MACRO-ECONOMIC stabilisation is a very elusive policy objective. More so when certain policies that are implemented end up causing unintended consequences.
Economists may recall that the Philips Curve is a typical example of how macro-economic policies are conflictual. The Philips Curve plots the trade-off between inflation and employment.
The key macro-economic policy objectives in any economy can be summarised as follows:
l Fiscal sustainability;
l Sustainable and inclusive growth;
l Low inflation;
l Exchange rate stability; and
l Balance of payments management.
These are the same policy objectives Zimbabwe has been grappling with in order to achieve macro-economic stability. People may ask me how and why Zimbabwe has been failing to achieve growth and stability.
First and foremost, I must hasten to say the obvious. It might be a broken record to state that confidence is the necessary condition for any economic success.
The confidence issue is demonstrable. The lack of confidence is costing Zimbabwe a lot in terms of the cost of borrowing and access to new capital.
The sovereign risk is very high. The negative implication is that no lender wants to touch Zimbabwe. For example, the international oil industry is normally not a cash-upfront business for importing countries.
Ordinarily, importers use credit lines and letters of credit to buy fuel. But in the case of Zimbabwe this does not work. As a result, government has to rely on individual syndicates to fund critical imports such as oil and food.
This is where state capture looms large.The global oil industry is a cartel dominated by the likes of Total, Glencore, Trafigura and other big companies. Local business tycoons with links to big oil companies are now providing lines of credit to government for the importation of fuel. This is expensive money because government has nowhere to borrow.
In order to service the debt, government has been cutting subsidies and allowed fuel prices to adjust according to international oil prices. The other sector where subsidies have been withdrawn is electricity.
Increases in energy products have stoked inflation and pushed prices beyond the reach of many citizens. This is the hallmark of the Transitional Stabilisation Programme.
The other area where individual syndicates have captured government is in Command Agriculture where US$3 billion went missing. It is all about who can arrange financial transactions and restructure deals for the cash-strapped government.
Zimbabwe’s woes can therefore be traced to usurious practices. Yet government has no choice because it is broke and technically insolvent. The economy is not growing.
The International Monetary Fund reckons that economic growth will decline by 7% in 2019. Export proceeds are probably not coming back to Zimbabwe yet the import bill is growing. So in terms of price stability, inflation will continue on the rise as long as electricity and fuel prices are not capped.
The demand for forex is far greater than supply. For as long as this is the case, the premium between the interbank market and the parallel market will actually widen. Again, these premiums stoke inflation. It is a vicious circle.
The solution is to allow the exchange rate to float until there is convergence between the parallel market and the inter-bank market. At the same time, the country must attract new investment and get more remittances. Boosting production and exports will be key to this strategy.
Zimbabwe has been experiencing stunted growth for very prolonged periods. This is caused by weak drivers of growth. Yes, it is convenient to blame the drought-induced El-Niño, but not all the past years have experienced the El-Niño effect.
The main drivers of growth are the mining sector (gold, platinum, chrome but not diamonds), tourism, tobacco and services. You can see from the list that manufacturing is conspicuous by its absence.
However, the mining sector is affected by fluctuations in international commodity prices and lack of beneficiation and value addition. As for diamonds, there are serious transparency issues that also border on corruption.
Balance of payments support
The biggest albatross is the issue of debt arrears, which makes it impossible for Zimbabwe to access new money or loans from bilateral and multilateral sources. Even if restrictive measures are removed, the situation will not change.
Creditors are and will still insist that Zimbabwe first clears its debts to the World Bank, European Investment Bank and African Development Bank. In 2011, Zimbabwe was hoodwinked into clearing International Monetary Fund arrears hoping that this was going to unlock new funding. As it appears now, the whole Lima Debt Service Plan is dead in the water.
In my view, the only way out of the debt trap is the Heavily Indebted Poor Countries (HIPC) initiative. Combined with debt cancellation, the HIPC route could possibly give us the much-needed debt relief.
In terms of the current account balance, it is worth noting that the trade deficit is narrowing, although the jury is still out regarding the issue of sustainability. The twin deficits (budget deficit and trade deficit) appear to have been so far contained. The capital account is sensitive to political risk hence its performance is linked to the country’s sovereign risk.
The budget deficit accelerated after 2013 when the inclusive government was collapsed by elections. The post-2013 Zanu PF government monetised the deficits through the issuance of Treasury Bills on the one hand and the central bank overdraft on the other.
The total amount of borrowing stood at US$9 billion by end of 2014, whereas the deficit was only US$50 million when the curtain came down on the inclusive government.
Clearly, this borrowing was crowding out the private sector. In order to curb the borrowing, government raised interest rates from 50% to 150% in the September 2019 Monetary Policy Statement. The current budget surplus is actually a fallacy because firstly it is reported in Zimdollars. Secondly, it does not make sense to have a book surplus when hospitals have no drugs.
In my view, the authorities have not understood the importance of economic principles as the basis for policy planning. The most cardinal principle of economics hinges on supply and demand. Economics is a double system.
The authorities have neglected to adjust incomes to match price increases. This is going to be the waterloo of the present regime. The social cost of neo-liberal policies and price increases will come back to haunt the system.
Inflation tax has destroyed people’s livelihoods. People’s hopes and dreams have been shattered. Amid all this is the manifestation of policy paralysis whereby government blindly continues to pursue the disastrous course of capitalist austerity. Where is the country going with austerity and neo-liberal policies?
Turnkey solutions are not easy to find. But where there is a will, there is a way. Zimbabweans must unite and put their differences aside. It is now common cause that the current Zanu PF government alone cannot turnaround the economy.
The government is not only clueless, but is equally infiltrated by a mafia and a bureaucracy that is incapable of reforming. Most ministers and top bureaucrats in the civil service are either incompetent or are economic saboteurs.
The economic compass ought to be reset so that Zimbabwe can get back to work.
The first order of business is the resolution of the legitimacy crisis. Without resolving that, the country is going nowhere. In the present circumstances, the country needs a pair of fresh eyes to run the economy. There must be the will to transform and not the will to power.
This is where MDC’s proposed Transitional Mechanism comes in handy. That is why a genuine national dialogue is inevitable. The country cannot continue to suffer a kwashiorkor of sound economic polices when there are skills and brains in civil society, the diaspora, private sector, academia, churches and other political parties. Simply put, the current cabinet must be dissolved by the end of the year to pave way for a Transitional Mechanism.
The Transitional Mechanism’s work is already cut out to:
l Stabilise the economy by reversing the current economic decline and crank up the economy in order to boost production, growth, exports and Investment;
l Implement a raft of economic, political, legal, institutional, electoral reforms;
l Fully implement the constitution, with particular emphasis on devolution;
l Galvanise the nation around a common vision;
l Unite and integrate society through reconciliation, peace-building and transitional justice;
l Eradicate policy ambiguity, policy inconsistency and policy paralysis; and
l Extinguish corruption and the parasitic elite.
Finally, Zimbabwe should either re-dollarise or adopt the rand as legal tender. Without wealth creation, the Zimdollar is of no value.
A currency is a derivative asset which derives its underlying value from national assets which are currently dead or under-performing.
The change that most people are afraid to embrace is the very change that will set Zimbabwe apart and awaken it from its deep slumber.
Mashakada is an economist and MDC’s secretary for policy and research.