eBusiness Weekly
Clive Mphambela
When Zimbabwe adopted dollarisation in February 2009, the hyperinflation era came to an abrupt end, as people gained lawful access to foreign currency, which became legal tender.
Stashes of currency which had been “externalised” to foreign bank accounts as well as caches of US dollars that were hidden in people’s mattresses suddenly became accessible as the money filtered into commercial transactions and was formally absorbed into the multi-currency regime.
Within a few months, banks were awash with dollars, daily cash withdrawal limits were very generous, and utopia was here.
Dollarisation saved the economy from descending into unmanageable chaos. Even those amongst us who often pretended to be more patriotic than others and would have wanted to cling onto the symbols of Zimbabwe’s sovereignty — the now defunct Zimbabwe dollar — had no choice but to embrace foreign currencies for their own and the nation’s survival.
However, whilst on the surface, everything was blissful; a tragic development enveloped our corporate sector.
As Zimbabweans adjusted to the formal use of foreign currencies, which foreign currency they could simply “request from the bank”, our local companies went into an import overdrive and all manner of goods which were once scarce, flooded the market.
Prices stabilised and even started falling rapidly as competition amongst retailers flourished. Inflation went into negative territory. Consumers were blessed.
However, this era of perceived plenty also brought with it the unfavourable circumstances which we find ourselves in today. Certain unpleasant realities about our Zimbabwean manufacturers have quickly come to the fore.
For a while, our local industries could not renew their plant and equipment and could therefore not meet the rapidly expanding demand for goods and services.
The companies were operating at between 15 percent and 20 percent capacity, whilst a few were within the 30 percent range. Most goods in the country, from essentials like cooking oil, tinned foods to potato crisps and breakfast cereals, were imported in huge quantities.
Many operators for instance, faced a plethora of challenges in trying to restore basic viability in view of the deluge of cheaper imports. These problems were compounded by lack of access to appropriate finance for recapitalisation, as well obsolete machinery and equipment.
With the US dollar virtually replacing the liquidated Zimbabwean dollar as the national currency, very few companies saw the need to export and build foreign currency reserves.
If a business needed foreign exchange, they simply called on the bank.
Everyone forgot that US dollars earned from trading goods locally cannot strictly be considered as foreign currency. The dollars circulating in the economy were merely a medium of exchange since Zimbabwe had adopted foreign currencies as a trading media, with the US dollar dominating the basket.
The economy was blind-sided by the “abundance of foreign exchange and we all forgot that the country needed to generate money from outside in order for wealth to grow.
Why then be an exporter under dollarisation?
The tragedy was that businesses in the country suddenly lost the urge to innovate and develop export markets and offshore operations which was imperative for long-term survival.
Foreign currency generation strategies disappeared from boardroom discussions and day-to-day meetings. The real tragedy in all this is that many Zimbabwean businesses began to assume that it was the next guy’s problem to export and earn ‘foreign currency’, whilst for their own needs, they simply resort to the bank.
To be fair however, it is not all Zimbabwean companies that shelved export programmes due to the fact that foreign currency became “available locally”.
Some entities found themselves seriously undercapitalised because their entire capital bases were eroded during the hyperinflationary era when plant and equipment depreciated and could not be replaced.
These businesses did not have the funding they needed to retool so that their production could reach levels at which they can compete effectively against foreign firms.
Volumes remained low and there were no economies of scale to talk about.
It is logical therefore that in order to regain our export competitiveness, the country needs a combination of “smart import controls” through a sound mix of measures that do not violate trade agreements, whilst exports should be aggressively promoted via appropriate incentives.
We therefore need realistic export incentives such as at the 15 percent export retention scheme that we used to have. For example, China gives back 180 percent of wage costs to some of its exporters as an incentive as soon as they dispatch goods. These exporters virtually have zero labour costs. Zimbabwe has to offer export incentives within the scope and realm of agreements such as the WTO (World Trade Organisation).
Local goods should be promoted especially via local content rules so that people can still have access to imported substitutes. The measures being implemented to make the economy more liquid, by attracting more foreign investment are good, but they are slow.
Under dollarisation companies no longer have the luxury of a depreciating Zimbabwe dollar to give them an edge in export markets or to price imports out of the market.
Import Controls give short term relief, but can cause long term damage.
Resorting to import controls in an attempt to bridge the trade deficit gap and balance of payments imbalances has always been a bad idea. Import controls are also unsustainable because of the treaty obligations under trade agreements with Sadc, Comesa and the WTO. Import controls, ultimately breed uncompetitive firms with high costs whilst they also foster corruption and impose an administrative burden on an already over-stretched public service.
Export promotion remains the best option notwithstanding that the government is operating under very tight budget constraints, which make it rather difficult to suggest incentives that do not cost the fiscus, either in terms of reduced revenues or increased spending.
I therefore suggest that making the country an attractive low cost investment destination, will boost exports and inward revenue flows in the medium to long term.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.
