New Perspectives: Towards a productive economy: Critique of the monetary policy

The recently announced Monetary Policy Statement (MPS) was couched around rebalancing the Zimbabwe economy towards more production, which will be achieved through a reduction in consumption. Production deficiency has been identified as the major challenge weighing down the economy. This is exacerbated by high consumption levels, which have resulted in increased dependence on imports, making the country a “supermarket” economy.

Persistence Gwanyanya

To put this into context, Zimbabwe consumes more than 80% of its Gross Domestic Product (GDP), meaning less than 20% is available for investment annually. The bulk of investments go towards replacement of obsolete equipment, leaving less for new capital formation. No country faced with this situation can hope to grow. A country that does not invest will also not generate income and employment and may be caught in this vicious cycle for a long time unless bold steps are taken to rebalance or adjust its economy. So one can only think Zimbabwe’s economic problems — from economic decline to high unemployment levels and tight liquidity conditions — as emanating from this economic imbalance. That is why the Reserve Bank of Zimbabwe (RBZ) believes that in order to change the country’s economic fortunes; the structural issues underpinning this imbalance should be addressed sooner rather than later.

Reserve Bank of Zimbabwe believes that in order to change the country’s economic fortunes; the structural issues underpinning this imbalance should be addressed sooner rather than later.
Reserve Bank of Zimbabwe believes that in order to change the country’s economic fortunes; the structural issues underpinning this imbalance should be addressed sooner rather than later.

What underpins the RBZ’s notion of economic rebalancing is the logic that the adjustment towards increased production and reduced consumption will be complemented by the reduction in imports and increase in exports. As the country starts to produce more than its domestic requirements, it will have to export and earn more revenue. This way, a strong economic growth let alone recovery can be achieved. That is why economic rebalancing is seen as a panacea to the country’s economic woes today.

While the notion of economic rebalancing outlined above makes sound economic sense on paper, my view is that to tout it as the panacea to the country’s economic challenges is overly simplistic. Changing the structure of an economy from a consumptive to a productive one is not an easy task. It requires time and in our case may take a couple of decades to get to where protagonist of this rebalancing would see as a desirable balance. A look at China’s problems today bears testimony to this proportion. China’s biggest challenge is to transform its economy from an investment led growth model to a consumer driven one-exactly opposite the direction we want to take our economy. China’s economy is now expected to grow at less than 7% from average growth rate of more than 9% prior to the global financial crises as it struggles to adjust towards increased domestic consumption. That is why the country is suffering from over investment, which may last for a long period and may even result in a hard landing scenario.

Given the structure of the economy characterised with shrinking private sector and growing share of public services, the journey towards creating a productive economy will require massive trimming of public expenditure notably labour costs. Zimbabwe spends more than 80% of its budget on wages, reflecting the effect a bloated government, a scenario that has characterised the economy since independence. One wonders how easy it can be to reduce this expenditure type, given the high levels of unemployment in the country. Economic Structural Adjustment Programme (Esap) tried to rationalise the public service sector and the consequences were dire. If the government decides to retrench, it can only do so at the expense of increasing informal sector, which is itself a drag on economic growth today. Civil service retrenchments would have negative ramifications on the country’s already high unemployment and poverty levels. This leaves the government with limited options such as cleaning up ghost workers, freezing wage increases together with new posts, among other measures that could be implemented to rationalise the civil service. However, these measures are not enough to achieve the desired result, suggesting that economic rebalancing, though necessary, may not be achievable in the short run.

Research has shown that in order to sustain a productive economy, there is need to build a strong base of investible resources mainly savings. However, with a poor savings culture in Zimbabwe, it will take time to transform the country from a consumer economy to a net saver. The country’s hyperinflation policies prior dollarisation are widely blamed for this poor saving culture. Savings of all forms — from short term to long term savings such as insurance and pension funds — will remain scarce in the short to medium term despite RBZ’s drive to promote a saving culture through financial inclusion among other measures. Arguably so, because financial inclusion may not produce the best results in an economy faced with high and increasing levels of unemployment and the informal sector.

Given the significance of long term savings in driving the country’s long term economic growth, there is need to transform institutions charged with responsibility to grow national savings, notably pension funds and National Social Security Authority (Nssa), into more efficient, well managed and regulated institutions. The thrust should be towards rebuilding the contract of trust between saving institutions and the investing public, which was broken at the experience of hyperinflation. This transmission may be weighed down by government’s tendency to “trim,” to compromise, to avoid taking a bold and principled stand required to strengthen its institutions and make them more credible, reliable and efficient in both mobilisation and deployment of national savings.

The need to transform national institutions extend beyond pension funds and Nssa, to the institutions of learning and training. Achieving a productive economy starts with the country’s education system, which points to the need for transformation from academic towards practical and technical bias. The now famous Science, Technology, Engineering and Mathematics (Stem) project immediately comes to mind as a government initiative to transform the country’s education system. A production oriented country like German, prioritises vocational training and education over academic education.

This structural change will be necessary in Zimbabwe as we try to transform our labour market into a more competitive one, supportive of a productive economy. While the Stem programme has generated a lot of excitement among Zimbabweans it should be complemented by industry through establishment of more vocational training centres and apprenticeship structures supportive of the transition towards a productive economy.

Whilst the idea of rebalancing the economy towards more production is plausible, the feasibility of how this transition could be achieved remains largely unexplored. RBZ seems to be convinced that a low interest rate regime will support the growth of the productive sector in Zimbabwe. In this context, a maximum all-in interest rate of 15% per annum to the productive sector has been set for the banks to comply with whilst penalty rates should not exceed 18% annually. Whilst the causality between lower interest rates and higher levels of production may be strong, tight liquidity conditions will weigh down on credit creation by banks as they go for quality. Ideally a low interest rate regime would need to be supported with higher levels of liquidity, which may not be easily achievable in a dollarised Zimbabwe, with low savings.

To satisfy the country’s recapitalisation and new investment demands, the country will have to increasingly rely on foreign capital of all forms from foreign direct investment (FDI), to foreign loans, portfolio flows and diaspora remittances. However, given the country’s high debt levels hovering around 70% of GDP, Zimbabwe may not afford to increase borrowings especially for consumptive purposes without risking getting into a debt trap. Thus there is need for government to restructure its debt and the Lima agreement is an opportunity to achieve this. Zimbabwe must clear its arrears of US$1,8 billion to the International Monetary Fund, World Bank and the African Development Bank within the agreed time frame. That way, the country may unlock new borrowings at affordable rates due to possible revision of the country’s risk profile.

Increasing the country’s debt levels may not be an optimum growth path for Zimbabwe. The country would need to attract more FDI for sustainable growth. However, this is incompatible with the indigenisation law. Thus the indigenisation laws will have to be continuously improved to reflect the realities on the ground. Research has shown that FDI flows to destinations where the conditions of doing business are sound. As such, the government would need to continuously implement the ease of doing business reforms in Zimbabwe.

The government will remain financially crippled calling for increased dependence on private capital which means privatisation and public-private joint ventures will be essential. Bizarrely, while re-iterating its commitment to privatisation and promising to accelerate it in the next few months, the government is setting up yet one more new parastatal for mining exploration, Zimbabwe Consolidated Diamond Company.

What is clear from the above analysis is that the shift from high consumption to investment is a long term process and in between there may be opportunities to grow by unbalancing the economy like right now. An unbalanced economy will import more and prefer foreign rather than domestic products, whilst it builds local productive capacity. This will be supported by the sustained depreciation of emerging market currencies and strengthening US dollar which may last for a long period. Zimbabwe may have to rely more on imports for both capital and consumptive goods from mainly emerging markets, as they get cheaper with the latter’s currency depreciation.
Companies in the mining, agriculture, manufacturing and energy sectors should capitalise on the extension of duty and Vat rebate on imported capital equipment for values from US$1 million and above to capitalise their businesses. There may be need for government to consider supporting the importation of mainly capital goods through its guarantees. Banks should up their game on international trade facilities such as Letters of Credit to support increased importation of especially capital goods!!

Gwanyanya is an economist and banker. New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail kadenge.zes@gmail.com, cell +263 772 382 852