THE year 2019 was very difficult, with the economy contracting by 6,5%, the worst economic performance in sub-Saharan Africa (SSA).According to the Confederation of Zimbabwe Industries (CZI)’s 2019 CZI Manufacturing Sector Survey, industry’s capacity utilisation fell by 11,8 percentage points to 36,4% in 2019 from 48,2% recorded in 2018. The projected capacity utilisation for 2020 is set at 27%, which is a 9,4 percentage points decrease from the 2019 figure.
Statistics from the Reserve Bank of Zimbabwe (RBZ) reveal that foreign direct investment (FDI) into the country slumped from US$717,1 million registered in 2018 to US$259 million in 2019. Even though government has made some notable progress in terms of doing business with respect to the soft factors, the hard factors remain problematic.
The economy continues to be characterised by macro-economic instability reflected by the continued depreciation of the local currency on the black market. Subsequently, there has been a widening of the black market premium. The black market premium is a major driver of inflation developments in the country.
Consequently, prices of most goods and services have been on an upward trend. The widening of the black market premium points to a government that seems to be losing control of the economy. Importantly, the Zimbabwean economy is now predominantly informal, characterised by underground (black market) activities of a speculative and rent-seeking nature. This makes it extremely difficult for the government to effectively regulate and control the economy.
Even though the government has committed to fiscal and monetary discipline in 2020, there is a heightened risk that government could continue increasing money supply which would have serious ramifications on macro-economic sustainability going forward.
It is a known fact that the government lacks a track record of fiscal discipline (financial prudence) and this, coupled with the absence of a strongly independent central bank, might be a sure recipe for financial and macroeconomic disaster. Fiscal discipline and strong institutions are the bedrock of economic and financial prosperity.
In fact, the economic and financial troubles the country has been facing can be attributed largely to fiscal indiscipline. This is supported by the fact that the country has recorded negative savings-to-GDP ratios over the past 20 years. Negative savings-to-GDP ratios is an indicator of an unsustainable fiscal framework whereby the government is spending beyond its means.
Government has been wont to exhibit a penchant for spending money that it does not have (or has not earned) which has always necessitated printing of money as well as borrowing to finance that spending spree. This explains why government had to introduce the bond notes in 2016 and prematurely re-introduced the local currency in June 2019 in order to finance its high consumption orientation which was not possible under a dollarised regime. Using the US dollar had a self-disciplining effect on the government since it could not print US dollars.
That is the reason why the country enjoyed macro-economic stability during the time of the multi-currency regime, between 2009 and 2013, and things began to deteriorate following the introduction of the bond notes in 2016. It has been demonstrated in empirical literature that that significant dollarisation can be an optimal response to a volatile economic environment as it: (i) lowers inflation by reducing the impact of domestic money growth on inflation; (ii) promotes financial deepening by encouraging individuals to deposit assets in the financial system; (iii) lowers transaction costs by reducing the need to convert to local currencies; and (iv) promotes fiscal discipline by reducing the ability of the government to monetise fiscal deficits.
Owing to the chronic high inflation (see graph below), the economy has been re-dollarising with a number of economic agents rejecting the weakening local currency. Chronic high inflation also increases uncertainty and undermines economic and business confidence. There is a negative relationship between inflation and economic growth (growth-reducing effect).
When inflation is high it also induces self-fulfilling expectations as economic agents expect inflation to continue to rise and they make decisions based on those expectations. De-dollarisation was always going to be a tall order, especially given the fact that key fundamentals of production and confidence were not yet in place. Ultimately, the value of any currency is a function of production and confidence.
Drastic and decisive measures around currency, institutional and political reforms need to be taken to restore macro-economic stability a necessary condition for sustainable economic growth and development. There can be no economic prosperity without macro-economic stability. A social contract involving all stakeholders is critical to ensure consensus, unanimity and social cohesion.
Chitambara is an economist and scholar based in Harare. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society. — firstname.lastname@example.org or mobile: +263 772 382 852.