REGARDLESS of who is to blame, the reality is that the economy is in a quandary, and a recent statement by Foreign minister Sibusiso Moyo that we should brace ourselves for at least three more years of hardship confirms it.
Economic activity has shrunk dramatically and the concern to an average breadwinner is not what happened in the past, but what the future holds. The real dilemma or challenge facing government is that the economy may have well and truly entered stagflation, an unnatural phenomenon outlining an economic condition combining slow growth and relatively high unemployment with rising prices, or inflation.
The authorities seem to be cognisant of this situation, as recent monetary policy, though meant to support Statutory Instrument 142, largely consists of actions that are traditionally used to control stagflation. By increasing interest rates, which most banks have or are implementing, the Reserve Bank of Zimbabwe governor John Mangudya seems to have set his primary macro-economic objective as the reduction of inflation, even if this causes higher unemployment and lower economic growth in the short term.
The intentions may be noble, but it may not be so simple. Monetary policy in essence controls inflation through increases in interest rates, in turn, increasing the cost of borrowing and reducing aggregate demand. Now this may or may not work well in reducing inflation in an economy suffering from stagflation. One thing for sure is that the aggressive rise in lending rates invariably causes a much bigger fall in the country’s gross domestic product growth, which eventually exacerbates the very problem of stagflation itself, especially in an economy which already has a very low growth rate. Increasing rates in this economy is likely to have even more shortcomings and this calls for an in-depth understanding of the real drivers of inflation (at 176% as at June 2019) and the leverage that interest rates actually have on spending or on influencing aggregate demand.
The mistake most people make is looking at Zimbabwe’s inflationary phenomenon through the Western prism. Zimbabwe’s inflation push is totally different, as it is not being stoked by the traditional factors. Inflation in the country is being driven by rushed reintroduction of a local currency, in an economy that had self-redollarised and, ultimately, a depreciating currency in an economy that is heavily reliant on imports of a fairly inelastic nature. Another driver is an ambitious and fast-track revenue drive by this government in the name of austerity. Taxes have not only gone up, but the policy or aggressive rise in taxes was done instantaneously.
Furthermore, the adjustment of rates has resulted in a rapid and steep rise in the cost of borrowing for local manufacturing that naturally reflects in the end prices to the consumers. In effect what this means is that monetary tightening in the traditional sense will just not work.
Clearly, Zimbabwe’s inflation has completely different dynamics and is being largely driven by government’s own policy measures and not due to any external factors. The local currency has been depreciating rapidly since inception and together with an already compromised average individual disposable income, due to an increased burden of new taxes, hikes in the interest rates only further hurt the already struggling domestic industry’s competitiveness, thereby further jeopardising employment creation and worsening the poverty levels in the economy.
Rather than increasing rates, the authorities need to bring them down, but do so gradually. The sheer downward direction will deliver a powerful message that government wants to enhance economic activity and not curtail it. It will also do government good to facilitate increasing of aggregate supply through supply-side policies, such as privatisation or otherwise quickly resurrecting state-owned enterprises, deregulation reforms to increase efficiencies and announcing policy measures that directly aim at reducing the costs of production for the domestic industry. That is the only way out of this menacing economic situation.
Tinashe Kaduwo is a researcher and economist. — firstname.lastname@example.org