HomeBusiness Digest‘Statutory instruments, knee-jerk reaction to weak policy measures’

‘Statutory instruments, knee-jerk reaction to weak policy measures’

THE Zimbabwean government has projected 3% economic growth this year despite the numerous headwinds which include a debilitating liquidity crunch, prolonged power outages, a depreciating local currency, foreign currency and fuel shortages as well as runaway inflation that has decimated incomes and pensions.

Economist and Zimbabwe National Chamber of Commerce chief executive Chris Mugaga argues that the economy will, in fact, contract by 3%.Business reporter Kudzai Kuwaza (KK) caught up with Mugaga (CM) this week to discuss the reasons behind his projection, the increased use of statutory instruments and his take on the Monetary Policy Statement presented by Reserve Bank of Zimbabwe governor John Mangudya on Monday this week, among other issues. Below are excerpts:

KK: In your presentation at the Employers’ Confederation of Zimbabwe Employers’ Symposium recently, you spoke about the country contracting by 3% this year. What informs your projection?

CM: From an official position, I think we had seen growth projections of about 3%, annualised. This projected growth is precarious and quite a mammoth task to deliver on, given the significant downward risks relating to energy, climate, geopolitical headwinds, domestic monetary pressures as well as weakened consumer demand. As was articulated in the Zimbabwe National Chamber of Commerce [ZNCC] Survey on Energy; the threats posed by a working environment without electricity are quite unfathomable. There is certainly urgent need to deal with the power shortages currently bedevilling all facets of the economy.

This power deficit, coupled with geopolitical pressures notably emanating from South Africa, exposes us to a tranche of risks. The once reliable (South African power utility) Eskom is almost on its knees with a debt exceeding R400 billion choking it and the impact on Zimbabwe is predictable. The political tensions swirling around the land issue cannot be ignored with the recent stance by Afriforum to report SA leader Cyril Ramaphosa to the UN on allegations of farmland violence a scar within the region. Commodity prices are set to fall, and commodity exporters have a significantly bigger chunk than importers and host more than 75% of the region’s population. Soft commodity prices imply slower growth and weaker fundamentals for the region.

The sustained wage compression is also spearheading contraction in aggregate demand with wage levels being only about 18% of what they were 12 months ago with inflation for 2019 averaging 250%, regarding the inflation outlook, the threat of consumer prices facing northwards remains stubborn with recent figures on monetary aggregates pointing to such a direction. Regardless of a modest 0,1% growth in manufacturing sector for this year , the threats to the sector are a scare which can reverse it to -4% if the status quo is to remain into the third quarter of the year.

KK: You also project just 2% growth in the mining sector this year. What is the reason behind this projection?

CM: It is vital to appreciate that government projections for the mining sector growth are perched at about 4,7% against our projections of 2%. A number of factors are militating against the sector which ranges from energy or power outages, forex shortages, fuel shortages, high cost structure, skills shortages , a sub-optimal tax framework and to think of the mining vision of a US$12 billion sector by 2023 can be intimidating . It is achievable but will call for a number of drastic measures, the obtaining violence by machete wielding gangs has to be stopped forthwith, the sector is a capital intensive one and knowing the cowardly nature of capital, it can never be attracted to a land where machetes are a common sight. Given the operating environment we are in, it is also a necessity for the central bank to urgently liberalise the forex retention policy in the sector to allow for at least 80% retention of forex proceeds by the players. Most of the policies currently obtaining are extractive in nature, which gives an unfair advantage to artisanal miners and those who are in commodity trading and not exploration and extraction.

KK: What would you say are the main fears of business in 2020?

CM: Like any business in the world, fears are a given but what gives us hope is the fact that we are not operating in a war zone where we cannot take control of our fears, regardless of the fact that fears are definitely there. They include the currency volatility, inflation, industrial action, drought, political noise as well as delegated legislations.

To put it into context, having 258 statutory instruments in one year is staggering by any measure, and what makes it ugly is that most of these SIs have an impact on being retrogressive one way or another. The use of delegated legislations to correct market failures has been a poisoned chalice which continues aggravating the already catatonic policy uncertainty levels in the market. There is need for consistency and respect for our institutions whilst dealing with delegated legislations instead of knee-jerk reactions where emphasis is on reactionary tactics to market gyrations. The ineffectual interbank market continues posing risks to the inflationary expectations, confidence, as well as creating a haven for corruption. As much as we called for the establishment of the interbank market as business, our worry has been on the sticky nature of the rate movement which continues giving hope to the parallel market.

Drought seems to be with us regardless of a wet fortnight we have just entered into; there is need for massive education, notably to our farmers, on the best means of responding to climate change. The fear of industrial action is a reality, given the yawning gap between average inflation rate and the domestic currency- denominated wage rates. This has eroded the consumer spending which has been a major component of GDP.

KK: You have talked about the countless statutory instruments in the past year. What is the impact of this?

CM: Statutory instruments are a knee-jerk reaction to ineffectual policy measures as well as a ploy to overlook Parliament by the executive arm of state. Indeed it is worrisome to see a nation releasing 258 statutory instruments in one year. The downside of promoting statutory instruments as a policy instrument is that it is confirmation of a nation that cannot trust market forces to determine economic direction. It could also be confirming that most of our policies are not well thought out hence the policy inconsistency which brings about the statutory instruments.

KK: How crucial is it for the two main parties Zanu PF and MDC to unlock the political logjam in the country?

CM: My greatest fear is overestimating the significance of political talks but at the same time it is almost impossible to overlook the great success stories which Zimbabwe experienced between 2009 and 2013 which was the GNU period. It is my personal belief that the major opposition party should throw away the unnecessary condition of contesting the victory of President Emmerson Mnangagwa in the 2018 election. It is certainly an irreversible victory.

What could be called for is unity and peace. Political noises have very loud decibels in this country to the extent that any potential investor will not even hear the policies on the table due to such noise. It creates unnecessary reputation risk and perception risk for the nation . Therefore these two parties’ meeting is necessary but not sufficient for the progress of the nation. The bigger picture calls for independence of institutions, conviction of corrupt elements, tabling of a lasting solution to our currency conundrum, policies which promote competitiveness , as well as a bureaucracy which operates a performance culture .

KK: The Monetary Policy Committee (MPC) has said the target is to reduce year-end inflation to just 50%. Is this achievable?

CM: I am not sure about the basis for such a projection by the MPC but I am quite confident that it can’t be a walk in the park when it comes to inflation taming. Government spending alone is expected to breach the ZW$100 billion mark in the fiscal year 2020, the exchange rate volatility will remain worse, given the attrition expected from trying to de-dollarise officially when the market seems more comfortable working with the greenback. The risk associated with setting up policies to re-dollarise an economy are immense , it can promote extreme management of the forex exchange through a managed interbank rate and tightening of the lower forex retention ratios as a way of promoting domestic currency; all these measures are a recipe of confidence erosion which leaves the government in an unenviable position .

Inflation target of 50% to year end is certainly unachievable given all that and the focus for now must be on arresting reserve money and broad money supply which are the major drivers of inflation. Rather we expect year-on-year inflation to average (between)150%-200% per annum as to December, assuming prudent fiscal management and tight monetary control is achieved.

KK: The RBZ governor presented the Monetary Policy Statement (MPS)this week, what is your view of the policy statement?

CM: The Monetary Policy Statement is hawkish in nature, replete with defiance in the midst of a changing economy. In summary, we can view the policy as a debate on two schools of thought which are to re-dollarise or de-dollarise. The document focussed much of its time on defending the de-dollarisation path but factors on the ground point to an economy which is re-dollarising and this is worsened by the informal state of the economy. The more informal an economy is, the more difficult it becomes to achieve monetary targets which will impact on the economic trajectory of a nation.

My greatest challenge with the announced MPS is its constant reference to Monetary Policy Committee deliberations as well as lack of latitude to maintain policy independence from the fiscal policy which was announced last November. Consistency in policy does not entail sticking to a position regardless of its negative impact on the economy. As much as the budget attempted to focus on ways and means to miraculously de-dollarise, it is the monetary policy’s duty to interrogate monetary realities and make recommendations to the government some of which might not be popular in political corridors.

It is also my fear that the monetary policy failed to address competitiveness issues, knowing fully well that the gyrations of our exchange rates [alternative market] makes planning a horrible exercise. Most of the businesses in the country are struggling with competitiveness challenges emanating from the catatonic policy uncertainty brought about through delegated legislations such as statutory instruments, conflicting messages on the reference currency even when doing business worse still given that most organisations’ payrolls are becoming dollarised. An export retention ratio which promotes externalisation as well as interest rate policy which continues discouraging domestic borrowing. The setting up of the National Competitiveness Commission by the government of Zimbabwe was a noble initiative which we believe as business will be used as a platform to interact with the central bank on matters affecting competitiveness, notably those which are monetary in nature.

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