Devaluation a must for survival
By Eric Bloch
THE government has been vigorously opposed to devaluation of Zimbabwe’s currency to such an extent that when President Robert Mugabe opened the 2002 mid-year parliament
ary session, he said “advocates of devaluation are saboteurs and enemies of the state”.
There are undoubtedly many occasions when it is contrary to the economic interests and the wellbeing of a country, but equally there are occasions when devaluation is an essential element of economic adjustment, which must be pursued if there are not to be immensely negative repercussions upon an economy and, therefore, upon the populace dependent upon the economy.
Regrettably, that incontrovertible fact has been repeatedly disregarded by the government, and any suggestions that Zimbabwe devalue its currency are scathingly castigated with insinuations that they are driven only by personal interest, as distinct from those of the nation, and that they are therefore verging on the thresholds of treason.
There are probably three key reasons for the government’s rigid opposition to devaluation.
The first is a deep-seated conviction that devaluation fuels massive inflation, to the prejudice of the populace, of commerce and industry and of the government. That conviction is normally not devoid of foundation, for an immediate consequence of devaluation is that the landed cost of imports rises commensurately with the devaluation.
However, for every rule there is an exception, and that is certainly so in the case of the impacts that devaluation would have had upon Zimbabwean imports since the millennium. The government studiously disregards that the overwhelming majority of Zimbabwe’s imports are not funded through official currency markets, but through the alternative “parallel” and “black” markets.
The premiums payable for foreign currency within those markets are gargantuan, and therefore the feared devaluation- created inflation is already sustained. Therefore, devaluation would have had only relatively minimal inflationary impacts, and those would be more than offset by compensatory factors, which are addressed later in this column.
The government’s second ground of resistance to the pressures for devaluation is that it is a major user of foreign currency, be it for military imports, requirements of many prostates, funding of the numerous embassies and missions of the Ministry of Foreign Affairs, inordinately great foreign travel, or for many other purposes. If Zimbabwe’s currency is devalued, the cost of all those expenditures would rise exponentially, severely swelling the state’s mammoth deficits and recourse to borrowings.
The probable third reason for endless resistance to devaluation is one of ego, for the government believes that devaluation is evidence of economic failure and, as it believes itself to be omnipotent and infallible, admission of failure is not an option, even if only an implied admission. Governmental maturity is not sufficiently great to place national interest ahead of its self-image, pride and ego.
However, when a country is critically dependent upon foreign currency generation, because of its high import needs, and its economy is suffering the ravages of hyperinflation, it cannot afford not to devalue its currency, whether by way of exchange rate management, or by allowing market forces to determine required rates.
The hard fact is that if the national currency does not devalue to the extent of inflation, all exporter profitability is fast eroded, and very rapidly none can afford to export. Since Zimbabwe last devalued (relatively marginally!) its currency on August 1 to US$1: $250, inflation has been at least 85%. With production costs of industry, mining and agriculture, and operating costs of tourism, having risen by at least to the extent of that inflation, and in some instances to an even greater extent, the exporter now needs to generate approximately $470 for every US$1 to cover the increased costs, and to be effectively in the same situation as pertained three months ago.
The absence of inflation-related devaluation is the assured death knell for exporters. Bankruptcy, closure of business, increased unemployment, loss of downstream economic flows and cessation of fiscal revenues become the unavoidable result of the failure to effect necessary, ongoing, devaluations until inflation has been fully controlled and contained.
And Zimbabwe’s parlous insufficiencies of foreign exchange can only intensify to even more horrendous levels than presently is the case. The government regularly refutes those contentions, by charging that whomsoever it has devalued Zimbabwe’s currency, there has been no enhancement to foreign currency inflows. It fails to recognise that that enhancement cannot materialise overnight, and that three is a significant lead time until forthcoming.
Once devaluation occurs, only if adequately so, the exporter must first woo back the support of lost customers, and obtain export orders. Then the exporter must source foreign exchange for required production inputs. Thereafter the exports must be produced, shipped to the customer, and payment obtained. Thus devaluation-stimulated foreign exchange inflows can realistically only be anticipated to be forthcoming, at least four to six months after devaluation. Moreover, in view of that lead time, the exporter cannot afford to commit to customers solely on the strength of devaluation, but needs to be assured that the exchange rate will continue to move, in alignment with inflation, failing which the ongoing inflation erodes all benefits of the devaluation between the date thereof and the dates of execution of the export orders and receipt of payments. Exchange rate constancy cannot be applied until such time as inflation is minimal in extent.
The government also needs to recognise that the more it consigns exporting and other foreign exchange generation to extinction, the more it is fuelling inflation (to a far greater extent than any inflation as could be attributable to devaluation). The lesser the availability of foreign exchange within the official market, due to diminishing export revenues, the greater is the dependency of the economy upon the alternative markets to satisfy essential foreign exchange requirements, driving up the exchange rates in those markets, with consequential enormous inflationary impacts.
In addition, the inadequacies of foreign exchange, due to inadequate export revenues, result in low levels of productivity, with many industries unable to source sufficient inputs to enable continuing, high levels of production. Rising fixed costs have to be funded from reduced volumes of production, sharply raising unit costs and, therefore, selling prices. The inflation occasioned by those costs, and by the movement in alternative market rates, due to non-devaluation, or inadequate devaluation, vastly exceeds the inflation as would be the result of devaluation.
Over a period of time in which inflation has risen by over 1 000%, the exchange rate accorded to exporters has moved by less than 200%. And that is despite the declared intent, in July, to establish an Exchange Rate Management Board.
Since the announcement of the intended creation of that body, nothing has happened other than that more and more exporters have been brought to the verge of collapse, the economy has continued to decline, foreign exchange availability has worsened markedly, inflation has continued to sky-rocket, and nationwide poverty has become increasingly endemic. It is long overdue for the government to remove its blinkers, discard its ill-conceived misconceptions of devaluation, recognise realities, and appreciate that devaluation has become a must for survival.