HomeOpinionGovt muddles through economic policy vacuum

Govt muddles through economic policy vacuum

Conrad Dube


GOVE

RNMENT has resorted to crisis management instead of devising sustainable economic policies in an attempt to remove policy-induced distortions, analysts said this week.


They say this day-to-day management style has caused irreparable damage to the economy.


Finance minister Herbert Murerwa conceded that government had failed to harness runaway inflation and persisting foreign currency shortages when he addressed a National Economic Consultative Forum meeting two weeks ago.


 “Under such circumstances, we have virtually moved to the practice of crisis management in place of sustainable development,” Murerwa said.


“Yet it is clear that this form of management is not sustainable and can never build the confidence much required in reviving our economy.”


He said the government was “committed to removing policy-induced distortions and regulations such as price controls and implementing other fiscal and monetary stabilisation measures that promote production in all sectors”.


Economic commentators said the advent of price controls was a result of poor fiscal policies.


The short-term benefits of price controls was to conceal lingering penalties for the economy, the commentators said.


“Investors do not welcome authorities imposing controls as these lead to confusion as to whether Zimbabwe was a controlled or a free market economy,” one commentator said.


“The introduction of controls was a retrogressive step that scuppered confidence.”


Price controls were introduced in October 2001 to cap price increases, which however continued to race behind the inflation rate.


In a significant departure from Zanu PF policy, as set out by the politburo, Murerwa said price controls had proved ineffective in containing inflation or protecting consumers. 


Inflation is currently at 300,1% and still heading north.


Government would limit price controls to a few basic commodities and monitor the prices of other essential commodities, Murerwa said.


Analysts said the impact of these controls was reflected when companies published half-year and full-year results.


The companies said price controls restricted growth in turnover and reduced margins against a background of continual increases in input costs.


“Willdale reported that price controls resulted in the discontinuation of some face-brick lines,” an analyst said.


“ZSR Corporation’s sugar business, which was forced to sell refined sugar at below the cost of production during 2002, sustained a loss of $167 million compared with a profit of $278 million in 2001 … due to price controls, while a tonne of Sable Chemicals product (ammonium nitrate) was selling at a controlled price of $30 000 when the same tonne was being sold  on the open market at over $170 000. Analysts also said while companies were yet to come to terms with price controls, government had introduced new measures governing corporate foreign currency accounts in November 2002.


The liquidation of FCAs was a repeat of the December 1997 fiasco, which led to the dwindling of the country’s foreign currency reserves, the analysts say.


Both domestic and foreign savings have been declining since 1995.


The country’s domestic savings ratio fell from 20,8% of gross domestic product (GDP) in 1995 to 9% in 2000, while the capital account balance deteriorated from a surplus of 7,1% in 1995 to a deficit of 6,5% in 2002.


Zimbabwean exporters have lost the benefit of accessing their own foreign currency to import essential inputs due to the requirement to dispose of half of foreign-exchange earnings to the Reserve Bank of Zimbabwe (RBZ) at the official US$1: $824 rate, while worse still, the other 50% is available to exporters on request through a priority list. The bureaucracy involved has retarded operational efficiency.


Commentators said government was addressing symptoms rather than the real concerns of the industry.


They said there was need to address export market competitiveness to redefine Zimbabwe as a major regional exporter and improve forex inflows.


Retention and expansion of export markets has slumped while many competitors have enjoyed benefits of greater productivity and economies of scale such as export incentives.


Analysts argued that the disparity between Zimbabwe’s inflation rate and customer countries had proved to be a problem for exporters. Exporters said the rate at which the dollar was depreciating was reflective of the currency strength of trading partners South Africa, Botswana, Zambia and Malawi where inflation rates are 11,3%, 11,1%, 25% and 16,7% respectively.


“The massive inflation rate made exports uncompetitive in export markets because of the increased costs of production,” an executive with an exporting firm said.


Recent reports that individual foreign currency accounts were now affected by the 50:50 foreign exchange retention requirement shows government would stop at nothing in search of the elusive forex.


But analysts say the government’s policy is ill-advised and would worsen cash shortages currently prevailing. They say the central bank should consider offering higher interest rates to US dollar account holders and set a mechanism on the forex account which would guarantee the account holder access to the greenback.


The lunge for individual FCAs exposes the failure entrenched in a regime focusing on its stay in power at the expense of restoring and reviving the economy, analysts say.


Such knee-jerk policy decisions were reminiscent of the 1997 government decision to award $5 billion in gratuities to war veterans. The government’s arbitrary decision to buy war veterans’ political support using taxpayers’ money caused a major knock on the economy.


The recently announced salaries for civil servants, where the lowest paid would earn $54 650 a month and the highest paid received at least $800 000 would push both inflation and the domestic debt to unprecedented levels.


Analysts said the increments were coming at a time when interest rates have shot up to levels above 70% providing expensive money for government borrowings.


“The salary increments, though justified, were awarded without regard to market salaries and were not performance-related and would stretch government’s capacity to pay,” economist Eric Bloch said.


Government has also failed to come up with a comprehensive fuel policy since last year when President Mugabe announced that the government would stop importing fuel for private players amidst assertions that the fuel sector was strategic and had to be regulated.


Last Wednesday, deputy minister of Energy and Power Development Reuben Marumahoko announced that the fuel industry had been deregulated and the oil industry could import its own fuel, with the National Oil Company of Zimbabwe importing only for strategic “reserves”.


The absence of policy has resulted in a multiple-tier pricing regime in which dealers charge according to demand.


Industry sources said above 70% of Zimbabwe’s fleet was running on fuel sourced at prices above the gazetted tariff.


Bloch said reflex reactions characterised decision-making in government.  He said where government came up with new policies, they were either implemented too late or not implemented at all.


The Economic Structural Adjust-ment Programme, which was supposed to have begun in 1991, was only implemented three years later in 1994, while the Zimbabwe Programme for Economic and Social Transformation (Zimprest) was published in 1998 when it should have been implemented in 1996. Bloch said Zimprest was never implemented.


“The government has also come up with the National Economic Revival Programme (Nerp) which is yet to be implemented. We have become good at devising economic policies but bad at implementation,” Bloch said.


Murerwa, the chief architect ofNerp, cast a shadow on the programme’s future conceding that its implementation would not be easy under the present environment.


“The implementation of policy in Nerp will not be easy under the present environment where external assistance is limited to food aid and other humanitarian assistance. As partners, we need to jointly rekindle international support,” he noted.


Analyst Tony Hawkins said government’s “fire fighting measures have failed to put out the fire as officials have been hopping from one policy distortion to another without success”.


“Nerp is an incoherent policy in an environment where the government does not adhere to any productive policies but rather opts to approach events as they unfold,” he said.

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