monetary authorities are grappling with the loss of their ability to manage the exchange rate for export competitiveness purposes.

Recently, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya said that fiscal and internal devaluation were viable options after the loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness in the region and beyond.

Devaluation has numerous benefits which can be enjoyed in the local economy. A devaluation of the exchange rate will make Zimbabwean exports more competitive and cheaper to foreigners.

This will increase demand for local exports.

Meanwhile, local products are more expensive as compared to imports due to the skewed cost of production owing to the current value of the US dollar on the local market. In principle, the local consumers will automatically go for substitute products which are affordable and cheaper.

In the same vein, devaluation means imports will become more expensive and this has the direct effect of reducing demand for imports which at the moment are flooding the local market.

A devalued currency makes an economy’s exports more favourable. This is because their currency has become cheaper than other countries, increasing the demand from exporters. As well as reducing the purchasing power of citizens abroad, for instance, it would be more expensive to go on holiday abroad and/or purchase goods in neighbouring countries like South Africa and Zambia.

Reduced imports lead to an increase in the demand for domestic goods. This increases the domestic supply of goods in an economy, and in turn increases economic activities that require manpower; leading to increased employment rate and reducing unemployment.

In reality, devaluation could cause higher economic growth as higher exports and lower imports should lead to higher rates of economic growth. Therefore, this provides a boost for domestic demand, and could lead to job creation in the export sector and downstream industries.

Higher levels of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.

Zimbabwe should take a leaf from the recent Chinese devaluation of the yuan against the US dollar. The move made Chinese goods cheaper after 8,3 percent fall in exports in July 2015.

Dr Mangudya says a country which cannot devalue its nominal exchange rate can gain competitiveness and promote export performance by streamlining domestic costs of production. He further asserts that measures to enhance competitiveness through reduction in production costs amount to depreciation in the real exchange rate in a manner that promotes exports.

This is particularly important as Zimbabwe’s implied real effective exchange rate is currently over-valued by an estimated 45 percent. This largely reflects a progressive appreciation in the US dollar underpinned by strong economic recovery in the US and accommodative monetary policy measures adopted in most Eurozone countries.

Dr Mangudya claims that the nominal appreciation of the US dollar against major currencies has had concomitant effects on the real effective exchange rate, a development that has continued to undermine the country’s export competitiveness. He said under the fiscal devaluation, value added tax could be imposed on selected imports that had close local substitutes.

As well as application of other than fiscal devaluation, complementary “internal devaluation” measures targeted at reducing the cost of doing business, boosting competitiveness, increasing productivity and fostering confidence in the economy could also be pursued.

At the moment the major cost drivers identified in Zimbabwe include labour, power, water, finance, transport and logistics, tariffs and trade taxes, taxation and information technology costs. In tandem with the prime aim to increase competitiveness of local goods, it is imperative to have the working combination of lower unit labour costs and higher consumption tax decreases the price of exported goods and increases the after-tax relative price of the imported goods.

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