IN his mid-year monetary policy review, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya proposed two approaches of internal devaluation to deal with the current account deficit.
Financial Matters Shingai Moyo
The first approach is through reduction in wages and salaries, accompanied by a similar reduction in the cost of finance and utility charges, while the second approach is through a combination of improving the exports competitiveness and simultaneously levelling the playing field between importers and domestic producers.
The first approach of salary and wage cuts is in tandem with Finance minister Patrick Chinamasa’s rejected austerity measures. This approach has been widely implemented in the private sector dating back to March 2015 when Econet implemented a 35% salary cut across the board. Many other companies have implemented such reforms, including retrenchments, suspension of some benefits and price renegotiations with their suppliers.
However, the first approach is falling short in the public sector. From the two policy review statements, mid-year fiscal and mid-year monetary, Chinamasa and Mangudya seem to have agreed to implement austerity measures in line with International Monetary Fund (IMF) recommendations. As we all know, Chinamasa and Mangudya are at the forefront of IMF negotiations. Although there is a risk that austerity measures may further depress aggregate demand and entrench economic recession as the government is the major consumer in the economy, such sacrifices are needed.
Chinamasa’s interventions together with Mangudya’s approach of internal devaluation would have been widely accepted by the IMF and would show government commitment to the re-engagement initiative. However, from past experiences, we have noticed that drastic measures are often not popular with many governments and the electorate in general. They are often perceived by governments as too stringent and explosive and, therefore, a threat to the ruling party’s political survival. Therefore, it was not surprising to see Chinamasa facing huge resistance and public humiliation from his colleagues in the Zanu PF government. Considering that elections are just around the corner in 2008, coupled with the current bouts of civil unrest, Chinamasa’s proposals and Mangudya’s approach will not be accepted, especially in the public sector.
Mangudya, clearly knowing and understanding the public humiliation his boss Chinamasa faced, had to come up with the approach of internal devaluation. The move suggests “a combination of improving the competitiveness of the country’s exports, whilst simultaneously levelling the playing field between importers and domestic producers”.
According to Mangudya: “The bank (RBZ) shall be accelerating the second approach of internal devaluation after consultations with business and consumers.”
In that connection, I wonder what tools the monetary authorities have to implement this approach besides bond notes.
According to the RBZ, bond notes are coming as an export incentive. Given the current fiscal position, how will bond notes serve the promised purpose, given resistance to Chinamasa’s measures and imminent increased government expenditures associated with electoral funding for forthcoming polls? Levelling the playing field between importers and domestic producers entails introducing more tariffs on imports, quotas or subsidising local producers. The economy is already overtaxed and can no longer absorb more tariffs. Implementing such measures may result in shortages of commodities affected.
Furthermore, it may cause some diplomatic rows and retaliation as the country is signatory to many trade blocs and bilateral agreements which promote free trade. Offering subsidies has an impact on the fiscus. Government has no room to expand its spending and, as such, no meaningful subsidies are expected.
Mangudya, through bond notes which are a quasi-fiscal activity, is generally subsidising exporters. The problem with Mangudya’s incentive scheme is that it is not on incremental production. There is actually no incentive to produce more as any exporter will receive that incentive at current level of production.
Moyo is an economic and financial consultant.