Rebalancing the Economy
Through Competitiveness and Compliance
BY
DR. J. P. MANGUDYA
GOVERNOR

INTRODUCTION
This Monetary Policy Statement is issued, in terms of Section 46 of the Reserve Bank of Zimbabwe Act [Chapter 22:15] at a time the nation is in need of solutions to address the intertwined challenges of uncompetitiveness, low productivity and lack of confidence (or war of negative perception) besetting the economy.
 
The major causes of uncompetitiveness of local products are the higher costs of production emanating from high mark-ups to sustain high overheads epitomised by high utility tariffs, finance charges and wages and salaries which are higher than those obtaining in neighbouring countries and beyond. In addition the continued appreciation of the US$ against the country’s major trading partners’ currencies has made imports cheaper thereby making local goods uncompetitive.
 
The combination of the above uncompetitive factors has continued to put pressure on the balance of payments position of the country as imports of finished goods have become the order of the day leading to company closures and job losses. Lack of competitiveness therefore needs to be urgently addressed across all sectors of the economy.
Monetary Authorities’ response to the national challenge of lack of competitiveness due to high mark ups has been to procure the small denomination coins, bond coins, as change for the US$ paper money to deal with the rounding up of prices by businesses. The introduction of small denomination coins is beginning to have a positive impact on the prices of goods and services. The appreciation of the US$, on the other 5
 
hand, is outside the influence of monetary policy and should therefore be taken as a fait accompli. It can only be addressed through higher productivity and enhancing competitiveness which I will address later in this Statement.
 
Given the lack of competiveness and its negative effects on the economy, we do not see any room for wage and salary increases within the national economy. Instead, the prevailing circumstances call for a downward adjustment in the prices of goods and services in order to promote competitiveness and ultimately for the recovery of the economy. Further wage and salary increases would only serve to choke the economy.
 
Thus, instead of addressing the welfare of consumers (including workers) from the demand side of the equation i.e. by increasing wages and salaries, I am advocating to address the uncompetitiveness challenge from a supply side of the equation i.e. for the reduction in prices to increase the purchasing power of the US$. Hence, apart from the inability of the economy to carry additional demand burden or load, I am convinced that the economy and consumers would benefit more from a price reduction than from increasing wages and salaries for obvious reasons, chief among them being money illusion. Lower prices would induce more demand through the concept of price elasticity of demand which is good for both consumers and businesses and leading to the rebalancing of the economy.
 
The second challenge of low productivity is closely related to lack of competitiveness. Low productivity is attributable to a combination of poor work ethics (poor work attitudes and lack of discipline) and the use of 6
 
antiquated plant and machinery within the domestic economy due to lack of capital or financial resources to replace the old equipment. This challenge would need to be partly addressed by amending the Labour Act in order to bring it in sync with regional and international best practice to foster productivity. At the same time, mobilisation of financial resources for the modernisation of plant and equipment is also critical. As Monetary Authorities, we are doing our part in mobilising the required resources by the economy to upgrade some of the obsolete equipment. In addition, the sluggish performance of the utilities sector both in terms of cost and supply, especially energy inefficiency, is having a negative impact on productivity
 
The third challenge of lack of confidence reflects the war of negative perception which increases country risk that has negative effects on liquidity and causes despair and despondency amongst many people within the country. Government is addressing this phenomenon by improving the business investment climate to ensure that Zimbabwe is a good investment destination and to promote the ease of doing business in the country. The Reserve Bank is buttressing these Government initiatives by engaging the Diasporans through various outreach programmes to encourage the Diasporans to invest in their country like what is happening throughout the world.
 
As already stated in my previous
 
competitiveness and compliance boosting drivers under a positive motto that ‘Zimbabwe is back’ in business.
 
In line with the objectives of the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimAsset), we have identified in this
 
 
GLOBAL ECONOMIC DEVELOPMENTS
Global economic activity remained subdued in 2014, as the world economy experienced a slower growth rate of 3.3% in 2014 (same as in 2013) against the initially projected 3.7 %. Economic activity was weighed down by the intensification of geo-political tensions between the Russian Federation and Ukraine, as well as political instability in the Middle East and North Africa.
 
Notwithstanding these downside risks, advanced economies grew from 1.4% in 2013 to an estimated 1.8 % in 2014, largely underpinned by a rebound in economic activity in USA. In addition, supportive quantitative easing, robust labour market reforms, revival in investment, and a reduction in the pace of fiscal tightening, increased contributions from net exports and the stabilization of domestic demand, spurred economic 8
 
recovery in the Euro-area. The recovery in advanced economies, albeit in an uneven manner, was attributed to the expansion in aggregate demand.
 
In emerging markets and developing economies, activity is estimated to have slowed down from 4.7 % in 2013 to 4.4 % in 2014. Notably, the weakening of economic activity in China, from 7.8 % in 2013 to 7.4 % in 2014, combined with heightened political tension in Thailand, contributed to the downside risks to recovery prospects in emerging market economies.
 
Reflecting the deceleration of economic activity in China, one of the world’s largest commodity consumers, international commodity prices retreated in 2014 as shown in Tables 1,2 and 3 and Figure 1. CLICK HERE to read