2010 first quarter economic review

ANY reasonable person with basic macroeconomics knowledge is unlikely to have believed that the economy could be performing quite as projected in the 2010 Fiscal Policy Statement (FPS). 

Nevertheless the first quarter economic review given by the Minister of Finance Tendai Biti confirmed what had become increasingly evident in the last quarter of 2009: economic growth was beginning to slow down again after a strong performance in the six-month period to September.
Rapid growth in the economy occurred when a raft of business-friendly economic policies were initiated at and after the formation of the inclusive government.  For a change, businesses were left to do their work with minimal interference from politicians. Capacity utilisation accelerated from under 10% to a minimum of 30%. Revenue collections by the fiscus jumped from US$5 million in January 2009 to the current monthly average of US$100 million.
The positive performance that was achieved in 2009 prompted Treasury to come up with upbeat projections for 2010.
Barely four months into the New Year, the economic projections have already been adjusted. In contrast to 2009 where economic growth was reviewed upwards to 5,1% from an earlier estimate of 4,7%, the new projections for 2010 all constituted downward revisions. The economy will not grow by 7% as anticipated in the 2010 FPS but by only 4,7% because of “a number of downside risks”.
This is sad but hardly surprising. It is sad because investors had bought into the idea that the country was in a turnaround mode creating an atmosphere of enthusiasm.
Normally, economies emerging out of crises similar to what this country endured in the past 12 years could be expected to record double digit, or at least higher single digit growth rates for several years to catch up with erstwhile peers.  A slowdown in economic output in the second year of the perceived recovery phase does not inspire long-term confidence. Not only does it destroy the hope of some dynamic economic action but it can also instil panic among investors especially as memories of hyperinflation days are still fresh. No one wants to be trapped again in that stagnation so soon. With other countries supposedly experiencing real recovery from the two-year global crisis, the country has an onerous task of keeping capital within its borders given that investors have many other options at their disposal.
From the onset, the growth rates projected for the key sectors of the economy by minister Biti were overly optimistic.  While the economy was largely expected to register positive growth, projections of a 40% upturn in the mining sector and 10% each for agriculture, manufacturing and tourism were too ambitious given businesses’ perceived high political risk. Players in the private sector were geared for the take-off, but issues such as the delay in finalising the political talks impeded the fundraising efforts of companies seeking to capitalise. For instance, some companies lost orders while others who had successfully negotiated lines of credit saw the facilities being terminated when the MDC decided to “disengage” from government. Up to now industry is still licking business wounds inflicted by that incident despite the party having ‘re-engaged’.
The gazetting of the Indigenisation and Economic Empowerment regulations has literally brought the economy to a halt with foreign investors construing it to be a forewarning of an impending expropriation of assets by indigenous groups. Foreigners who had started warming to the inclusive government and the stability in the economy have once again became apprehensive.
This has effectively cut off the country from the foreign suppliers of capital, be it debt or equity. Shutting doors to foreign capital through deliberate or unintended means is now hurting the economy making hopes of recovery a mere pipe dream. Already some companies that had managed to increase production in 2009 are experiencing declining capacity due to factors such as a lack of funding and weak consumer demand for their commodities. The slump in production, and not necessarily speculation, is stoking inflation as companies hike prices in order to cover their overhead costs.
It is important that Biti correctly identified the pricing of public utilities as one of the factors hampering economic growth. Electricity tariffs and municipal rates are very high compared to the level of economic activity in the country notwithstanding the pricing models service providers are using. A situation whereby utility expenses constitute 30% of the total expense bill as is currently happening to many firms is untenable. Well, maybe consumers would not have minded so much if the high tariffs were meant to improve operational efficiencies of the utility providers.
The news that as much as 70% of the revenue collected by these institutions is used to cover staff salaries and benefits is disturbing. The men and women working for these organisations rightly deserve to be paid for their labour but not by plundering their consumers without improving service delivery. Many companies are losing significant production time because of power and water cuts despite paying colossal amounts for these services. This is costing the fiscus potential tax revenue. 
If Biti together with his colleagues in government could expedite the rationalisation of utility pricing certainly they would have solved a large part of the problems holding back productivity in the economy.


Ranga Makwata