PHILLIMON MHLANGA
Finance Minister Mthuli Ncube will not make major macroeconomic reforms next year, in what could be seen as a major climb-down on the austerity measures that were widely criticised for pushing up the cost of living.
Ncube who was appointed in September last year promised a raft of reforms as part of Zimbabwe’s bid to fully reengage with international institutions as well as restore macro-economic stability.
But the current state of the economy, characterised by hyperinflation, high unemployment, and low business activity, still demands that the finance minister sees through his reform agenda.
However, in an unprecedented move, Ncube announced he would not make major reforms next year. Ncube’s performance has seen several economists suggesting that the government is no longer in control of the voyage, leaving the long-suffering Zimbabweans carrying the load of economic crisis.
Since September last year, the finance minister has come up with measures aimed at rescuing Zimbabwe’s economy. They were unprecedented in their scale. The use of policy tools, however, threw them into turmoil.
Inflation, which reached record levels in June and sluggish economic growth rates have been the major source of worry for the finance minister. It appears he has failed to find methods of cooling down the economy. High inflation wipes out profits and wages.
According to the Keynesian School of Economics, if an economy slows down, unemployment will rise. To counter this, fiscal and monetary authorities normally respond to such recessions through expansionary policies, yet inflation is normally fought through contraction policies.
Interestingly, Ncube, last month delivered an expansionary 2020 National Budget, meaning the current situation in Zimbabwe had placed the Treasury boss in an invidious position.
This could be because the economic tools to deal with such a crisis were built on the assumptions that rising inflation and rising unemployment would not happen concurrently. In fact, Ncube was targeting a drop in inflation to about 5% by year end, which has already been missed.
Consequently, companies are sinking deeper into dire straits, while consumers wallow in economic despair. Ncube made the surprising announcement to abandon reforms in front of President Emmerson Mnangagwa at the Zimbabwe National Chamber of Commerce meeting held in the capital last week.
“We expect a better economy next year. We are walking the talk. I think we have achieved a miracle without external support. Let me say I will not announce major economic reforms in 2020. The President is here listening to me. Maybe, he will crack the whip on me,” Ncube said.
The Reserve Bank of Zimbabwe (RBZ) said radical policy actions were needed to deal with the economic crisis. Deputy Governor, Khupikile Mlambo said the economy was suffering from stagflation, which is an environment where there is a co-existence of recession and high inflation.
Stagflation makes fiscal and monetary policies less effective. Generally, stagflation results in supply side inflation, a downswing which reduces aggregate demand and forces many companies to cut back on output, thus resulting in serious workforce layoffs.
This means producers would not be motivated to produce more because of high costs. Experts say the two economic indicators – lower output and higher prices co-exist and feed on each other.
“Zimbabwe’s economy is suffering from stagflation, characterised by a coexistence of recession and a high rate of inflation and for policy makers, it’s always a dilemma,” Mlambo said.
“The economic growth for 2018 was 3.4% but it has contracted to -6.5%. There is a high level of underemployment. Economic activity is constrained by persistent foreign currency shortages, energy shortfalls, two consecutive years of unfavourable rainfall (constraining agriculture and throughput to manufacturing),” Mlambo added.
High inflation has emerged as a major challenge to economic growth and micro-economic stability. Month on month inflation in October was 38.75%.
“Increase in inflation in 2019 reflected pass through effects of the exchange rate, adverse inflation expectations, and administered price shocks (fuel and electricity),” he said.
Mlambo was, however, hopeful that the monthly inflation rate would progressively decline to below 5% in the second half of 2020, underpinned by a monetary targeting programme.
If anything, growth in broad money, has been a significant driver of inflation and exchange rate instability. Between June and September 2019, broad money increased by 139.8%, according to official data obtained from the central bank.
The RBZ, however, says it is committed to reserve money targeting, going forward, to manage liquidity and inflation. In fact, the central bank, has resolved to come up with quarterly monetary aggregate targets, which will be monitored and communicated to the public as part of the disinfection programme.
Mlambo indicated that the central bank would next year put in place a robust disinfection programme. That is to limit reserve money growth to contain inflation, and maintain a strong coordination between monetary and fiscal authorities, stabilise the exchange rate and limit government recourse to central bank financing.
There was significant increase in reserve money since June this year from ZWL$3.6bn to ZWL$7bn in November, meaning a doubling of reserve money would lead to a 100% depreciation of the exchange rate since econometric analysis show that there is a relationship between money supply growth and exchange rate depreciation.
The economist Brians Muchemwa pointed a rather sombre outlook. He indicated the austerity measures have failed to resolve the economic crisis.
“[Mthuli Ncube] realised that it was losing sense, not making sense than reality,” Muchemwa said.
“It’s more of political pressure. He failed to manage the economic growth target. The target was to have a growth of 3%, now we expect a contraction of 6.5%. He was targeting an inflation of about 5% by year-end. Now, the October figures was 38.75%. It’s expected to be more than that by year-end. Policy makers have failed to manage expenditure. We love to promise good things, trying to impress. But he has failed.”
Moses Chundu, another economist said the freeze was a sign that the “government is not in control of this voyage. Stagflation is closest to describing our situation. It’s difficult to deal with. It’s a stubborn animal to deal with,”Chundu said.
Cain Mathema, the acting Industry and Commerce Minister, expects a significant weakening of the economy.
“Manufacturing capacity is expected to fall further to 40% by year-end. Companies are subjected to a plethora of challenges, including foreign currency shortages and power cuts. Some have downsized operations and some have closed,” Matema said.
