NEVER has there been a time when investors and Zimbabweans in general have been so mesmerised as this week and the coming one as they partake in a spate
of official announcements.
First to speak was the president who, on Tuesday, delivered the opening address to the sixth session of parliament. As expected, the presidential speech was in very general terms and did not set any political parameters for either the fiscal or monetary policy statements.
One issue omitted, for which many would have been disappointed, was the proposed new mining legislation.
Previous announcements have left many confused as to what the government’s intentions really are. The need to provide for the participation of locals has never been doubted, it is the modalities which remain contentious. The generality of the investing community and the mining fraternity itself would have welcomed a precise statement from the president on the position of the sector in his speech to parliamentarians.
Without knowing what more is about to be revealed, information currently emanating from the real economy is discouraging.
Despite an ambitious US$2,5 billion plan for economic recovery (NEDPP) and a generally above average rainy season the tobacco crop — once the largest export earner — at an estimated 50 million kilograms is its smallest for at least 40 years. Maize and wheat deliveries are well short of the country’s minimum needs.
Output of that other traditionally major foreign exchange earner, gold, has fallen by nearly half while the production of other important metals and minerals, such as coal, is lower due to adverse influences such as a shortage of imported inputs, non-availability of petroleum fuels and electricity cuts.
The manufacturing sector reports that it is operating at only 25% capacity for broadly similar reasons. Tourism remains depressed by zero growth in the number of foreign visitors and consequently in their local expenditure.
What the business sector will be particularly looking for from the authorities is credible evidence of concrete proposals for reversing the on-going economic contraction, which, taking anticipated developments in 2006 into account, will see the economy ending this year nearly 40% smaller than it was eight years ago. If all the real growth achieved prior to 1998 is factored in the economy could be heading back towards the size it was in 1980.
Since the latter date Zimbabwe has gone from being the sub region’s second biggest economy after South Africa — albeit if only about 7% of the latter’s size — to one of Sadc’s smallest entities. If the two-thirds growth in population is taken into account income per head is only 65% of what it was at Independence.
A much greater fall in average real wages has been one particularly pernicious effect of inflation. Between 1985 and 2005 average real wages, that is wages adjusted for price increases, have plummeted by around 90%. This explains why so many salary and wage earners experience such difficulty in meeting their living costs from their disposable incomes and why others, able to do so, have opted to seek employment outside the country.
While most people are only too painfully aware that their income grows nowhere near as quickly as prices are rising the root cause of this state of affairs is not always completely obvious. Nor is the identity of those primarily responsible for it. There is in fact little mystique about the origins of the problem. It is the direct result of a huge rise in the quantity of money in circulation which has nowhere near been matched by a rise in the quantity of goods and services available. Indeed, as already noted, the country’s real output has fallen almost 40% over the past eight years.
By contrast, the quantity of broad money (M3) in April 2006 compared with the corresponding figure for April 1996, shows an increase of over 602 955%. The only way in which the change in the quantity of money can be reconciled with that in the prices of the goods and services which it purchases is through a corresponding rise in the latter. This is not a matter of economic theory. It is a matter of arithmetic.
Nor is there much doubt as to who the originators of the problem really are. Inflation is produced by government because it alone possesses a printing press on which it can turn out money and because it has the power to enter appropriate numbers in a ledger. This is not to say that the government deliberately seeks to promote inflation. It has indeed stated that it regards it as “public enemy number one”.
But the government is effectively a prisoner of the wishes of its constituency which while seeking increases in spending for its benefit abhors the implied rise in taxes needed to finance them. Saddled with a public sector deficit which it has no direct means of eliminating, or even substantially reducing, the government has perforce to have recourse to inflation as a means of taxation.
The inflation tax provides revenue in three different ways. The decline in the value of cash balances is effectively a tax on holding them: higher wages and salaries push people into higher income-and tax-brackets thereby raising their tax burden: and people who lend government good money are paid back in bad, effectively paying government for the privilege of lending to it.
What is required if the markets are to be convinced that this year’s measures will succeed where previous ones have failed is convincing evidence that money supply growth will be significantly curtailed.
And also, that the country’s increasingly scarce resources will be directed towards those areas where they will be employed to halt and then reverse the ongoing downward slide in output and away from those the prime concern of which seems to be to indulge in conspicuous consumption.