Minister should return to the womb
By Eric Bloch
THE Minister of Finance, Samuel Mumbengegwi, has a remarkable tendency to tackle anything and everything back to front.
He favours putting t
he cart before the horse, and then blames the horse for its inability to pull the cart.
He is so prone to do things in reverse that, perhaps, it is time for him to return to his mother’s womb, for he must surely believe that birth comes before conception.
The latest demonstration of this ministerial philosophy occurred when he addressed chief executives of banks last week.
He dogmatically informed the bankers that the exchange rate will only be reviewed when there is increased productivity in the economy. He stated that “the exchange rate is a function of productivity”, and that “the exchange rate cannot be addressed until we do what we can to increase production”.
Zimbabwean productivity has fallen cataclysmically in recent years, and especially so in the last six to nine months.
The causes of the decline are many. Although they do not include the oft-repeated, totally false, governmental contentions that a major cause thereof are diabolical, evil machinations of Western countries, in conspiracy with Zimbabwean businessmen, in order to destroy the economy and thereby ensure a political regime change.
The causes of shrinking productivity are also not so-called “illegal, international sanctions”, for such sanctions only exist in the convoluted, distorted thought processes of the minister and his colleagues, but not in reality.
However, one of the most pronounced causes of the tumultuous fall in productivity is government’s gross mishandling of the exchange rate.
The exchange rate policy impacts both directly and indirectly upon productivity, and if government obdurately adheres to its current stance, then yet further collapses in productivity are inevitable. The productivity of agriculture, mining, tourism and manufacturing operations in Zimbabwe is greatly dependent upon exports.
Save for certain agricultural commodities, the capacity of the Zimbabwean market to absorb the volumes of the production necessary for viable productivity of those sectors does not exist.
Not only is the total population only about eleven million, but much of the population is poverty-stricken and vested with minimal consumer spending power.
Therefore, such volumes as can be produced and sold to Zimbabweans must be greatly complemented by production for, and sale to, export markets.
However, one cannot sell in export markets unless one’s products are both quality and price-competitive.
Zimbabwe has long proven its ability to meet the highest of internationally sought quality standards, be it Zimbabwean tobacco, cotton, beef, precious and semi-precious minerals, tourism amenities and services, or be it manufactured textiles, clothing, footwear, furniture, pharmaceuticals, toiletries and cosmetics, engineering products, or a vastly diverse array of other goods.
But its ability to be price-competitive is wholly frustrated by a governmental bigoted policy on exchange rates, which policy fails to recognise the consequence of Zimbabwe’s world-record levels of hyperinflation.
When costs of production soar upwards by more that 25 000% in one year, which was the case in 2007, and when those costs more than double each month, as is currently the case, any aspirations to export are totally destroyed, unless there is commensurate exchange rate movement.
The producer cannot increase prices to cover the rising costs, for his competitors in other countries are not faced with similar cost escalations, and therefore do not have to increase their prices other than very marginally to address the low levels of cost inflation sustained by them.
Therefore, if the Zimbabwean producer is to be able to compete, the exchange rate must adjust in alignment to the real inflation borne by the producer.
The destruction of export viability, by government’s rigid adherence to tunnel-vision exchange rate policy determination is a major contributant to inflation, for in the absence of exports, the production for the domestic market has to absorb the entirety of the producer’s fixed costs, whereas if higher volumes were produced, in order to service export markets as well as the domestic market, then the proportion of fixed costs attributable to domestic production would diminish.
A further very major hindrance to productivity is the insufficient availability of foreign exchange to fund importation of operational inputs, consumables, spares, and state-of-the-art machinery and equipment.
Agricultural production has been curtailed, year after year, by insufficient availability of fertilizers, insecticides, fuel, equipment, and much more.
So too has been mining production. For much of the manufacturing sector, production volumes are heavily reduced by frequent stoppages necessitated by non-availability of inputs, or by the scope of operations being severely constricted by insufficiencies of such inputs.
However, were producers to have real export viability, accorded to them by credible exchange rates, they would be generating the foreign exchange required by them for both their export and domestic market production. In addition, most of them (if not all), would also be generating foreign exchange required by those producers servicing only domestic needs, not being engaged in exports, and as required by government and other sectors of society.
In particular, substantially increased exports, made possible by meaningful exchange rates, would result in a very significant reduction in the unlawful foreign currency “parallel” and “black” markets, bringing about a stabilisation of rates therein, and ultimately a reduction of such rates.
As those markets are amongst the biggest triggers of Zimbabwe’s ongoing hyperinflation, those increased exports would markedly reduce the inflation attributable to the operations of those markets. This would, in time, contribute to stabilisation of official exchange rates, due to the then falling levels of inflation, although in part contingent upon government also taking other overdue, constructive steps to contain inflation.
Whilst back in the womb, minister Mubengegwi should seek to develop a more substantive economic backbone, so that after his rebirth he can put first things first.
One of those first things must be to move rapidly to market-force driven exchange rates. Minister, put the horse before the cart and you’ll be amazed how both it and the cart can then go forwards!