Much ado but not that much a-done

AFTER waiting with bated breath for the three most important official announcements, investors can be forgiven for a feeling of deja-vu. Economic commentators will also lament the chance that has gone begging not to turn the economy around but to at least stab

ilise it.


After President Robert Mugabe had laid down the gauntlet with his address to the nation on the occasion of the opening of parliament, it was the Minister of Finance who set the ball rolling last Thursday with the presentation of the fiscal review for the first six months of 2006 before the governor of the Reserve Bank took to the lectern this Monday.


One thread that ran through all three addresses was their congruence, in terms of whom, how and what is to blame for the quagmire that the economy finds itself in. The Minister of Finance cited “indiscipline, accountability, ethics and corruption” as the main culprits, in addition, obviously, to sanctions. The governor called them “the four vices”, again mentioning “indiscipline, corruption, bureaucratic inertia and speculation”.


Another common feature of the last two pronouncements is that they started off with a lot of promise such that one could not escape feeling encouraged. The Minister of Finance in his opening paragraph clearly articulated that the “major policy imperatives and priorities in dealing with our challenges remain, credibility and consistency of policies and their timeous implementation”.


He also listed the country’s challenges — read problems — as on pole position; corruption, followed by the usual candidates; rising inflation, declining savings and investment, inadequate foreign exchange, erratic fuel supplies and interruptions to electricity supply.


With such a reading of the situation on the ground one would have expected a comprehensive solution package to address these problems. As one goes through the statement — especially as analysts are fond of doing — matching the problems with the proposed prescriptions, disappointment sets in.


For the first six months, government revenue inflows amounted to $76 trillion against a target of $58,2 trillion mainly on account of inflation being substantially higher than initially envisaged. During the same period a total of $90,8 trillion was spent, against a corresponding target of $74,3 trillion.


The gap between inflows and outflows from the above is $14,8 trillion, but according to the statement, the deficit for the same period was $17,8 trillion. This was said to have been financed through borrowing from the local market through 91day treasury bills amounting approximately to $17 trillion excluding interest.


For the remaining six months of 2006, an additional $140 trillion is expected to be collected, against an expenditure target of $327,2 trillion. In other words, the government will spend 2,3 times more than is in its purse. This means that the budget deficit for this period will be $187,2 trillion.


The contradiction resulting in the ballooning budget deficit which if one solves an equation derived from the different pieces of information in the statement comes to 24% of GDP for 2006 is the fact that the economy is now roughly 50% of what it was eight years ago, yet the government, in terms of size, is twice what it was then. No country in the world runs a budget deficit as big as ours and expects to have single digit inflation.


The monetary policy statement, we regret to say, also flattered to deceive. First the venue was changed from the traditional Reserve Bank auditorium to the Harare International Conference Centre. Secondly, the event was moved from its traditional slot of 2:30pm to 10:00am and invited company executives were allowed to bring along members of their executive management.


The idea, we surmise, was to give as many people as possible a chance to experience the new beginning as it were. The monetary policy statement pack, in addition to the main statement, included close to 10 supplements (most in full-colour gloss), among them an entirely humorous cartoon booklet of the various ills afflicting the economy.


It is rather difficult for one to sufficiently and comprehensively comment on the monetary policy statement because not only is it too voluminous to go through in four days but, unlike the fiscal policy, it is highly personalised such that one cannot comment upon it without fear that the opinions then expressed would be taken as an attack on the person of the monetary authority itself.


In fact, the governor, at point 9.13 on Page 17 of the main statement, had this to say: “It is also clear to me that venomous outpourings by some of our armchair critics and boardroom analysts seeking to convince the most gullible amongst us, in their eloquent technical jargon, and retrogressive never-see-good forecasts which seek to lay blame for all our evils on one institution, one person, or one stakeholder constituency, are nothing more than what one writer, described during the Rhodesian era as ‘pseudo-economic intellectualism feeding from reckless dishonesty.’”


However, what the monetary policy statement did manage to do was to create a lot of pandemonium both within and without the country. The dropping of the three zeros and the withdrawal of the family of the now old bearer cheques with the attendant limits has seen a lot of people running around.


The informal market both for goods and currency which deals mainly on a cash basis will have its operations hamstrung, until such time as things have stabilised. At this juncture, however, our little knowledge tells us that the dropping of the zeros only goes as far as providing convenience, nothing else.


The governor also announced the reduction of the accommodation rate from 850% to 300% per annum, which had been preceded by the fall in the yield on the 91-day treasury bills from 510% to 200% per annum. Hard on the heels of a 2,5 percentage points reduction in the statutory reserves a week earlier a further five percentage-point reduction was granted.


The bankers are concomitantly expected to reduce their minimum lending rates. In terms of negative real interest rates we have now gone full circle and are back to 2003 again. The more things change the more they stay the same.


In response, the stock market has since the day of the announcement gained 48,5 percentage points to reach an all-time high of 137 266, 79 points (new currency) this Wednesday. On a year to date basis, the industrial index is showing gains of 642,4% which probably puts it way ahead of the compounded monthly inflation rate and slightly ahead of the currency devaluation on the parallel market of approximately 550%, using the rate of $650:US$1.


The movement of both these market indicators seems to confirm our view that the authorities, besides, the rhetoric, did not show much resolve in fighting inflation, at least through the orthodox and textbook economics’ means.