By Respect Gwenzi
LATEST inflation numbers are out and they confirmed our fears, the economy still in fragility mode. The state of affairs demands a handle with care caveat, targeted especially at the policymakers.
More so, beyond fragility, it is important to ascertain objectively the direction the economy is taking, or if it is even moving at all.
These are sensitive issues the authorities in Harare have tried hard to paint abright picture of, but with little success on substantive results.
Year-on-year inflation, which is a measure of average prices, rose for the first time in 13 months. In essence inflation has been trending downwards since the reintroduction of the interbank market, in the second half of last year.
The indicator climaxed at 830% in July 2020 and has since come off to lows of about 50% over the past 13 months.
What the later trend shows is that the decline in inflation on an annual basis can be traced to the interbank market. The interbank market was revamped in June 2020, following which the exchange rate was further liberalised but not fully.
The rate of exchange immediately moved by over 50% from 1:25 to about 1:50. Market confidence in the formal market immediately improved. The gap between the parallel and formal rate significantly closed.
As a consequence the level of liquidity flowing through the exchange more than doubled. From daily averages of US$2 million, supply levels increased to about US$5 million a session, by the end of 2020. With increased forex liquidity, the economy immediately moved into a fragile stability zone.
A whole lot of other policy measures have been implemented to support the currency stability and these include removal of 30/60 day moratorium on unutilised forex balances, increasing and fixing surrender portion on export proceeds, tighter monetary policy regime buttressed by the Monetary Policy Committee.
The use of multicurrency, also simultaneously returned thus allowing for local nostro built up and higher circulation of forex within the economy and the formal spaces.
These measures are broadly monetary and our view has been that the monetary arm can only be used as a temporary measure to cool off the economy, but the key fundamental pillars of stability are fiscal driven.
While a lot has been done on the fiscal front, the net results have not been positive in our view. It is this leg, which is properly configured would have ushered a more sustainable macroeconomic environment.
The fiscal framework in Zimbabwe remains constrained given the fast dilapidation of social amenities and services in general.
The infrastructure such as road network and electricity infrastructure which are key elements to sustained growth, are underfunded and long neglected, hence inhibiting growth or limiting the economic upside realizable. The cost implication is reflected in the high cost of doing business and uncompetitive nature of locally produced goods, based on price.
This is just an element within the broader sphere of things. Government has failed to reform the parastatals and quasi government entities, a key promise it has made to the people through the widely hailed Transitional Stabilisation Programme.
To charter a new course, it is imperative for the government of Zimbabwe to streamline its quasi entities while broadly restructuring. Restructuring will have to begin from a position of reliving the old guard, on whose watch these entities were paralysed.
Of the 150 plus parastatals, less than five are profitable. This means something is fundamentally wrong. Some entities will have to be sold off or seek partnerships, which will bring in expertise, technology, new minds, enhance transparency and capital.
These collective entities account for a good fraction of the national budget and their loss positions are absorbed by the populace through the national budget.
If these entities become profitable, they will declare dividends to the State and thus enhance the fiscus. This would mean that resources are allocated to other productive uses.
At present government has claimed to have solved the economic stability through suppression of incomes. While historically the ratio of recurrent expenditure at 70% of the budget, proved unsustainable, the form and manner of realignment pursued thereafter has proved to be unsustainable.
Suppression of civil service wages was done at a much more deeper level, which dragged overall demand in the economy to very low levels.
There was a contagion to the rest of the economy given the size of wage cuts and also the fact that the civil service contains the biggest pool of formally employed Zimbabweans.
Poverty levels, thus, scaled up to levels last seen in the 1990s and some companies went out of business. the economy contracted by double digit margins.
This alignment has failed because after all this, inflation is creeping back up the exchange rate is refusing to be tamed. The engineered exchange is failing to replicate or sustain its magic of yesteryear.
This is coming at a time government is beginning to adjust wages and increase its expenditure on infrastructure, but with little attention to structural reforms focused on parastatals.
It is a given that this is happening because there is no resolve to transform right at the top. All parastatals are run by government appointed employees and these are aligned to the ruling party and strategically positioned.
They are offered the jobs, typically as ways of thanking them or positioning them on the feeding trough. Their objectives are not to maximise return for the entities they are tasked to lead.
In this same line is corruption, which has now become endemic in the country at all levels. We are of the view that the economy will not charter a stable to growth trajectory nor inflation be tamed on a sustainable basis unless these reforms are pursued.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com