Deal­ing with the cur­rent ac­count deficit through in­ter­nal de­val­u­a­tion

Chronicle (Zimbabwe) - - Business - Anal­y­sis John Man­gudya

THE use of the multi-cur­rency ex­change sys­tem puts Zim­babwe in a spe­cial cir­cum­stance that takes away the flex­i­bil­ity of ad­just­ing the nom­i­nal ex­change rate to main­tain rel­a­tive com­pet­i­tive­ness.

This unique sit­u­a­tion is sim­i­lar to the ex­pe­ri­ence of coun­tries within the Euro-area, for ex­am­ple, which are un­able to re­verse a loss of com­pet­i­tive­ness and bal­ance of pay­ments im­bal­ance through a nom­i­nal de­val­u­a­tion of the cur­rency.

For coun­tries in this predica­ment, the loss of com­pet­i­tive­ness can only be re­versed in­ter­nally, through rel­a­tive gains in the ef­fi­ciency in pro­duc­tion and or through ac­tion to re­duce cost of pro­duc­tion, that is, in­ter­nal de­val­u­a­tion — aimed mainly at re­duc­ing wages and other re­lated labour costs.

His­tor­i­cal ex­pe­ri­ences with in­ter­nal de­val­u­a­tion have been mixed. Some have been suc­cess­ful whilst other “suc­cess­ful” in­ter­nal de­val­u­a­tion have been ac­com­pa­nied by fall­ing de­mand and re­ces­sion. The truth of the mat­ter is that there are al­ways pros and cons with de­val­u­a­tions, whether it is nom­i­nal or in­ter­nal de­val­u­a­tion. Man­age­ment and choice of in­ter­nal de­val­u­a­tion is there­fore crit­i­cal.

Whilst there is gen­eral ac­cep­tance across the board in Zim­babwe about the need for in­ter­nal de­val­u­a­tion in the coun­try, there is no con­sen­sus on its form and for­mat. Statis­tics at the Re­serve Bank show that the coun­try would need to grad­u­ally de­value by up to 45 per­cent over a three-year pe­riod to re­store com­pet­i­tive­ness.

In­ter­nal de­val­u­a­tion in Zim­babwe can be achieved through two pos­si­ble ap­proaches. The first ap­proach would be for re­duc­tion in wages and salaries, ac­com­pa­nied by a sim­i­lar re­duc­tion in the cost of fi­nance and util­ity charges.

Once this is done, the coun­try would need to find a com­para­tor to bench­mark with to en­sure that costs would not in­crease again with­out be­ing checked. The chal­lenge of this ap­proach is that it can lead to fur­ther re­duc­tion in ag­gre­gate de­mand and to de­pres­sion and re­ces­sion. An equi­lib­rium po­si­tion would there­fore need to be de­ter­mined for this ap­proach to pro­duce de­sir­able re­sults.

The sec­ond ap­proach, which also takes ac­count of pe­cu­liar­i­ties in Zim­babwe, would be to achieve in­ter­nal de­val­u­a­tion by a com­bi­na­tion of im­prov­ing

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