via Dollarisation inhibiting Zimbabwe’s competitiveness | The Source November 20, 2013
Delta Corporation’s performance seldom falters when it comes to providing a good read on key fundamentals pertaining to the Zimbabwean economy and HY 2014 financials did not disappoint in that regard. Muted growth in consumer spend of five percent, significant down trading by consumers to supposedly inferior brands- among them sorghum beer and the four percent decline in overall volumes all undoubtedly mirrors the strain being felt by consumers in the market today.
Of note however was Pearson Gowero, the Delta chief executive’s discussion on sugar imports.
Notwithstanding the stated desire to ‘buy Zimbabwe’ and availability of the commodity locally, Pearson stated that sugar is available on the domestic market at 60 percent more than what Delta can land it from the region. No one would fault Delta management for shunning ‘local content’. It simply makes no sense to reward inefficiency of such magnitude. But is it really the problem of sugar manufactures in Zimbabwe or the problem goes way deeper than that?
Fellow listed food producer Dairibord finds itself in a similar quagmire. The company reported that it pays 50 percent more for locally sourced raw milk compared to what their South African competitors are paying. The premium must have expanded further with the weakening of the South African rand in 2013. This also coincided with waning fortunes for the company as it posted its first ever loss since dollarisation. Dairibord is now trying to restructure its operations, yet one is not wrong in wondering whether it is operating efficiency that the company really needs to focus on. The list goes on and on. National Foods finds itself in a similar quandary with wheat and flour prices, while fertilizer manufacturers in Zimbabwe are nowhere closer to matching prices being offered by regional peers.
The real cause should surely go beyond antiquated machinery, high cost of capital, the low capacity utilisation of below 50 percent and loss of skills that analysts are fond of citing. The challenge is structural and entrenched in our economic system that further efficiencies should still be possible even with the elimination of the above factors.
In this piece, I focus on dollarisation’s role in making Zimbabwe uncompetitive, interrogating the setting in which it was born and the conditions that would make its negatives stand out amidst a sea of possible positives. I should note, however, that dollarisation as an economic tool remains an area with few conclusive studies on its economic effects owing to the fact that losing one’s monetary policy independence is difficult to take and only very small economies have gone the route of full dollarisation.
Tony Hawkins, in his address at an Invictus Capital sponsored economic workshop posed a question on whether Zimbabwe, ranked 131st in the Global Competitiveness Index, could prosper using the same currency as the country ranked 5th in the world? This ought to be viewed in the context of a neighbouring economic powerhouse whose currency, according to consensus view of analysts, is undervalued with Stanlib estimating it to be 13 percent below its true value. Hawkins on the other hand estimates the US dollar to be probably 25 percent overvalued in Zimbabwe, setting conditions for dearer prices in Zimbabwe compared to South Africa. The situation is however worsened by the fact that Zimbabwe’s neighbours have closer ties to South Africa, some belonging to the Rand Monetary Union, thereby making Zimbabwe a very expensive source of products and services.
Imports to Zimbabwe have consequently become too cheap and no level of efficiency by a local company can outstrip the impact of the high cost base obtaining in the country, no wonder Delta can land its sugar 60 percent lower than domestic prices. Exports, on the other hand, are becoming expensive and markets for Zimbabwean produced goods are shrinking. This brings to mind Turnall Holdings Limited’s challenges in seeking a market for its non-chrysotile roofing products in the region. The company has been supplying roofing sheets to a low cost housing scheme in Hammanskraal, South Africa, but has begun to face stiff competition from South African companies that have become competitive following the weakening of the rand. Zimplow on the other hand has now resorted to ‘licensing’ manufacturers in China who can produce their products cheaply to be able to compete and defend its regional markets. While its position is made worse by unavailability of steel locally, the company however made its name in the region exporting ploughs made from imported steel. The biggest change since that time has of course been dollarisation.
So, is dollarisation really serving Zimbabwe’s developmental needs? Coming out of hyperinflation, its benefits were immense and far outweighed the possible outturn should the Zimbabwe dollar have been retained. However, Zimbabwe is today steadily sliding in the wrong direction and the merits of dollarization ought to be studied without emotional attachment. By adopting a multi-currency regime, Zimbabwe instantly tamed the scourge of inflation, eliminated currency risk from international trade transactions and brought about some improvement to the country’s attractiveness as an investment destination. Growth soared initially, scaling double digit levels that hitherto were unknown to Zimbabwe, which all could clearly be attributed to the decision to dollarise.
The party was however short-lived as within five years, the robust growth registered a marked slowdown as foreign currency inflows dwindled, domestic money market liquidity tightened despite record injections of US dollars via quantitative easing, agriculture underperformed largely from poor funding, while policy and political risks escalated ahead of the 2013 elections. The castle thus began to crumble, yet all these fundamentals remained as inextricably tied to dollarisation as much as the positives discussed above. Dollarisation, which rescued Zimbabwe from the jaws of certain collapse, appears to be stifling it and inhibiting growth for full recovery to be realised.
When Zimbabwe admitted its developmental needs were better served by subcontracting monetary policy formulation, the nation was left hugely exposed, owing to its huge debt position, then more than twice the size of its GDP, and the inability of revenue collections to funds government expenditure. There was simply no room to respond to any shocks asymmetrical to what Ben Bernanke and friends were facing. Where other nations would have used reserves to buy local currency in exchange of the new foreign currency being adopted, Zimbabwe simply allowed the Zimbabwe dollar to die an unnatural death by reducing the value of bank balances and Zimbabwe dollar notes in issue to zero -put differently by writing off a significant portion of the country’s balance sheet with a simple stroke of a pen. There were just no savings to do the right thing and retire the Zimbabwe dollar with honour and by the same token, the RBZ had no tool whatsoever that it could use in the event of a shock in its fragile banking system. RBZ’s role of lender of last resort also died together with the Zimbabwean dollar.
From the onset therefore, the ground was set for an elevated valuation of the dollar in Zimbabwe. There were far too many risks for the country to start off as a reasonable cost base. The introduction of the multi-currency system without fair compensation to Zimbabwe dollar holders pointed to potential huge obligations that could stop the program right on its tracks. The absence of a lender of last resort meant possible turbulences in the banking system without a possible defence mechanism given the empty coffers at the central bank. The system aggregated these and other similar ills into prices of factors of production setting the ground for an uncompetitive sovereign in a world whose trading conditions were toughening. As such, from 2009, Zimbabwe has been importing more than what it exports simply because it was cheaper to do so and covered the gap with borrowed funds. Estimates are that the country accumulated $7 billion debt since 2009, and it took five years for GDP growth to indicate how unsustainable the system was.
But what options does the country have? Abandon the multi-currency system altogether and re-introduce the Zimbabwe dollar? This will be very unpopular and unthinkable. Develop some exotic system that will see the RBZ regain some of its powers of self-determination while maintaining the multi-currency regime? This will again be very unpopular with especially given that the central bank is yet to gain friends, but the strategy is clearly gaining currency as options continue to reduce. Lastly, stick with the US dollar and seek to devalue internally! Plausible and loaded with long term benefits, but, the strategy has proven to be very painful elsewhere and given Zimbabwe’s affinity to attract negatives in any strategy, this may as well lead to more imbalances than benefits. Whichever way one looks at it, Zimbabwe has very tough decisions to make if it is to become competitive once more. For now, however, let’s be content with Coke laced with South African sugar!
Farai Murambiwa is an investment analyst with a leading Zimbabwean brokerage firm.
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