Internal Devaluation Will Stabilise Prices


Zimbabweans on Tuesday woke up to refreshing news that Government had slashed excise duty on fuel, a move that will have positive ramifications on the overall cost structures of firms doing business in the country.

Fuel is one of the key economic enablers and recent steady increases in the price of the commodity could have been among factors propelling the ongoing price madness. Excise duty on petrol was reduced by 6,5 cents per litre from 45 cents to 38,5 cents, while that on diesel dropped from 40 cents to 33 cents.

Following the reduction in duty, Government directed the petroleum industry to reduce fuel prices with immediate effect to $1,35 per litre for petrol, $1,23 per litre for diesel and $1,17 for paraffin and they took heed.

As the business sector, motorists and the general public celebrate this landmark development, the fundamental question is what it means to the macroeconomic fundamentals? The reduction of fuel prices, arguably, marks the internal devaluation process, though a lot still needs to be done to address other cost drivers.

There has been an outcry by the business sector that high fuel prices were contributing significantly to the cost of doing business, accounting for some price increases of basic commodities. As a result, Zimbabwe has lately experienced wanton price increases, which have partly been blamed on high cost of doing business, including costs emanating from high prices of fuel and premiums on hard currencies on the black market.

Yes, inasmuch as the introduction of the multi-currency regime in 2009 breathed a new lease of life into the economy after the ravages of hyperinflation, the economy, however, seriously struggled to register fast growth. Despite using the US dollar, one of the strongest currencies in the world, prices in dollar terms continued to be triggered by non-economic fundamental issues such as speculative tendencies including hoarding and selling foreign currency.

 This internal devaluation process entails cutting down the cost of production. Even if some economists have reservations about its effectiveness as a macro-economic policy to turn around the economy through enhanced competitiveness of locally produced goods, internal devaluation remains one of the most potentially viable and appealing options available.

This process should not only end with fuel, but may entail reducing the cost of labour in public and private sectors and engendering high efficiency levels in production across all sectors of the economy to make local goods affordable and preferable to imports. The price reduction on fuel, definitely will have quick wins for firms that depended directly on distribution of their products to consumers such as the beverage industry, bread manufacturing and newspaper companies among others that spend hundreds of thousands of litres monthly on deliveries.

Surely, profiteering and greediness aside, immediately consumers of such products should start enjoying a steady decrease in prices. Key players such as parastatals and local authorities that provide major services such as power, water, communications to industries, should also play ball by adjusting their prices after reviewing their cost centres.

Local industries should soon start enjoying these benefits, triggering a downstream effect on all the products and services they provide. However, cutting public spending and putting pressure on private sector to follow suit at times is not exactly easy — it can take long to regain competitiveness through the reduction of salaries and wages.

Further, there could be resistance from labour, as this would seriously affect the earnings for low-income earners, reducing their buying power, which could also lead to lower demand for goods. Internal devaluation should, therefore, have in-built measures to neutralise the numerous potential negative effects of this exercise and must address factors of cost build-up such as high cost of power, utilities, transport and energy.

Government, labour and industry (Tripartite partners) if they work in unison there is nothing that can stop Zimbabwe from successfully achieving internal devaluation for purposes of turning around the economy. It is thus welcome that industry representatives, the CZI and the ZNCC have also come out in support of Government efforts.

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