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Effective responses to Esap (II)

THE economic Structural Adjustment Programme (Esap) makes four major recommendations: Firstly the devaluation of the currency; secondly, reviewing and reducing the number of public servants and their posts; thirdly, lowering support for industries; and fourthly, making agriculture more export-orientated.

Fay Chung
educationist

The first demand is devaluation of the Zimbabwean dollar. This has been done, from US$1:ZW$1 in January 2019, to the interbank rate of US$1:ZW$18,18 on March 22, 2020. The informal market exchange rate on the same day was US$1:ZW$44,3. The informal market rate is so much more attractive, and is widely used. The first and essential step is to stabilise the currency as soon as possible.

Zimbabwe adopted the multi-currency exchange rate in 2009: it worked extremely well except that it led to individuals and businesses as well as neighbouring countries utilising Zimbabwe to expatriate US dollars. A more sophisticated approach is needed to ensure that such a massive loss of US dollars does not recur.
It is important to address the three main functions of money: firstly, to pay Zimbabweans for the work they do; secondly, to pay for imports, in this case mainly from South Africa — more than 80% of Zimbabwe’s trade is with South Africa; and thirdly, for individuals and companies to keep their savings safely — this generally requires use of the US dollar as the most utilised and stable international currency. Of course, savings can be done through infrastructure and cattle, as was the case in Zimbabwe’s well-known history.

Zimbabweans should be given opportunities to invest in Zimbabwean businesses, rather than just sending their money outside the country.

Zimbabwe does not have much trade with the United States. Instead, its major trading partner is South Africa. This would entail utilising all three currencies at the same time: the Zimbabwean dollar can be used to pay workers; the South African rand can be used to pay for imports from South Africa; and the US dollar for personal and business savings. Such an approach will target the three uses of money adequately. If such a policy is followed, the amount that must be reserved in US dollars could fall to about 10% to 20% of export earnings.

One negative factor has been over-expenditure by the government, utilising more than is available to the country. This has been exposed by Africa Confidential, which alleges that the Reserve Bank of Zimbabwe (RBZ) provided US$366 million to Kuda Tagwirei in October 2019, and the latter almost immediately placed US$220 million on the informal street money market, exchanging it for ZW$2,3 billion (published in Africa Confidential, Vol 60. No. 20, 11 October 2019). This creation of billions of Zimbabwean dollars overnight naturally leads to inflation. This is creating Zimbabwean dollars through electronic banking.
The provision of large amounts of foreign exchange to what are known as “cartels”, another name for “monopolies”, is also revealed in this analysis: favouring cartels or monopolies is well-known to create serious economic imbalances and crises worldwide, and is treated as a serious crime in the West. This is another dangerous aspect of the utilisation of scarce foreign exchange to enable government to carry out its programmes: much of this is utilised to pay public servants striking for better pay. Some of it is corruptly used.

Expanding the money supply to pay public servants is, of course, a very direct way of causing hyper-inflation, as the bureaucracy is not directly increasing the economy.

The more or less total control of foreign exchange by the RBZ naturally means that this one institution decides how Zimbabwe’s foreign exchange is utilised. This is veiled in secrecy. Removal of secrecy and open prioritisation of the scarce foreign exchange would help to solve this fundamental Gordian Knot.
The RBZ should only have enough foreign exchange for state purchases, and the rest should be available for banks to distribute to their clients. The distribution should be in the three alternative currencies suggested above.

Secondly, the number of civil and security service employees has increased from about 300 000 in the 1990s to 550 000. There is serious over-staffing in some departments, combined with poor salaries and poor conditions of service all round. Doubling the number of employees without doubling the budget means that salaries today are less than half what they were in 1980, when average civil servant salaries amounted to US$500 a month. Support that are key to success such as materials and equipment, physical infrastructure, in-service training and supervision are missing, and means that although staff are paid, they cannot do their jobs properly.

It is imperative to deal with this challenge, by retiring those who are over 65; removing those who do not have professional qualifications for the jobs they are holding; and offering voluntary retirement packages for the many who see little future prospects in the civil service.

A large number of youths have been enrolled as staff for political rather than technical and professional reasons, and may not have sufficient qualifications and experience to do a good job.

In-service training with internships and modest allowances will be attractive to many youths. The police, for example, are presently trained for only six weeks: offering a more in-depth and longer term professional training, especially integrated into distance education and internships, would be attractive to many youths who can then see their future in the police force.

Agriculture can offer hundreds of thousands of youths such internships, using the under-utilised land to grow crops under training, internships and supervision. Such internship programmes can be done through existing institutions such as secondary schools which already do agriculture; private farmers; non-governmental organisations; religious centres, etc. It would mean that each institution would select its own interns and follow a well-developed in-service training programme provided by agricultural extension workers and specialists. This is in line with the government’s policy of making schools into productive units.

The failure of the police and army in stopping the post-election demonstrations is an example of severe weakness of their training in the face of the more sophisticated tactics of the demonstrators and rioters. A number of civilians, mainly shoppers, were caught up in the violence and were injured or killed. The demonstrators had threatened to burn buildings, and actually burnt several cars.

The Motlanthe report of 2019 provides a description of the more sophisticated strategies of the demonstrators. The arsonists appeared to be small groups of well-prepared individuals, none of whom were caught.

Thirdly, Berg recommended less support for industry by removing customs duties and allowing local manufactures to compete with international companies. The impact of such policies has been disastrous for Zimbabwe, where the contribution of manufacturing industries to the gross domestic product has shrunk to a quarter of its past level (Sources: CZI, the Zimbabwe Manufacturing Sector Survey 1994 and the World Bank 2018).

While some healthy competition is certainly good, Zimbabwe’s technically backward industries were in fact not able to compete fairly with newly industrialised countries such as China and South Africa which utilised new technologies and had a large home market on which to test their products.

What is required is a more detailed and specific evaluation of Zimbabwe’s present and potential capacities, and building up these capacities. Research shows that success depends on developing products first for the home market, and then expanding the market through export.

Without evaluating the home needs and market, it is unlikely that replicating the same industrial goods of the 1950s and 1960s will work, as those goods were designed for the small settler elite, and are unsuited to the needs and economic levels of the vast majority of the population. A clear example is that Zimbabwe does not produce tractors and other agricultural machinery and equipment, yet it has more than two million small-scale farmers who desperately need mechanisation. These farmers are willing and able to mechanise, but they cannot afford to purchase the highly expensive high capacity tractors that are imported.

There is obvious need for tractors of all sizes: generally a large capacity tractor is only needed for two to three weeks of the year, whereas for the rest of the time a much smaller tractor is needed.

Industrialisation, particularly to satisfy the needs of the local entrepreneur, is a key to economic development as well as to job creation. Industrial training linked to existing and new industries would do much to boost Zimbabwe’s economic potential.

Fourthly, agriculture remains the most important industry in Zimbabwe. Not enough has been done to boost the productivity and capacities of farmers. Sound planning and technical aspects were ignored, as were adequate equipment, training and supervision. Agricultural training combined with affordable inputs, can double output.

In 2017, agriculture contributed only 12% to GDP. There is enormous potential to increase this sector’s performance. It has been estimated that agriculture’s contribution to the GDP could double in a year or two. This would be of great advantage to the country which is presently importing most of its food.
Although agriculture is given such prominence in the Berg report, agriculture has not received adequate support especially since Esap was adopted. Zimbabwe was self-sufficient in food before 1996, when all subsidies were cut for small-scale farmers through the Grain Marketing Board.

It is essential that these small-scale farmers be assisted by having affordable fertiliser — the present cost of fertiliser is unaffordable to all farmers, and has a deleterious impact on maize production, as the price of maize is usually lower than the cost of fertiliser. The answer has been demonstrated by neighbours Malawi and Zambia, which have provided about US$100 million subsidy to fertiliser companies.

Ironically, a Zimbabwean fertiliser company was subsidised by the Zambian government for many years, and this enabled Zambia to have a huge maize surplus which it sold to starving Zimbabwe. The fertiliser company was utilising this subsidy to purchase essential imported inputs.

Meanwhile, Zimbabwe has been importing cheap maize from outside instead of supporting its own companies.

The only crop that has triumphed since Esap is tobacco, which follows Berg’s advice to place greater emphasis on export crops. However, as farmers replaced food crops with tobacco, Zimbabwe has been forced to import food or to beg for food aid. The success of tobacco, which has received generous funding, training and close supervision from tobacco companies, provides an important model for all crops, including food crops.

Conclusion

It is not possible to reject Esap completely as the powerful international financial institutions (IFIs), the IMF and the World Bank, have such great influence on both donors and investors that contravening what they consider to be sound economic principles means that Zimbabwe will find it difficult to obtain investments. Western countries and banks in particular follow the IFIs’ advice and regulations.

Four key areas are identified above. The issue of the money supply and exchange rate are fundamentally important. The present system which allows the street money market to control the exchange rate combined with over-expenditure by government requires urgent correction. Streamlining the public services so that they can do a better job and be adequately paid is critical. The inefficiency of the present public services makes it difficult to have good welfare services as well as productive investments.

State financial provision targeted at economic development and growth remains very critical. Present provision is both too low and incorrectly targeted. Provision should favour agriculture and manufacturing industries, and should combine training including technological updates, internships and marketing.
The state budget should be radically revised so as to target economic growth. The state should examine existing institutions first to see how their capacities can be enhanced, rather than funding new organisations. A key area is to control the leakage of US$1 billion a year estimated to be lost through corruption.
World Bank advice that government should lower assistance to industries should be analysed in detail. Present investment by the government into the private sector has not proved effective or profitable. Greater emphasis should be placed on supporting fertiliser factories: providing “presidential gifts” of free imported fertiliser is politically popular but obviously leads to subsistence production only.

There is need for substantial and targeted focus on supporting manufacturing industries which are known to be linked to economic growth and work creation. Concentration on providing the machinery and equipment to allow the large agricultural sector to mechanise can double agricultural productivity.

Machinery and equipment should be bought rather than gifted to political supporters: it is essential to include machinery and equipment which is affordable to small scale farmers. This is closely linked to the fourth Esap recommendation that there be more focus on agriculture.

Finally, the basic human rights, such as the right to a clean water supply, education and healthcare should continue to be respected as they are the foundations of a sound economy.

Chung was a secondary school teacher in the townships (1963-1968); lecturer in polytechnics and university (1968-1975); teacher trainer in the liberation struggle (1976-1979); civil servant (1980-1987); former minister of education (1988-1993); UN civil servant (1994-2003). These weekly New Perspectives articles are coordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society . — kadenge.zes@gmail.com or mobile +263 772 382 852.

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