For any economy to grow and develop, it has to invariably balance the uneasy macro-economic triangle.
This triangle is made up of the macro-economic trinity of fiscal balance, monetary stability and external balance (which includes the trade balance and the net debt position).
Although this uneasy triangle is important for the reinforcement of growth, it does not necessarily substitute other growth-enabling policies and programmes such as infrastructural development and investment promotion.
Zimbabwe’s perennial problems of macro-economic stability primarily stem from the failure by the authorities to balance the uneasy triangle.
To drive my point home let me start by unpacking the financial sector. In 2009, bank deposits barely stood at US$800 million. By the end of 2013, bank deposits had risen to US$5 billion. This was a phenomenal growth in the financial sector reflecting growth in the real sector, which averaged 7% per annum. Financial sector stability improved and during this period loans in the amount of US$3,5 billion were disbursed to the private sector.
Inflation remained in the negative. Most banks’ liquidity positions improved and so did capitalisation. Of course, there were still bad apples that suffered from bad loans and poor corporate governance. These banks eventually collapsed — although some still think they were forced to collapse. This debate is for another day.
My point is that financial stability is good for macro-economic stability and growth. The custodian of monetary policy is the Reserve Bank of Zimbabwe (RBZ). The RBZ tried to maintain financial and monetary stability post 2009 although its hands were tied by dollarisation. Under dollarisation, the RBZ lost some of its most important core functions. One of the most critical functional tools lost to dollarisation was the exchange rate. Previously, the exchange rate had been used to devalue the Zimbabwe dollar and boost exports. The RBZ lost its power to set interest rates because it was no longer the bank of last resort.
A host of other money market operations were also lost. But the RBZ still retained its general supervisory and regulatory functions. After 2013, economic growth faltered gradually. In 2016, the economy grew by 1,6% and the financial sector suffered the consequences. Bank deposits declined to US$3 billion by end of 2016. The situation was made worse by the panicky withdrawals and the run on deposits that characterised the greater part of 2016 leading to an unprecedented cash crisis and the subsequent introduction of bond notes. Thus, the financial crisis mirrored the calamity in the real sector of the economy. This point is important because there are some analysts who miss the point and think that the RBZ can stimulate growth per se.
All in all, the financial sector was abused by the issuance of Treasury Bills (TBs). In 2016 alone, it is thought that government issued TBs in the amount of US$4 billion. The majority of these TBs have not been redeemed.
Pension funds, mutual funds and building societies were badly exposed to these TBs. To this day, one of the building societies has not recovered from the exposure.
With regard to fiscal stability, the budget plays the most critical role. Between 2009 and 2013, government ran a cash budget and balanced its books. By the end of 2013, the budget deficit only crept to US$50 million.
Between 2013 and 2016 the budget deficit rose to US$1,2 billion. Fiscal prudence was thrown out of the window and government recurrent expenditure rose dramatically. Yet revenue performance declined over this period from US$4 billion per annum to US$3,6 billion by end of 2016. Expenditure ballooned from US$3,8 billion to US$4,8 billion.
The take-over of the RBZ debt and other parastatal debts compounded the fiscal position. The unexplained increase in employment costs did not help the situation. Clearly, without fiscal balance there is no macro-economic balance.
The fiscal deficit has sparked a deep fiscal crisis in Zimbabwe. This fiscal crisis has had contagion effects on the monetary sector and the external sector.
I now come to the external sector. The external sector is comprised of the current account and the capital account. The current account has always been in the red since the Rhodesian days and the government of Zimbabwe has failed to break this vicious cycle. In relation to trade, Zimbabwe imports goods and services worth US$6 billion every year, but only exports goods and services worth US$2,9 billion. This leaves a trade deficit of nearly US$3 billion per annum.
The situation has slightly improved by default since the introduction of bond notes and the drop in nostro account balances. I say by default because export levels are still depressed. Linked to the external sector is the question of the debt crisis and its resolution. In 2015, the government of Zimbabwe arrived at an agreement with our main creditors to service debt arrears then to the tune of US$1,8 billion. The arrears were jointly and severally owed to the World Bank (US$1,2 billion), IMF (US$150 million) and IBRD (US$600 million). To date, government has cleared IMF arrears using its Special Drawing Rights. The remaining balance is yet to be paid.
At present, Treasury does not have the capacity to raise funds to repay. The other leg of the external balance is the capital account which is populated by foreign direct investments, portfolio investments, Diaspora remittances, and NGO and embassy funds. The capital account is sensitive to the political environment and policy inconsistencies. In terms of inflows, the capital account receives about US$2 billion annually.
Having analysed the uneasy triangle of fiscal, monetary and external sectors and how important it is, I now wish to say that for macro-economic stability to be achieved, the three sectors have to register favourable balances. In other words, the balances have to be in the ball park. The range of the ball park is debatable but for the fiscal deficit it must be 5% of GDP and the deficit must be a productive deficit, not a recurrent one. But to achieve macro-economic balance, the economy has to produce and grow. The uneasy triangle will not improve unless there is production and growth in the real sectors of the economy.
At present, the Zimbabwean economy is anchored on tobacco, which rakes in about US$800 million per annum; gold which rakes in about US$650 million per annum; platinum (US$700 million); diaspora remittances (US$1 billion) and NGO/embassy funds (US$600 million per annum).
Unfortunately, the diamond sector is the missing link here. As you can see, I have the economy in the palm of my hand and, given the chance, I would do things differently. If I were the Minister of Finance I would set my eyes on the ball and pursue the following goals. First and foremost I would pursue production, inclusive growth, and infrastructural development, boost exports through trade facilitation and promote domestic and foreign investment.
Secondly, I would dismantle the indigenisation policy and improve the ease of doing business by repealing or amending all archaic laws that hinder investment (and there are many). I would engage business and labour and develop a codified social contract. I would do away with ghost workers, reduce foreign travels by government bureaucrats and stamp out corruption. I would ensure that diamond revenues go to Treasury. I would also direct all revenues collected by government departments including the police, Registrar-General, Zinara funds, and all funds collected by a battery of constitutional funds dotted around ministries to be handed over to Treasury.
I must emphasise that I would deal with corruption at all levels from border posts to the corridors of power. No one would be spared. I would aim to run a US$20 billion annual budget funded by domestic resources and external support. In regard to the debt crisis, I would immediateltly seek debt relief via the Heavily Indebted Poor Countries (HIPC) initiative route. It is a fact that Zimbabwe qualifies for debt relief under HIPC. For starters, our debt-to-GDP ratio is over 90% and the HIPC threshold is 80%. I would open parastatals to foreign and domestic investors. I have in mind such parastatals as National Railways of Zimbabwe, Cold Storage Commission, Ziscosteel, Zupco, Grain Marketing Board and others.
In agriculture I would insist on productivity and efficient use of the land, including the enforcement of maximum farm sizes and access to agro-finance; more resources would be channeled towards mining, tourism and the manufacturing industry. The overall thrust would be production, inclusive growth, job creation. Once government is right sized, civil servants, army, police, intelligence and prison services would be paid handsomely.
Issues of redistribution are very important. Once growth is evident and revenues improve, I would put more funds in health for procuring drugs and equipment in public hospitals. More money in education and social security.
Finally, I would invest in infrastructure across the board and ensure that development is engendered. The economy would register green growth and adopt clean energy. Government would prioritise access to clean water in rural and urban areas. A new housing development model would be introduced for rural areas and incentives given to individual and corporate citizens who invest back into the community, especially in the provision of decent rural housing and rural infrastructure.
I would seek to raise the level of economic activity in the informal sector and promote lawful cross-border trade and vending at designated places. Keeping the environment clean would be at the top of my priority list. Civil society would play an important role in the economic governance of the country.
But all these things can only be achieved under a peaceful and democratic political environment. At present, our politics is toxic and it affects economic recovery.
In conclusion, it is my humble opinion that Zimbabwe has great potential to balance the uneasy triangle of fiscal, monetary and external sector balance provided we adopt growth-oriented policies under a peaceful, orderly and democratic political environment.
Dr Mashakada is MDC-T MP for Hatfield, economist and former Minister of Economic Planning and Investment Promotion. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: email@example.com, cell +263 772 382 852