Hope of economic revival deferred

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The ousting of former president Robert Mugabe in November 2017 led to the emergence of the “new dispensation”, creating high expectations from ordinary citizens and the international community, for substantive political change and economic recovery. However because of various reasons, things have not gone as expected.

By Vince Musewe

Policy-related macro-economic instability, lack of investment, unresolved land tenure disputes, high input costs and outdated machinery, inefficient government bureaucracy, inadequate infrastructure, high consumptive government deficit, a high trade deficit as imports far exceed exports and unfavourable current account have remained the key challenges.

Protracted fiscal imbalances have constrained development and social service provision, undermining poverty reduction and creating serious unemployment pressures, which have been mounting. This has in turn created despondency, mostly among the unemployed youths (Under 35) who make up the majority of the population.

The economy has been characterised by low production levels, which have increased unemployment and poverty levels and led to a high import bill compared to exports, a declining tax base due to low incomes, an informalised sector, declining local demand and de-industrialisation.

The new dispensation’s key policy response and thrust have been based on “Zimbabwe is Open for Business” mantra which comes after years of financial sanctions and lack of foreign direct investment during the Mugabe era.
The Transitional Stabilisation Programme (TSP), a new policy, introduced in October 2018 by Finance minister Mthuli Ncube, has sought to arrest the deteriorating economic environment by dealing particularly with stabilising the macro-economy and the financial sector, introducing necessary policy and institutional reforms, transforming to a private sector led economy, addressing infrastructure gaps and launching quick-wins to stimulate growth.

The Zimbabwe economy is mainly driven by agriculture and mining sectors which generate about 80% of export revenues. The high unsustainable debt-to-GDP ratio, a high fiscal deficit, cash shortages, three tier pricing systems and limited foreign exchange which continue to stifle economic activity, persistent shortages of essential goods including fuel and consumer goods, which are mainly imported, remain strong headwinds which are preventing any meaningful economic recovery.

Political disputes and general discontent have added to the situation. The Movement for Democratic Change Alliance (MDC-Alliance), led by its now elected leader Nelson Chamisa, has continued to dispute the election of President Emmerson Mnangagwa. Added to this, have been demonstrations and stay-aways by a restless population protesting against continued deterioration of incomes and standards of living. The slow pace of political and economic reforms and reported fissures within Zanu PF has also unfortunately dampened recovery momentum.

There is no doubt that sustainable economic and social development can only happen in a stable macro-economic environment. Macro-economic stability is the absence of currency fluctuations, high debt burden and unmanaged inflation, which can result in economic crises and collapse in GDP. It also includes minimising economic vulnerability from both internal and external shocks and the pursuit of consistent well-thought out economic policies, which create predictability, and allow effective economic planning and growth. Fiscal and monetary discipline, as well as a sustainable balance of payments position are therefore key.

The restoration of fiscal balance through fiscal discipline to reduce the government budget deficit is one of the biggest challenges being faced by the new Minister of Finance.

However, the situation has since improved with budget surpluses being reported for both the months of January and February 2019. Key to the improvement was the introduction of an unpopular electronic transaction tax of 2% geared to increase revenues, while cutting down the government wage bill. Considerable success seen achieved to date and tax revenue increases have seen increased expenditure in infrastructure health and education.

Our key challenge for the economy remains that of generating adequate foreign currency, which the economy is highly dependent on. Lack of adequate foreign currency, primarily earned from agricultural and mining exports utilised to meet the day-to-day needs of the country, such as the import of raw materials and machinery have particularly constrained the revival of the industrial sector and continue to be the source of a liquidity crisis and high inflation, which has created an informal foreign currency bourgeoning parallel or black market.

Unfortunately, the informal market’s exchange rate has become the key determinant of the pricing of goods and services as companies, traders and citizens have been forced to procure their foreign currency needs for imports informally and not through the banks. Annual inflation, which used to be contained within single digit levels, for the first time since 2009, suddenly rose to 20,9% in October 2018 and maintained the rising trend in November to reach 42% by December 2018.

The sharp increase in inflationary pressures was caused mainly by a very high exchange rate between the US dollar and local currency and an increase in fuel prices. Taming inflation and ensuring price stability are therefore key.

The Reserve Bank of Zimbabwe (RBZ) monetary policy statement of February 2019 introduced a formalised interbank foreign exchange market where companies can source foreign exchange on a willing-buyer willing-seller basis, in an attempt to arrest illicit trade of foreign currency and inflationary pressures. The market is still to have the intended impact of directing foreign exchange trading to the formal sector away from the speculative parallel market.
Zimbabwe currency reforms have been seen as critical for macro-economic and price stability and the Minister of Finance, including Mnangagwa, have promised to introduce own currency by year-end once satisfied that the appropriate fundamentals are in place.

It is clear that without the appropriate institutional arrangements, any developmental initiatives are bound to fail. Zimbabwe’s institutional capacity to deliver has been hugely compromised for the last 38 years and the following issues have been identified as key deliverables. These include:

Budget expenditure control;

Reform of the public service;

Public enterprises and local authorities’ reforms and service delivery;

Empowerment of provinces;

Dealing seriously with rent seeking and corrupt behaviours;

Ease and cost of doing business;

Integrating back into global financial markets in order to be able to access foreign exchange credit lines and developmental aid and loans from international banks and financial institutions such as the World Bank; and
Creating sustainable inflows of foreign exchange into the country and not be too dependent on primary product exports of tobacco and gold.

Dealing with corruption has, however, been perceived as slow and insincere. Mnangagwa has faced serious criticism in selective application of the law. The anti-corruption body, the Zimbabwe Anti-Corruption Commission, has been seen as toothless, which led to its dissolution and appointment of a new body is still pending.

As if this is not enough the United States further renewed Mugabe-era sanctions on Zimbabwe and they have been calls, particularly from within Africa, for this policy to be revisited. Sanctions continue to be a hidden cost to doing business while discouraging foreign investment which is key to both economic and social recovery.

Of concern is the limited access of Zimbabwean banks to foreign credit lines which in turn perpetuates high cost of capital, low production levels, high imports, high unemployment levels and an inability for the government to deliver social services and address increasing poverty levels.

Going forward, we are bound to see a new thrust towards political dialogue in order to reduce perceived political and country risk. Ncube is under pressure to resolve the high debt levels, further cut the budget deficit, attract new foreign direct investment inflows, address currency issues and institute wide ranging fiscal and monetary reforms as intended. His success will largely be based on the response of the international community to resolving the debt issue and avail much-needed financial assistance.

In conclusion, the economic recovery of Zimbabwe has been somewhat delayed in comparison with expectations.
Continuing inflationary pressures for whatever reason continue to pose a threat to social stability while the tangibility of the benefits of the TSP policy adopted by government remain rather academic. Political will, co-operation and constructive dialogue with the opposition political parties, constructive international re-engagement and the urgent address of the provision of basic needs and price stability remain on the critical path to meaningful economic revival.

Vince Musewe is a local economist. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past-president of the Zimbabwe Economics Society. — kadenge.zes@gmail.com, mobile: +263 772 382 852.

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