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SAGIT – Budget geared to boost production levels

By Taurayi Mushambi

ECONOMIC growth rate refers to sustained increase in the real gross domestic product (GDP) of a country.

The in

crease in GDP should not be a one-off but a sustained one which reflects a rise in the underlying factors of production.

The factors of production are land, labour and capital. Thus the recent budget and monetary policy statements have been geared to increase the factors of production so as to boost the supply side of the economy. An increase in the supply side is instrumental in the fight against inflation and the generation of foreign currency.

Over the years 1999 to 2003, the cumulative decline of real GDP was 28,4% whilst this year the decline was at 2,5% owing to a number of factors.

Firstly, there was low capacity utilisation in the manufacturing sector. The low capacity utilisation in the manufacturing sector was due mainly to the acute foreign currency shortages and expensive foreign currency which was purchased on the parallel market. This meant that the necessary raw materials needed in production could not be imported resulting in low capacity utilisation and company closures by those who could not balance fixed costs with the revenue from low production. Interest rates, which were gradually increasing, did not help either because they threatened the viability of business.

Secondly, parastatals were operating at low capacity levels and were thus not profitable, meaning that the government had to heavily subsidise them, dealing a blow to their contribution towards the GDP.

Thirdly, agricultural activity was subdued because of the land reforms. Whilst the land reforms were necessary to achieve social equity, this, however, saw a decrease in land use and destruction of farm implements which now need to be imported.

The fourth aspect is the negative publicity Zimbabwe has been receiving from abroad which has scared tourists and potential investors away. This has seen a significant reduction in the number of tourists coming to Zimbabwe and thus a decline in the percentage contribution to the GDP by the tourism sector. The negative publicity also led to a decline in the level of foreign direct investments coming into the country, resulting in deficits on the capital account.

Investments were also low because of low savings as people were discouraged from saving because of the negative real interest rates. The recent budget and monetary policies were designed to address the above factors so as to increase the factors of production which would lead to a sustained increase in the GDP and subsequently economic growth.

The two national policy statements’ primary aims are to increase capacity utilisation because of its effect on inflation and foreign currency generation.

The productive sector facility PSF, which was availed to most sectors of the economy at concessional rates has resulted in increased capacity utilisation aided by increased forex inflows thus allowing businesses to import essential raw materials and increase capital expenditure such as machinery and tractors. Increased production has seen shortages of basic commodities becoming a thing of the past whilst helping in the reduction of inflation and a rise in exports.

Arresting an inflation spiral is the panacea to keeping on increasing exports as this helps maintain export competitiveness as global trade increases. To further enhance purchasing power parity, inflation needs to be reduced.

This calls for fiscal discipline on the part of the government and a reduction in money supply growth.

Budget deficits, though inflationary, are necessary to increase aggregate expenditure via the multiplier effect but should be kept at levels where the resultant increase in money supply should equate to the increase in output. We just hope the $750 billion to be released under the Diaspora Housing Scheme will not be inflationary because after funds are disbursed there will not be any corresponding increase in output.

Arresting de-industrialisation has thus been a primary objective of government. PSF funding and prioritisation of foreign exchange allocations have so far helped in arresting de-industrialisation but the importation of cheap products such as the Zhing-Zhongs are threatening local industry because that’s what most average Zimbabweans can afford. Though these imports should be controlled they have taught Zimbabwean manufacturers and retailers not to profiteer from fellow Zimbabweans.

The effectiveness of the monetary policy, government fiscal discipline and repayments to international lenders like the International Monetary Fund have seen an increase in investor confidence. Zimbabwe has been engaging in talks with international lenders and the coming of foreign investors such as the Chinese, who are investing heavily into the economy, is a boost for economic growth.

On the local scene, reducing the gap between lending rates and deposit rates is necessary as an incentive for people to make savings which are necessary for investments. Reducing the gap might be difficult because of the tight monetary policy which is meant to arrest inflation which results in an increase in lending rates to trail the repo rate. Inflation also needs to be reduced so as to reduce the premium included in interest rates.

Thus low inflation, increased foreign currency generation, low interest rates, investor confidence and increased local savings are important factors in achieving sustained economic growth rate.

* Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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