By Admire Mavolwane
WRITING about policy statements, even soon after they have been made, can be an unrewarding exercise. More often than not public reaction will have
by then already indicated how their contents have been judged. All the unfortunate commentator can then do is either to confirm the markets’ assessment or try to convince readers that everyone, apart from himself or herself, that is, has got it wrong — an uphill battle.
Thus a week after the monetary policy statement, the stock market appears, by its upward movement, up 14% on the week, to have reached a conclusion — it means higher inflation. It would be grossly unfair to say that this was its intention. The RBZ governor himself spelt out his opinion that while inflation had been rejuvenated since March, the rise was “not sustainable” and was at “variance with the collective vision of macroeconomic stability”. It was “expected to reverse during the last quarter of the year… to around 80% by December 2005”.
While there will be differences as to the relative importance of the five reasons he cited to explain the resurgence of “Public Enemy Number 1”, two of them, the fuel price adjustment and monetary expansion, are noteworthy because they epitomise the roots of Zimbabwe’s seemingly intractable economic problem, a fundamental imbalance in transactions with the rest of the world and a long established tendency to live beyond the country’s means.
For structural reasons the balance of payments is perennially negative. Since, as students of economics are taught, the balance of payments must always balance the situation can be rectified only by one or more of the following measures; reducing the rate of development; replacing imports; expanding exports; improving the terms of trade; inducing increased foreign aid, or investing or borrowing externally. Most of those objectives are part and parcel of current policy, although some are not possible in present circumstances while others have not always been effectively pursued.
One reason why the fuel price increase is so important is its burden on the import bill. The policy statement shows fuel and petroleum products accounting for 32% of the foreign currency auctioned in the first half of the year. Not only was this the largest single category of imports but it was hugely above the 11% of total imports accounted for by fuel in the 1990’s.
With some forecasters projecting a rise in international fuel prices well beyond US$60 a barrel a reduction in fuel imports is absolutely essential. The best way of doing this is to raise domestic fuel prices and this will be bolstered by the 40% downward adjustment in the exchange rate. Unfortunately, this will, as the stock exchange has correctly assumed, lead inevitably to higher prices. But this is unavoidable if imports of all items other than fuel are not to be further drastically curtailed. The import substitution investments such as methane extraction, oil from coal and increased electricity generation listed in the statement will, even if feasible, take very many years to come to fruition.
Steps to treat the country’s other major macroeconomic imbalance, namely living beyond its means, were less reassuring.
The statement mentions “unacceptably high levels of monetary expansion” as another factor behind the resurgence of inflationary pressures. It notes the 343% increase in credit to government in May compared with an only 65% increase to the private sector and a 40% rise in credit to public enterprises. The slowdown in credit to the private sector is clearly of concern to the monetary authorities. This can be taken to be a crude indicator of the general level economic activity and reminds one of the classical “crowding out” effects.
Even more disturbing is the 392% increase at the beginning of July recorded in government’s domestic debt compared with a year earlier. Even this does not include the projected $3 trillion for the housing of those displaced in the clean-up operation and no doubt still more for drought relief, food imports and the parastatal and local authorities’ reorientation programme. The public sector deficit thus looks certain to be several times the 5% of GDP originally forecast. Since this constitutes an increased claim on resources unrelated to an increase in their supply, higher inflation will be the inevitable outcome. The markets have got that right too.