Economic policy after the 2018 polls

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In 1991, with the announcement of the Economic Structural Adjustment Programme (Esap), it seemed the ruling Zanu PF had turned its back on the Marxist-Socialist dogma espoused since the 1970s. The programme failed to achieve its targets, due partly to flawed design, partly to the catastrophic 1991/92 drought, but also because the government was never fully committed.

Tony Hawkins,Economist

2018/19 promises to be a reprise as Zimbabwe is forced to sign up to a new reform agenda which, although it will not be called a structural adjustment programme, will be just that. Whether it will be implemented any more effectively than Esap remains to be seen, but because the economy has deteriorated dramatically since the early 1990s, the pain for Zimbabweans will be far greater.

There are many similarities between the two situations. Then — as now — reforms were needed to tackle the debt burden, the budget and balance of payments deficits, the over-valued exchange rate and growing poverty and unemployment. In every respect the situation is far worse now than 27 years ago.

To tackle these problems, the government will not just have to abandon many of its mainstream policies, but also improve radically its performance. The omens for the new dispensation are not good. Within three months of presenting his 2018 budget, outgoing Finance minister Patrick Chinamasa had to admit that the budget deficit was 67% greater than his budget estimate. Similarly, he has junked his promises to cut employment costs a share of the budget. The same fate awaits the government’s election promises as the new administration tries to tackle the many problems of its own making that are seriously damaging the economy.

How open is a command economy?

For a start, it must acknowledge that command economics is incompatible with an open-for-business market economy. The plethora of market interventions, including Statutory Instrument (SI) 64, tariff hikes, local content regulations, export bonuses, agricultural and fuel subsidies, cheap lending windows for arbitrarily selected industries and firms, and massive public sector borrowing at home and abroad will have to be abandoned.

At a time when gold miners are able to earn premia of up to 75% on their exports, the Reserve Bank of Zimbabwe (RBZ) is borrowing offshore funds at 6% to pay them a 10% export bonus. Just how the RBZ justifies this unnecessary waste of public money is not known.

The central bank’s efforts to justify the one-for-one parity between bond notes and RTGS money and the US dollar are almost universally derided.
Devaluation is an urgent priority, since without it economy-wide distortions will constrain business efficiency in markets that have become a haven for politically well-connected rent-seekers.

Less state intervention

A good starting point for reform is acceptance that Zimbabwe needs less, not more, state intervention, especially of the command economy nature. References to emulating the China model with its connotations of political repression and economic totalitarianism are unlikely to sit well with private sector lenders and investors, even if donors and the Bretton Woods institutions are prepared to swallow their principles to accommodate the government.

In any event, the China model, to the extent that there is one, is in transition from dependence on over-investment in surplus capacity industries and over-reliance on low and medium-technology exports to higher levels of domestic consumption and the growth of high-technology industries and services.

Rapid Chinese growth has been driven by very high levels of domestic savings and a competitive exchange rate, neither of which applies in Zimbabwe, with its excessive levels of private and government consumption spending.

The long term

Any division of policy goals between the near and long term is inherently misleading to the extent that Zimbabwe needs action on a wide range of fronts, all of which are prerequisites for lasting prosperity. Long-term goals will not be met without radical near-term reforms targeting the exchange rate, the fiscal deficit, debt-restructuring and monetary and central bank policy.

Such short-term structural adjustment will have to be complemented by policies designed to halt, if not reverse, de-industrialisation and the ballooning informal sector, export diversification, a shift from consumption-led to investment and export-led growth, and from foreign-funded to locally-funded economic development.

The fiscal crisis

In the 2018 budget, delivered just weeks before the end of the fiscal year, Chinamasa forecast a US$1 billion reduction in the budget deficit from 9,4% of GDP to 3,5%, on the back of a 17% rise in revenue and a 5% reduction in government spending. This deficit was subsequently revised by no less than 66% to US$2,5 billion or 13,8% of GDP.

In the first quarter of 2018, far from declining — as promised — government spending rose by a quarter and the subsequent public sector pay hikes point to a deficit in the region of US$1,5 billion (7,7% forecast GDP). This is being funded by money printing at the RBZ, the issuance of Treasury Bills, drawing on the US$1,3 billion in 7% bonds issued to mop up the excess liquidity which government and the RBZ themselves are busily creating and offshore borrowing from the ubiquitous Afreximbank.

Remedying this will require higher taxes, reduced government spending and large-scale redundancies in the public sector, government itself and the parastatals — which escaped mention in the election campaign. Extravagant promises of increased government spending were made by all parties without reference to their financing. Donor funding may soften the adjustment blow in the short term, but even gullible donors are not in the habit of financing profligacy of this kind indefinitely.

The currency

The US dollar in Zimbabwe is substantially overvalued — at least 50% on a real effective exchange rate basis. There is no consensus on the way forward with suggestions ranging from the nonsensical — joining the Southern African Customs Union or the non-existent Gold Standard — to the politically unworkable (a currency board).

More realistic options are hitching to the rand, an endemically weak currency set for further depreciation in the years ahead or launching a new domestic currency. This last suggestion has political attractions because it would mean the return of monetary policy autonomy — not possible under other options.

There are no good options. All require some US$2 billion in borrowed reserves which no lender will provide in the absence of a viable macro-economic strategy including a competitive exchange rate. Devaluation of 50% will spill over into high inflation that will have to be reined in by fiscal retrenchment and monetary restraint, including positive real interest rates.

The balance of payments

Trade data highlight the urgent necessity for currency realignment and also the futility of import controls. Merchandise exports peaked at US$3,9 billion in 2012, falling to US$3,2 billion in 2015 since when there has been a recovery to a forecast US$4,2 billion in 2018.

In contrast, imports which peaked at US$7,7 billion in 2013 fell steeply to US$5,2 billion last year before rebounding to a forecast US$6,5 billion in 2018 which would leave an unmanageable trade deficit of some US$2,3 billion. Both sets of data are under-recorded, particularly imports, because of informal cross-border trade, meaning that in reality the trade gap is bigger than reported.

National debt

The official position is that by the end of this year, public debt of US$14,5 billion will approximate 75% of GDP. In fact, this will be seen to be an under-estimate because the authorities are known to have borrowed US$2 billion offshore so far this year against a budget figure of only US$208 million. Domestic debt has ballooned to over US$9 billion compared with a budget forecast of US$6,6 billion. By year-end, total public debt will be close to US$18 billion (93% of GDP) which, when private offshore borrowing of some US$2,7 billion is included, reaches 105% of GDP.

During hyperinflation, when the national debt reached astronomical levels, the authorities were able to cancel it by abolishing the currency, obliterating domestic savings and pensions in the process.

This time it is different. Domestic debt, Treasury Bills held by banks and institutional investors, pension funds, and savings in the banks are all denominated in dollars, thereby preventing the politicians and the central bank from replicating the three-card trick they played 10 years ago.

Nonetheless, the Zimbabwean in the street will pick up the tab, in increased taxes, reduced public services and higher inflation.

Inflation

Whatever the consumer price index published by ZimStat measures, it is certainly not inflation. The Consumer Price Index (CPI) shows prices up some 3% in the first half of 2018, while private estimates put inflation at anything from 10% upwards.

It would be truly remarkable if a country whose free market exchange rate has halved in two years and where money supply has more than doubled in the last five years had really experienced zero inflation over the period, as the official CPI suggests.

Equally remarkable is that when farm-workers on a monthly wage of US$80 are being given a 6,7% pay increase, civil servants and the defence forces are getting an extra 17,5% to 22%. Indeed, in the public sector, including education and health, average real (inflation adjusted) wages have risen more than 70% since 2011 — surely one of very few countries where real earnings have risen so spectacularly?

Industrial policy

Zimbabwe’s dependence on unprocessed or semi-processed raw materials has increased with de-industrialisation. Five primary products — gold, tobacco, nickel, chrome and platinum group metals — now account for over 85% of total exports, illustrating not just an uncompetitive economy but also the irrationality of policies such as SI 64 bolstered by export bonuses that promote increased reliance on primary products.

Among the many reasons for Zimbabwe’s dramatic de-industrialisation since the mid-1990s, four stand out:

(i) The uncompetitive economy only partly explained by an unstable, over-valued exchange rate;

(ii) The collapse of commercial agriculture with its strong linkages to manufacturing driven by land resettlement;

(iii) Resort to inward-focussed industrial policy to protect and foster uncompetitive firms; and

(iv) The global shift towards the “servicefication” of manufacturing, illustrated by the rapid growth of “asset-light” digitalised businesses.
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