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RBZ proposes devaluation

Zimbabwe should consider fiscal and internal devaluation to promote export competiveness in the absence of its ability to effect nominal exchange rate adjustments, the Reserve Bank of Zimbabwe (RBZ) has said.


The use of the multicurrency regime since 2009 has created headaches for the economy, with monetary authorities moaning over the loss of its ability to manage the exchange rate for export competitiveness purposes.

But RBZ governor John Mangudya said fiscal and internal devaluation were viable options after the loss of monetary autonomy and lack of exchange rate flexibility to enhance export competitiveness.

Internal devaluation, Mangudya said, entailed that a country which cannot devalue its nominal exchange rate, can gain competitiveness and promote export performance through streamlining domestic costs of production.

He said measures to enhance competitiveness through reduction in production costs amounted to depreciation in the real exchange rate in a manner that was promotive of exports.

“This is particularly important as Zimbabwe’s implied real effective exchange rate is currently over-valued by an estimated 45%. This largely reflects the progressive appreciation in the US$ underpinned by strong economic recovery in the US and accommodative monetary policy measures adopted in most Euro zone countries,” he said.

“…the nominal appreciation of the US$ against major currencies has had concomitant effects on the real effective exchange rate, a development that has continued to undermine the country’s export competitiveness.”

He said under the fiscal devaluation, value added tax could be imposed on selected imports that had close local substitutes. Simultaneously, an equivalent reduction would be effected on payroll taxes such as employers’ social contributions, Mangudya said.

“These two measures combine to effectively devalue the real effective exchange rate in order to promote competitiveness and narrow current account deficits in a revenue-neutral manner as has been the case in some Euro zone countries. In this respect, fiscal and internal devaluation measures should be seriously considered in Zimbabwe to improve the cost of doing business and export competitiveness,” he said.

Mangudya said other than fiscal devaluation, complementary “internal devaluation” measures targeted at reducing the cost of doing business, boosting competitiveness, increasing productivity and fostering confidence in the economy could also be pursued.

Major cost drivers identified in Zimbabwe include labour, power, water, finance, transport and logistics, tariffs and trade taxes, taxation and information technology costs.

In a working paper, Fiscal Devaluation in the Euro Area — a Model-Based Analysis, the European Central Bank (ECB) said a country belonging to a monetary union could not rely on nominal exchange rate devaluation to increase, in the presence of nominal price rigidities, its international relative price competitiveness and, hence, improve in the short run its trade balance.

It said an alternative way to increase the short-run international price competitiveness was through a temporary “fiscal devaluation” which is a combination of two measures: the decrease in social contributions paid by employers and the increase in consumption tax.

“The reduction in employers’ social contributions reduces the unit labour costs. As long as the latter are passed-through into final prices, the improvement in price competitiveness favours exports and reduces imports,” ECB said.

“The reduction in contributions is financed by increasing the consumption tax, which is also a destination-based tax. As such, it raises the after-tax price of domestic and imported goods uniformly, but not the price of exported goods.”

It said the combination of lower unit labour costs and higher consumption tax decreases the price of exported goods and increases the after-tax relative price of the imported good.

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