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04/04/2008 | Rebuilding Zimbabwe

Oxford Analytica Staff

When Zimbabwe's President Robert Mugabe is finally replaced, his successor will face the daunting task of seeking to reverse the country's decade-long process of economic decline. Far-reaching action and reform will be required in two key areas:

 

Public spending. Zimbabwe's hyperinflation has been caused by a reckless rise in government spending and the associated escalation of government debt. This necessitates the imposition of credible controls over public expenditure through a politically coherent and responsible budgetary process, including:

  • a deficit-reduction strategy within a priority-led fiscal framework;
  • rationalising the bloated civil service;
  • rebuilding the tax base and, hence, government revenues; and
  • a savings-promotion strategy, given that most pension fund payouts have been rendered worthless by the combination of hyperinflation and governmental plunder.

Also essential is a technocratic Reserve Bank with genuine monetary policy autonomy. A major policy issue will be the treatment of the existing mountain of domestic government debt.

Currency reform. Over recent years there has been a vast gap between the official and parallel-market values of the Zimbabwe dollar, with the latter value in near-continuous decline. In addition, the prices of many goods and services have been subject to administrative fiat. Together, these policies have either rendered production of many goods and services uneconomic, or have driven many enterprises into the parallel -- and illegal -- economy.

Restoring confidence will require the replacement of the existing Zimbabwe dollar by a new unit, possibly via a temporary fixed link to either the South African rand or US dollar. Either way, the exchange rate at which most commercial transactions take place needs to fall to a realistic -- preferably market-determined -- level, so that output prices more accurately reflect input costs. An associated requirement will be substantial liberalisation of foreign trade in order to boost the availability of goods currently in short supply.

Oxford Analytica (Reino Unido)

 


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