The IMF press release of June 2010 concluded the following on Zimbabawe: “Upside risks to the short-term growth outlook are materializing as the economy is benefitting from a significant increase in export prices and a good agricultural season……The authorities are advised to complete the on-going government payroll audit and start eliminating ghost workers, while attaching greater priority to social and development programs. It is also important to step up efforts in containing risks in the banking system, and to improve the business climate, in particular with respect to property rights. Against the background of a recent pickup in inflation and rising concerns about competitiveness, wage restraint is needed in both the private and public sectors….”
This general statement could be considered acceptable, but specifically the IMF doesn’t, unfortunately, seem to comprehend the dynamics of this country especially on the current challenges and what needs to be done specifically on the wages levels and civil service reform. Worrisome inflation is now a ghost that has been exorcised by the dollarisation in the literal sense. The subsequent deregulation of the goods and foreign exchange markets, abolishment of price controls etc have all converged to erode the distortions that usually favor demand-pull inflation. With the year-on-year at 6.1% in May, the IMF advice on wage restraint in both the private and public sectors is inappropriate.
True, there is a strong link between the wages and cost-push inflation in general, but to emphasize that point when considering the current state of the Zimbabwean economy is totally missing the point. Considering the broader dynamics of US$ pricing and deregulation of the goods market in Zimbabwe, this link has weakened significantly and may remain so for some time, and indeed that statement from the IMF could have only arisen out of ignorance. The imported inflation dynamics from balance of payment position need careful consideration especially if one considers that South Africa is Zimbabwe’s largest trading partner exporting $563 million worth of merchandise to Zimbabwe during the first quarter of this year. Therefore ignoring the US$/Rand exchange rate dynamics of the past quarter in understanding the inflation trajectory in Zimbabwe could create false perception on link between wage rates and inflation. Instead, working around the competitiveness of the industry and the economy as a whole should be the most important policy consideration ahead of wage restraint when targeting inflation going forward.
The major competitive hurdle industry is facing today emanates from shortage of working capital. Credit is not flowing in the economy as evidenced by the very low loan-to-deposit ratio below 50% within the banking sector, and more importantly, the little available credit is very expensive considering the long-term nature of capital that industry is seeking to revitalize weak balance sheets. The IMF has correctly noted that risk containment is very vital within the banking sector, but falls short to understand that every important link between high cost of capital and inflation ahead of wage levels.
Productive capacity within the manufacturing sector, for example, is still below 50%, and the excess capacity, itself a huge dent on competitiveness and efficiency, has more important effects on the industry’s critical fixed cost function ahead of the variable labour costs. Interesting as well is the fact that financial sector deepening and risk moderation will remain acute for the banking sector as long as domestic demand is still very weak, compounding further the ease with which credit can flow in the economy. Hence the wage levels play an important role not only in creating a sustainable pool of domestic demand to provide the market for the local producers, but equally to improve the overall financial sector risk perception that will result in credit doing its miracles.
The wages are still very low in nominal terms, averaging below $400 per month, and therefore making the financial markets more efficient could be more important in fighting inflation than having a blind policy of targeting wages. Internal growth models are very important in today’s well globalised environment, and without vibrant and sustainable domestic demand, Zimbabwe will take a more prolonged road towards solid recovery. The issue of brain drain has seriously affected this country, and the current low wage rates, if to be kept much lower for long, will not only perpetuate the status of Zimbabwe as a country of poor workers, but will equally hinder the infusion of superior skills at a time global labour mobility has become very fluid.
Equally, eliminating ghost workers cannot be more important than the broader rationalization of the entire civil service, whose core should be chopping excess baggage. GDP started declining in 1999, and almost 50% of it was wiped out by 2008. This of course translated to more energy having to be expended on state-related social programs to alleviate poverty, but considering equally that the central government’s solvency was compromised invalidates the justification in keeping about the same numbers of civil servants as in 1999. Wages take up about 70% of domestic revenues today, and trimming the government workforce will create fiscal breathing space and allow the government to embark on important capital projects. The secondary effects through private sector job creation will eventually offset the immediate employment losses and propel the economy into a more sustainable mode than the current hand-to-mouth fiscal position.
Therefore eliminating ghost workers should be part of the broader policy that should be moving towards containing the government wage bill within very specific targets than being part of a general policy of rationalization. Equally, the government has not been so clear on its targets, and a lot needs to be done towards setting and indeed moving towards the targets. What is the desirable level that wages should be capped as a percentage of domestic revenues? What is the target date by which government should be within the set limits? All these things need to be clear to steer the economy out of the mediocrity and work towards a vibrant second world economy.
No comments:
Post a Comment