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Questions on IMF, Zim optimism

The Brett Chulu

MEDIA reports on the International Monetary Fund (IMF) Article IV Consultation with Zimbabwe which were deliberated upon by the executive board of the international financial institution last week on February 24 missed the fact that the IMF is optimistic of an economy that is better this year than last year.

The business of making economic forecasts is not an exact science due to analysts’ differing underlying economic philosophies and ideologies that inform their assumptions.

Allow me to lease the late award-winning Harvard Business School luminary Clayton Christensen’s wise thoughts on the subject of divining into any economic future. Christensen notes that data is always available in the past and thus one cannot accurately predict the future based on data. He argues that a good prescriptive theory (based on a deep understanding of latent social-psychological behavioural patterns driving economic participants derived from conceptualised scientifically collected data) is more accurate than data.

A prescriptive theory can accurately explain what will happen in the future and why. The prescriptive-theory-is-more-accurate-than-data explains why 90% of historical economic forecasts have missed the mark, sometimes by a wide-berth. It is a well-known fact before our major global financial and economic crises became a reality that many respected financial and economic analysts made forecasts of better prospects, only for disaster to strike. The IMF is optimistic about improved macro-economic performances for 2020 in several areas; I will pick just three. Let me state upfront that my critique in areas where we differ does not in any way seek to cast aspersions on both the credibility and intellectual thoroughness of the executive board of the IMF — it should be seen as another point of view.

First, on real GDP growth, the IMF forecasts 0,8% for 2020. This is 171% more optimistic than the -12,9% forecast by the Economist Intelligence Unit. However, although the IMF is forecasting a sub-1% real economic growth for 2020, it is 275% less optimistic than the3% forecast given by Finance minister Mthuli Ncube (pictured). It should be noted that the IMF last week revised its view on the economic growth for 2019; IMF’s preliminary estimate for real GDP growth for last year is -8,3%. This is higher than the government’s forecast of -6,5% it (government) unflinchingly maintained last year.

Second, the IMF’s consumer price index (CPI)-based inflation forecasts for 2020 are much closer to those given by Treasury and the Reserve Bank of Zimbabwe (RBZ). The IMF expects the year-on-year CPI-based inflation to be 52% for December 2020. This IMF forecast is a mere 3,8% above the 50% December RBZ’s year-over-year inflation forecast. However, when it comes to the GDP-deflator-based inflation, which measures the economy-wide inflation (much broader than the narrow CPI basket of goods and services), the IMF is much more optimistic than our Finance minister.

Ncube, in his 2020 budget presentation, shared GDP growth data that implied a GDP deflator-based average annual inflation of 215%. The IMF is forecasting a GDP deflator-based inflation of 148,1%. This is 45% more optimistic. In fact, the IMF’s GDP deflator represents an anomaly when we consider the relationship of CPI-based inflation and GDP deflator-based inflation that has been obtaining since 2009. Data from our official statistical agency, ZimStat, shows that our CPI-based inflation has, with a single-year exception, always been significantly lower than the GDP deflator-based inflation — meaning our CPI-based inflation almost always understates the economy-wide inflation.

The IMF’s CPI-based annual average inflation forecast for 2020 is 221,1%. This forecast means the economy-wide inflation will be much less than the one based on the narrow consumer basket of goods and services. This seems to suggest that the productive sectors are expected to enjoy lower prices for their inputs but will not quickly pass through the price benefits to consumers. This, in my opinion, is a serious anomaly — however, the IMF’s optimism on money supply growth slowdown forecast for 2020 could be anchored on its expectation of a rapid slowdown in the 2020 inflation series.

This is the meat of my third point. Third, the IMF sees a dramatic slowdown in M2 money supply growth in relation to available United States dollars. M2 comprises cash, deposits, money market securities and other time deposits. The IMF forecasts that M2 in 2020 will fall to ZW$24,40 per every US dollar from ZW$127,5 for every US dollar in 2019. The ZW$24,4 per every US dollar is similar to the ZW$24 per every US dollar that was recorded in 2018.

That metric in 2018 was associated with a CPI-based year-on-year inflation of 42,1% for December 2018. It largely explains why the December 2020 forecast, at 52%, is not far from the corresponding outturn for the 2018 period. The IMF sees credit extended to government dropping from ZW$62,3 for every US dollar in 2019 to ZW$27,5 for every US dollar in 2020, a 126% improvement. A similar outturn is expected for private sector lending, with a drop from ZW$174,1 for every US dollar in 2019 to ZW$56,7 for every US dollar, a 207% improvement. It is without equivocation that the 2020 forecasts for the ZW$:US$ exchange rates are anchored on the proportion of M2 and the available forex. The IMF sees the official exchange rate (presumably, the interbank market rate) averaging ZW$21,5 in 2020 and expects it to close the year 2020 at ZW$24,5.

In my opinion, the IMF estimates are more generous than what I would arrive at. The reason for my skepticism is anchored on psycho-social and socio-political patterns underlying Zimbabwe’s economic landscape. Due to the undeniably extractive nature of our domestic political and economic institutions, there is no guarantee that intermittent shocks of huge high-powered money (reserve money or monetary base) will not happen. These shocks are expected and will radically alter the ratio of money supply (M2) to available forex, impelling a rapid weakening of the Zimbabwean dollar (Zimdollar) and pushing inflation.

Promises of reigning in money supply growth undertaken by Treasury and the monetary authorities may be very sincere, but in our extractive politics and economics context, that sincerity may be transformed into naivety. Apart from the extractive political and economic forces, our Treasury and monetary authorities have shown to be consistently overly optimistic in most of their economic forecasts largely because they seem to disregard the impact of political economy shocks.

Currently, there is an unrelenting over-milking of the positive current account balance of 0,7% of 2019 GDP (IMF preliminary estimate), yet there is a deafening silence on the IMF projection that the current account deficit will return to negative territory, with a -1% current account deficit expected this year. Gross national reserves are expected by the IMF to remain unchanged at 0,8 weeks of imports cover — hardly a reserve strength needed to support a stable Zimdollar. Extractive politics is a deadly risk to our achieving policy consistency and the meeting of the economic and financial targets the IMF wants Zimbabwe to meet as a pre-requisite for consideration for debt relief.

Barring a dramatic change from extractive politics and economics to inclusive political and economic institutions, any economic improvement is temporary, a mere shock, in economic terms. Figures, no matter how meticulously collected, in the absence of an understanding of the underlying social-psychological and social-political patterns driving the economic numbers, have little power to accurately forecast our economic future.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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