Critical reforms key to economic turnaround

Zimbabwe, like other African countries, continues to be in the hub of an increasingly open and integrated world economy. With the African Continental Free Trade Area (AfCFTA) Agreement having secured a minimum threshold of 22 ratifications for entry into force, it presents a lot of opportunities for the country and transformation of the African economies, but what is key is the strategy of what we need to achieve as a country and to take a position so that we are competitive and open up new markets and investment opportunities.

Economic growth remains a concern on the back of weak private sector fixed investment, high unemployment levels and constraints on consumer spending. Perception risk is a reality and that has been our biggest challenge as an economy, which calls for policymakers to pull in one direction and focus on creating a conducive business operating environment to attract both domestic and foreign direct investment. Uncertainty emanates from Policy pronouncements without consultations and this weighs on business especially on planning and forecasting. Businesses just like investors are risk averse hence policy consistency and coordination is important.

Competitiveness is key, hence there is need to be competitive as a nation, and industry must have a competitive advantage in both the domestic and international markets. Competitiveness in terms of fundamental attractiveness is needed. Investors simply prefer to invest in countries that are competitive and favourable to market forces where attractive rates of return can be earned.

In order to be competitive, and for the country to move from the consumption-led growth to an investment-led growth, there is need for essential reforms on the policy front and on monetary dynamics. We are in an era of rising global competition hence addressing challenges weighing on business will give much-needed economic boost which will put us on the map of global competitiveness for the next century, creating jobs and sustainable growth.

The quality of exportable goods will be greatly enhanced by this and millions of meaningful, respected, well-paying trade jobs with good benefits will be created.

Of late there have been concerns on the inflation trend which was largely trending below 5% for the greater part of 2018 and spiked to 20,9% in October 2018. The inflation spiked in October 2018 after the announcement that banks should separate nostro foreign currency accounts (FCAs) from the Real-Time Gross Settlement (RTGS) deposits. This directive from the government meant that the nostro FCAs are solely for United States dollars while the RTGS accounts are for electronic money and bond notes. This caused a ripple effect in the market. Year-on-year inflation rose to 66,8% in March 2019, as inflation pressures build in the economy.

The question has remained as to what needs to be done. Essential reforms in monetary dynamics are critical to buttress the confidence trajectory as these are weighing on business. The simple fact that we are immersed in biting foreign currency shortages characterised by a multi-tier pricing system means the cost of money has become both unsustainable and unpredictable.

As long as we are witnessing the prevailing foreign currency shortages, it means industry’s capacity to satisfy the market will remain weaker whilst credit to the private sector will remain compromised given the high cost of funds following a depreciated RTGS value compared to other payment methods.

The inter-bank forex trading platform has been ineffectual. With the establishment of an inter-bank foreign exchange market in Zimbabwe, to formalise the trading of RTGS balances and bond notes with US dollars and other currencies on a willing-buyer willing-seller basis through banks and bureaux de change, having been on the need to bring sanity in the foreign currency market; this has been ineffectual given that foreign currency is not available at the banks.

Failure by industry to import raw materials because of foreign currency shortages has led to low supply levels. Failure to acquire foreign currency on the formal market weighs on the cost of production and is imposing an unsustainable implicit taxation on businesses that import some raw materials or machinery, thereby resulting in price increases.

The inter-bank market has not been the real source of foreign currency, hence there must be less interventionist measures on the market. Market forces should determine the exchange rate and there is need to review the independence of the market. There is need for a guide to interbank market operations. Currently, there is perceived to be the official rate and black market rate resulting in the unavailability of foreign currency on the bidding platform.

Meanwhile, unregistered informal sector players are competing unfairly with the registered formal sector players who offer similar products/services but with added fiscal obligations.

The dominance of the informal economy means we can no longer rely on official inflation figures since a greater traffic of transacting is now taking place in the underground economy. As long as we have undesignated sites for trading in our urban sites, it is difficult to monitor price levels which have become volatile.

Going forward, on the policy front, it is important to note that unsustainable money supply growth has been the biggest threat on the economy hence the central bank should not print/inject more bond notes in the economy.
Printing money will create more inflationary pressures and promote black market trading. There is need for an interest rate policy which will also help in preserving the value of the RTGS. Absence of an interest rate policy which was the missing link in the 2019 Monetary Policy Statement has resulted in some taking advantage of arbitrage opportunities

On austerity measures, the minister of Finance Mthuli Ncube should also stick to the austerity measures outlined in the Transitional Stabilisation Programme (TSP) and ensure that unsustainable government expenditure is addressed given that it has been posing the single biggest threat to the economy. It is also important for the fiscal and monetary authorities to protect the economy by walking the talk on curtailing quasi-fiscal activities which will also curb inflation.

Going forward, essential reforms are key for economic growth and there is need for the monetary authorities to rebuild confidence of the general public. In order for the country to realise benefits from regional integration, there is need to support the production capacity of industry by addressing challenges currently weighing on business operations.

Dumisani Sibanda is the senior economist at the Zimbabwe National Chamber of Commerce. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past-president of the Zimbabwe Economics Society. — kadenge.zes@gmail.com and mobile +263 772 382 852.

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