Currency reforms have taken centre stage in the economic policy agenda of the country for the past two and half years.
In response to widespread and growing calls for reform, the authorities have embarked on an ambitious programme for comprehensive reforms in the fiscal and monetary space.
Most recently the Monetary Policy Statement issued by the central bank ushered in a new currency regime. The previous USDollar FCAs were re denominated as RTGS dollars, effectively introducing a local currency.
This followed the separation late last year of Nostro FCAs and RTGS FCAs. What do these developments mean for exporters and importers?
Well, to me the answer lies in a number of corners. Reports released this week show that gold deliveries have started picking up, whilst January trade statistics showed a significant narrowing down of the trade deficit on the back of a reduction in imports for the comparative period in 2018 whilst exports were firmer.
Very good developments. However, by far the most interesting development following from the currency reforms was the statement by Innscor in its annual report and I quote; “By its nature, the Group is a large user of foreign currency and we therefore welcome the recent Monetary Policy Statement which has sought to provide a transparent mechanism for importers to access currency from the market, whilst providing exporters value for their foreign currency earnings.
“We are hopeful that the system articulated will allow our businesses to plan working capital cycles and to execute on numerous capital projects we have in terms of our long term strategic targets. The new policy announcement will allow our business to quickly evaluate our export competitiveness, and we fully expect to commence exports in a number of our business units.”
This statement summarises the far reaching potential impact of the recent monetary reforms.
The enforcement of the one to one parity exchange rate with the USDollar was clearly working against progress. Whilst it created a sense of false stability, the USDollar environment was very uncompetitive for local industry.
Not only was the 1:1 rate a serious tax on importers but it became a severe disincentive for exporters to expand operations. Finally, despite teething implementation challenges, the new currency framework seems to be just one of those policy maneuvers the country needed to get our corporate sector actively thinking about exporting, and doing so competitively.
Why Export Led Growth at All?
Since the adoption of the multicurrency system in 2009, the major source of liquidity in the economy has been exports. Notwithstanding the fact that our export base has been limited to a few commodities; gold, tobacco and platinum, we have had to contend with a growing appetite for imports.
The net result has been a widening of the trade deficit (negative net exports), leading to an unsustainably negative cumulative balance of payments position.
This has been made worse by sustained global economic fragility which has seen very slow and uneven global economic recovery patterns. Locally, Zimbabwean firms were facing an overvalued real effective exchange rate, occasioned by the strengthening of the USD against regional trading partner countries; the persistent fall in commodity prices driven by decline in demand from China, particularly for agricultural and mineral products; other structural challenges in the economy ie use of obsolete equipment and infrastructural bottlenecks.
The main consequences of these factors have been the deterioration in the country’s BOT and overall BOP position, manifesting as ddifficulties in effecting international payments due to reduced foreign currency balances, a long pipeline of import payments; cash shortages prevailing in the banking system reflecting constrained ability of the economy to import cash; crowding out of private sector investment by way of excessive government borrowing due to constrained fiscal space and subdued revenue, which factors combined to pose threats to financial stability.
Inflation began to rage as a consequence of unbridled money supply growth resulting in a sharp climb in parallel market exchange rates and had become the benchmark for price setting in the economy.
However, is Currency Driven Competitiveness enough?
International trade between countries has since moved from being based entirely on one country’s “comparative” advantage but increasingly focus has shifted to a country’s “competitive” advantage. The key differences between Comparative advantage and Competitive advantage being that:
Comparative advantage, in economics refers to the ability of an entity (an individual, a firm, or a country) to produce a particular good or service at a lower “opportunity cost” than another party. It is the ability to produce a product most efficiently given all the other products that could be produced.
It is referred to as absolute advantage if a party is able to produce a particular good at a lower absolute cost than another party. The root of comparative advantage is usually due to factor endowments, ie it depends on how well endowed with various factors of production such as land, labour, and capital.
We all know that comparative advantage explains how trade can create value (gains of trade) for two or more countries even when one can produce all goods with fewer resources than the other with each specialising in those goods where it has comparative advantage, and trading those good for other countries’ goods.
However, Trade in the real world today works on the basis of competitive advantage.
A “competitive advantage’’ is obtained over competitors gained by the party offering consumers “greater value”, either by means of “lower prices” or by providing “greater benefits” and “superior service” that “justifies higher prices”.
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of trade and business strategy today is to achieve a sustainable competitive advantage over other firms and for countries — each seeks to become more competitive than another.
Therefore merely possessing a comparative advantage no longer guarantees success for a country on the global trade scene. The world is now driven by competitiveness. For Zimbabwe to enjoy Export Led Growth, we must therefore start thinking in terms of defining our “competitive advantages”.
The challenge therefore, is for all of us to understand that competitiveness is really about two key issues: Productivity and Innovation.
Productivity is the element that drives cost competitiveness or cost advantage, as it determines how efficiently resources are being combined to produce a unit of output or service.
On the other hand Innovation drives what the competitiveness guru, Michael Porter terms “differentiation advantage”, which speaks to the ability of a product or service to deliver benefits that exceed those of competing products in both export and domestic markets.
Thus, competitiveness is an optimal blend of Productivity and Innovation that will enable a country to generated superior value from its exports(of goods and services, including tourism products!!!) and therefore superior revenues for itself.
In the same vein our industry, which has been clamouring for a softer currency now has a small window to invest and take advantage of the effective reintroduction of a soft local currency. However, we must know that long term export competitiveness cannot and will not be driven by currency depreciation alone.
Why is this kind of thinking critical in the current competitiveness discussion that we are having in Zimbabwe?
This thinking is important to us as banks because we firmly believe that driving up the country’s competitiveness cannot be achieved by simply cutting labour costs across the board whether through internal devaluation or other means.
We ardently believe that as a country, we must also concurrently place greater emphasis on driving up Labour Productivity as well as incentivising Innovation into new products and processes and services in order to lower (unit) costs and improve quality on a sustainable basis. Low cost but low quality products and services will sell very cheap, will not earn us a lot of money and will not make this country a globally competitive player at all!!!.
We do not have the population size to follow the example of China, where comparative labour costs , due to a huge population, were leveraged to make China globally competitive as a global manufacturing centre.
If we try that route, we will just become a very small poor country, with a very poor, lowly remunerated and demotivated workforce. Neither do we have the population size and income levels to drive domestic consumption to levels where our corporations can become globally competitive. We thus need to look at export markets for both goods and services.
The most competitive and most valuable global companies do not sell cheap products, eg Apple Incorporated, Microsoft etc but deliver superior products based on Innovation and very high levels of productivity.
The most competitive economies in the world are high income economies, churning out superior value added products, they did not become competitive by going for cheap!!!
We therefore also need to start thinking in terms of areas where we can achieve very high productivity and very high quality in exchange for very high value.
Our tourism sector for example, which for all intents and purposes is an “export sector” is very low hanging fruit, where these concepts can be quickly rolled out.
The labour productivity analysis brought forth by the first Zimbabwe National Competiveness Assessment Report in 2015, highlighted that comparatively, the Financial Services Sector in Zimbabwe is the most highly productive, generating per capita income of over $80 000 per employee. However, productivity in agriculture was reportedly very low, registering annual income of just over $200 per employee.
In terms of regional averages, Zimbabwe at approximately $2 000 annual output per employee, ranked only ahead of Rwanda, but lagged behind Kenya and Zambia, and significantly behind South Africa and Mauritius.
Zimbabwe’s output per unit of labour is very low compared to its comparator countries, implying that the average productivity in the country is very low. This means that as a country, we are not competitive.
As we seek to drive export led growth, we therefore need to invest more in new technology, machinery and renovate our production processes in order to improve the country’s competitiveness. We need to introspect, and leverage those areas where we can offer a unique value proposition to our export markets. For example, what is unique about tobacco produced in Zimbabwe?
Is it just a commodity, or there is something extraordinary that can get us a globally competitive position as a tobacco producer.
Zimbabwean cheese used to rank second only to cheese produced in France. The French successfully branded “Champagne”, a white sparkling wine made from grapes grown in Champagne province, France.
Cuba has its world famous Cuban cigars. Ireland built its competitiveness on unique beers and other alcoholic beverages whiskeys and so on. The Swiss are renowned for making the best chocolate in the world.
In that context, what goods within our export basket, can we uniquely brand as a nation, in order to take on the extremely competitive global market place?
We used to pride ourselves as a producer of “hand picked cotton”. What aspects of our unique natural heritage, mineral and agricultural endowments, superior education and technical skills can we translate into globally competitive, high value products and services through an appropriate level and mix of productivity and innovation?
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 organizations that the he is associated or connected with. feedback related to this article to him on [email protected] or on mobile numbers +263772206913, +263772121227