The Oracle
Following the announcement of results of the historic 2018 general polls, one can only be very expectant in imagining how the outcome, despite current challenges and counter challenges, will shape Zimbabwe’s economic future.
I will wade into a bit of political economy as both an analyst and a citizen who also exercised his democratic right to vote in the polls last Monday. Aside from the unexpected violence that blemished what was generally in my view, a very good electoral process and the resulting loss of innocent lives, I still trust that many will agree with me that that the elections generally went well.
This was the first time that the democratic space has been opened up in an unprecedented way and for the first time in many years, Zimbabwe’s electoral process has been subjected to unfettered scrutiny by teams of foreign observers from across the world. Naturally any election will get its own fair share of support as well as criticism, and Zimbabwe’s recently concluded contest is getting a fair dose of both.
Whatever the end result of the current court challenge that has been lodged by the main opposition grouping, I have total faith that the courts will rule wisely and fairly to the satisfaction of all parties. My fervent hope is that whatever the outcome, the economy should be the ultimate beneficiary of the efforts of the new government that the people of Zimbabwe have chosen.
It therefore leaves me with room to share a bit of thoughts on what I see as the key and most immediate priorities for the President elect.
The shape of the Cabinet.
The President’s immediate task is to put in place a cabinet that is shaped in form and function to deliver. He must consider putting together a much smaller, lean and hopefully more focused cabinet and the wish and hope is that there will be a clear balance and distinction between Economic Ministries, Administrative Ministries as well as Social Service Ministries.
His primary aim must be to address the current macro-economic and fiscal misalignments and this can only be achieved if the President pushes for a cabinet structure that forces fiscal consolidation. One key challenge for the state at the moment is managing the expenditure capacity of the government within the constraints of revenues, which has led to perennial deficits. While deficits in and of themselves are not an evil, I still believe that sustainable deficit levels can be achieved as long as the expenditure is directed at investment and not consumption.
It will be crucial for the President to outline a clear vision for a new and vibrant Zimbabwe, all the while demonstrating that indeed, Zimbabwe has changed course and the country now means business. If the incoming President fails in this very first step, all hope for economic recovery may be lost very early.
Beyond just delivering a credible Cabinet made up of men and women of impeccable integrity and ability to deliver, the President still faces a gargantuan and unenviable task ahead of him.
As things currently stand, the economy is facing unprecedented challenges on many fronts. Inflation pressures on the back of monetary instability fuelled largely by fiscal indiscipline are rearing a very ugly head. The economy faces an acutely constricted foreign currency position, notwithstanding the strong recorded growth in export receipts and a falling import bill. The country’s external position remains precarious, with a long queue for outstanding foreign currency allocations for imports now estimated at over $800million. The dislocations in the financial system, the foreign exchange markets and the real goods market (multiple tier pricing) still persist and require sober and immediate attention.
Unemployment remains acutely high, with the majority of citizens now scrounging for a living on the street, mainly in the informal sector. In line with the declaration by Zanu PF that placed the creation of new JOBS in the economy at the forefront of their campaign messages, the President Mnangagwa must take steps to lay strong foundations for the creation of sustainable jobs in the economy for him to be relevant into the future. Rising inflation in the economy is severely threatening the security of households and the fact should not be ignored that real incomes have dramatically fallen in the last 12 months. While official inflation has been recorded at 2.91 percent for June 2018, having inched up from 2.71 percent for May 2018, this statistic unfortunately has not captured the real rise in business and household costs, which are significantly higher. Parallel market foreign exchange rate premiums
For businesses, the major risk is that we may see nominal wages rising significantly faster than productivity, causing further disruptions and denting competitiveness. Hon Chinamasa should not be shy to accept these realities if he is to deliver a meaningful and truthful financial plan for the country, which will be sensitive to the stark realities facing the nation.
The Government desperately needs to create fiscal headroom, but at the same time regain fiscal discipline. The country’s infrastructure is weak and we need new investment, in the transport sector (rail and roads), energy, public infrastructure as well as infrastructure to rejuvenate and sustain industrial and agricultural productivity.
At the same time confidence in the economy has significantly improved in the last eight months and the new leader must continue to throw fresh coals into the economic furnace.
However, the task of balancing short term political needs with the broader demands of sustainable long term economic reforms is a very a delicate one, requiring the President to dig deeply into his reserves of economic management skills, political energy and administrative resolve.
As an independent economic thinker, I should hasten to caution that we should be under no illusions. We must all be clear upfront that what we all HOPE for in the new government, and what we should realistically EXPECT maybe two very different animals.
I will not be able to talk justifiably on all the issues that the President Elect should deal with, so I will focus on just a few areas which I believe are imperatives for laying the base for sustainable economic recovery.
Currency reforms are central to economic recovery.
Any efforts at economic recovery that do not immediately address the currency challenges the country is facing will fail. Resolving the currency issue should be central of the restoration of confidence in the economy, and there is the need for the Government to decisively address the pervasive need to restore the integrity of the Multi Currency System. The new President can achieve this easily by allowing the appointed minister of Finance to take the bull by the horns and speedily drive a policy to either revoke and demonetize the Bond note so that we revert to the clarity and stability that was assured under proper dollarisation rules, or alternatively he should propose drastic changes to the export incentive, so that we can move rapidly from the current form of the export incentive, which is a destabilizing monetary tool, to a fiscalised export incentive based on appropriate import taxes. This is absolutely critical if economic stability and confidence in the economy will return.
Dollarisation in 2009 ushered in price and macro stability. From the goings on in the economy at the moment, it is now very clear that liquidity challenges in the can only be resolved in the short term through access to larger and cheaper lines of credit, sustaining the growth of inward remittances, portfolio and investment flows and grants and in the medium to long term , through the growth of exports, which are themselves a function of a sound investment environment underpinned by growth in productivity.
In this regard there is urgent need to honestly review the negative costs and uncertainty brought about by the introduction of Bond notes. The instrument, which had the dual purpose of stimulating exports and ameliorating cash shortages, seems to have had the unintended consequences of inadvertently driving hard currency out of circulation through the operation of normal laws of economics. As a result we have seen further dislocations in the macro-economic environment, manifesting as an resurgence in harmful parallel foreign exchange market activities fuelled by both genuine economic need and speculation. We also have an ugly multi tier pricing system in the economy and growing grey exports which are harmful to the sustainability and viability of local industry. There is need for Government to immediately institute measures to restore the integrity of the multicurrency system in order for confidence to return. A second painful option is for Government to allow the formalization of the RTGS balances as a local currency, create a representative form of the money and address valuation challenges associated with it. This will entail ring-fencing of the current RTGS stock as local currency and allowing any new USDollar inflows from a defined cutoff date to match bank nostro positions.
Improving the Investment Environment
The violence that marred the end of the elections and the subsequent squabbles all do not serve to inspire confidence. Perceptions created are suboptimal for promoting FDI inflows as well as spurring domestic investment. Tourism, which has recovered measurably, with a 22 percent upsurge in foreign arrivals will tend to suffer badly and immediately due to safety concerns. In the same vein investors, including Zimbabweans in the Diaspora who are keen to come back home begin to think twice.
To address the investment climate, political and social stability are key. These should underpin any efforts towards re engagement with foreign partners. These efforts must however continue and in fact must be further strengthened. A clear roadmap for bringing back the country back into the community of Nations must be drawn up as well as a clear strategy to help the economy to deal with the country’s external and domestic debt issues in a sustainable way.
Ease of doing business reforms must be speeded up and these should increasingly be pursued with a special focus on reducing the cost of doing business. Zimbabwe is currently among the countries with the highest costs of doing business in the region and there is need to address this aspect.
The Zimbabwean diaspora must be recognized as a key player in the economic recovery equation and must not just be relegated to being a source of remittances, but a critical source of investment capital. The new government must propose an incentive packages that will make it attractive and viable for Zimbabweans in the Diaspora to bring back the billions they currently hold in savings. Diasporans are also occupying critical positions across the globe and are well placed to mobilise funding for economic recovery. This constituency cannot therefore not be ignored in the political economy going forward. Consideration must be given towards regaining the trust and confidence of this community, including giving them recognition as an important constituency with full rights of citizenship.
Fiscal Deficits should be curbed and government made more efficient.
The upcoming government must come up with a very clear strategy and different model for funding government deficits in a more sustainable way. Fiscal sustainability and financial sector stability are like Siamese twins. The long term stability and sustainability of the financial sector hinges on fiscal discipline and sustainability on the part of Government. The inclusive and sustained development and deepening of the financial sector, through new financial instruments and creating and strengthening the financing capacity and diversification of the financial sector depends on Government maintaining strict fiscal discipline. The Government’s full attention must be turned towards and comprehensive review of the country’s fiscal framework. The current fiscal deficits and the manner in which the deficits are being financed is measurably unsustainable and imposes significant adverse implications on the stability of the banking sector. A growing proportion of the balance sheet assets of banks is now held in the form of Treasury bills, whose value is receding as government debt builds up. This debt build up is not only crowding out productive sector lending, but is also raising the risk premium for Zimbabwe, elevating the cost of debt and capital. This clearly militates against Government efforts which henceforth should be actively geared towards the reduction in the overall costs of finance in the economy.
Funding the growing domestic debt in this manner is also inflationary, fuels money supply growth and thus imposes an ominous threat to the domestic savings base. This may prove disastrous for confidence in the financial sector in the very near term. Government skewed expenditure patterns, with over 95% of its budget going into consumption, has contributed to the rising propensity for imports, the erosion of local productive capacity and the consequent depletion of the country’s foreign currency base. The new government must deal decisively with the above.
Consolidating and Sustaining the gains from land reform.
Land reform is irreversible. There is need to close this chapter and move forward. Just as the first phases of economic recovery of South Korea, Singapore, Taiwan and the post war Japan economy were anchored on Agriculture recovery and land reforms, Agriculture should underpin the first two to three years of economic recovery. The sector provides ample opportunity for rapid investment and recovery, job creation, foreign currency generation and import substitution. Agriculture will also put down a solid foundation for the recovery and sustenance of the agro-industrial and manufacturing sectors, whilst proving the impetus for the growth of the transport and heavy engineering subsectors.
Agriculture recovery should be spurred forward by unlocking the capital value of agricultural land. Government must urgently deal with the outstanding issues around the security of tenure for farmers, farm size rationalization whilst also putting to finality, the thorny issue of providing compensation to the previous land occupants in terms of the law. Government must also as of necessity, strengthen the agricultural marketing systems, so that investment can begin flow into agriculture, whilst investors are assured of reasonable returns on their investment. This leads to my next key imperative.
Parastatals must be re-engineered
It goes without saying that state owned enterprises and parastatals are key players in the economy. They however, can play their correct economic roles if they stick to their core mandates. The government should leverage SOEs to anchor both near term economic recovery and long term industrial growth. The Governments strategy for reforming state owned enterprises and how the Government will re-engineer the SOEs so that they start contributing to the new economic trajectory of the country remains an enormous task. It is critical that entities such as the NRZ, ZISCO Steel, the Cold Storage Company(CSC) and the Agricultural and Rural Development Authority (ARDA), are immediately and speedily brought back to viability.
The writer is an economist and can be reached on oraclefiles@gmail.com.
