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NewsDay

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‘Govt’s proposed internal devaluation not feasible’

Business
A SENIOR economist says government’s proposed internal devaluation due to the overvalued exchange rate is not feasible due to the existing levels of poverty and unemployment.

A SENIOR economist says government’s proposed internal devaluation due to the overvalued exchange rate is not feasible due to the existing levels of poverty and unemployment.

BY TATIRA ZWINOIRA

Estimates by the Reserve Bank of Zimbabwe showed that the US dollar is overvalued by 45%.

Fiscal and monetary authorities say government has to undertake fiscal and internal devaluation to cushion the country as it has no capacity to manage the exchange rate to promote exports competitiveness.

Economist Tony Hawkins said at the Zimbabwe National Chamber of Commerce Business review conference on Monday that existing economies have undergone real devaluation not through internal devaluation, but rather by currency.

“For the record, leading emerging economies, excluding China, have undergone real devaluation (on average) of some 40% since 2010, but this was not achieved by internal devaluation, but by 50% currency devaluation. Internal devaluation to the extent required (50%) is simply not feasible, either economically or politically, especially given existing levels of poverty and unemployment,” Hawkins said.

“In any event, the political cycle – elections coming in 2½ years’ time – is against squeezing incomes, wages, government spending and employment, to secure internal devaluation, especially of a 40% to 50% magnitude.Internal devaluation is successful only if it increases productivity and enhances competitiveness.”

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Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of a country mainly by reducing its labour costs – either wages or the indirect costs of employers.

The government has been on a drive aimed at making the country more competitive through establishing a national competitiveness commission, one-stop shop for investors, providing special economic zones, introducing legislation for ease of doing business and providing rebates on certain manufacturing equipment along with raw materials.

The country is facing a high unemployment rate due to the harsh economic environment that has led to companies closing down and severe liquidity constraints. This has led to high costs of doing business and prevented the country from competing in the regional market.

United Nations Development Programme senior economic adviser Amarakoon Bandara said credible reforms, policy certainty and attitudes would be key if the country was to grow.

“Government budgets have economic, political and technical considerations. Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use. Budgets often involve a compromise between optimal economic/technical solutions and the reality of politics and interests within a country,” he said.

Considering how the market is constrained, the need to provide sustainable measures to create ease of doing business will be crucial, by introducing measures geared towards creating jobs at no monetary cost to government.

Hawkins said recent history in the eurozone that saw economies take a tumble suggests that internal devaluation is very unlikely to reboot the Zimbabwean economy, especially given the existing socio-political climate before a proper enabling environment is created.