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Pain is unavoidable before the cash crisis is solved

Chris Chenga

The last several days have offered two interesting cases for observation with regards to the International Monetary Fund monitored reform programmes by countries needing financial and technical assistance. Rating agency Standard & Poors announced that it had upgraded bonds issued by Piraeus Bank and the National Bank of Greece (NBG) to investment grade. It is the first time since the start of the economic crisis in Greece that a bond issued by a Greek bank is rated as investment grade, and it is a landmark in the country’s efforts to return to international capital markets, especially at competitive offerings for the country’s securities. Greece has committedly been following a thoroughly monitored reform program for several years since a sovereign debt crisis left the nation exposed to defaulting on its various creditors and also crippled its banking system. The country finally sees potential for an end to a tough program.

During the weekend, riots erupted in Haiti over disputed fuel price hikes. The fuel price hikes were conceived from recommendations made to Haiti in its staff monitored program, particularly encouraging the elimination of fuel price subsidies as part of fiscal recalibration by the small island country. Less than 24 hours after the price hikes went into effect, Haiti’s Prime Minister Jack Guy Lafontant announced that the measure had been temporarily suspended. The government shows no certainty within itself on whether or not to commit to these fuel sector reforms.

Photo: Dieu Nalio Chery, AP. People protest over the cost of fuel in Port-au-Prince, Haiti, Friday, July 6, 2018. Major protests erupted Friday in Haiti as the government announced a sharp increase in gasoline prices, with demonstrators using burning tires and barricades to block major streets across the capital and in the northern city of Cap-Haitien.

The events of Greece and Haiti in the last few days are an illustration of policy motion or inertia as caused by governments with differing levels of decisiveness. Even though Greece has had a lot of political back and forth in selection of its governments it ultimately committed, though begrudgingly, to a painful reform program and will very possibly come to finality with appraisable results. Haiti on the other hand, already faces inertia and all signs from its government reflect policy uncertainty that may linger for long.

Besides the distinct disparity in commitment by policymakers of Greece and Haiti, focus on those two cases, however, should also emphasize that economic difficulty can mainly occur in either of two forms; structural or cyclical. Indeed it could also happen that the two difficulties befall an economy simultaneously. Unwisely, policymakers from developing countries overlook these scenarios in their own economic appraisal as structural and cyclical remain narratives of assessment used only by developed economies. The technical minds at the IMF are guided by the cyclical or structural outlooks of a country. Far too frequently, disputes between the IMF and whichever developing country it is offering its program to center around the interpretation of the cyclical or structural outlook of the country. As developing economy policymakers forego such understanding of these two forms, conflict always seems inevitable with the IMF, much so long term programs are hardly seen through to the end.

Zimbabwe, post-election, will be looking to rev up its own monitored reform program. Even though legitimate harmonized elections precede formal consent with the IMF and other lenders, it is hoped by most governance prospects – ZANU PF, MDC Alliance, BZA and the likes – that engagement in the form of a monitored reform program is the inevitable path to be taken to “fix the country’s finances”. But maybe therein lays the problem. All the aforementioned incumbent prospects merely show a commitment to fix the country’s finances in abstract context. The unspoken truth in this election season is the extent to which Zimbabwe’s structural and cyclical outlook will demand a painful reform program, and no political party is willing to be as honest to suggest these practical reforms that do not sound like a palatable near future for voters. Similar to the case of Greece, Zimbabwe’s return to economic health will take a very long time. And like Haiti, all prospective governments post-election do not seem to have the stomach to commit to the necessary painful long term reforms. Expectedly, individual political parties will point to their campaign manifestos as the reference to their reform intentions. Reality should set in on an idealist political class that reforms for an indebted Zimbabwe excluded from global capital markets, will be determined by creditors such as the IMF, World Bank, and Paris Club. Internal manifestos are merely campaign formalities.

This proposition can be best explained by focusing on the liquidity crisis that has been in the economy for several years now, almost hitting a bottom in April 2016 before the intervention of the bond notes instrument. The liquidity crisis is a structural and cyclical difficulty that will remain for longer than politicians are leading on. And to resolve it, it will require actions and decisions that may dismay the general citizenry in the near term, and only a government that is able to sway public perception to go through the painful needful will lead Zimbabwe to a sustainable resolution.

April 2016, Zimbabwean citizens sleep outside banks in anticipation for morning queues for cash.

The liquidity crisis can only be sustainably rectified by a deliberate approach that consciously balances out the structural and cyclical challenges of the economy, and that will be determined by whether or not the next government can abide by stringent reforms expected from multilateral creditors like the IMF. Structurally, the liquidity crisis is caused by a productivity gap between the goods we competitively produce and the money in circulation. Productivity is perhaps one of the more difficult metrics to boost in an economy as it involves incentivizing private sector confidence, but only after pursuing convincing public sector reforms, which in Zimbabwe will be under frequent cyclical re-evaluation by the IMF and other creditors. More simply, if the economy is to fix the liquidity crisis, the next government has no choice but to commit to a long term cyclical reform program. That means that public sector reforms, such as civil service rationalization and social service adjustments, will be determined by the repayment schedules as agreed on with creditors. That repayment schedule will demand thorough reforms in a capacity that policymakers are yet to convey to the public.

Superficial perception by politicians is that private investment will fix the productivity imbalance. This is not true. These politicians undermine that private investors will first wait to see how Zimbabwe abides by the cyclical debt repayments as agreed by multilateral lenders. Until then, Zimbabwe remains an unproven high risk proposition to private investors. Indeed these multilateral institutions will insist on reforms in public expenditures such removed subsidies to sectors like agriculture, and open market competitive tariffs in the energy sector as seen in Haiti. Reforms will demand that government interventions as financed by a budget deficit, central bank credit and treasury bills be significantly drawn back. These reforms will directly hit the pockets of unsuspecting citizens and government dependent private proprietors. Moreover, civil servants who have recently shown a propensity to demand higher wages than currently provided will have to face tough reforms in their salaries, and likely their job prospects too, as government will have to pursue stringent civil service rationalization. What all these reforms serve to do is create capacity for government to enable cyclical debt servicing to multilateral creditors. These are necessary short-term aches that are deemed necessary by an observing base of potential financiers and investors into the economy.

However, the greatest challenge to be faced by all these reforms is that they will neither reflect in the trimming of bank queues nor the availability of cash in the near term. Liquidity injection into the economy will only occur to notable extents after prolonged evidence that the new government can commit and meet cyclical debt repayments. This can be perceived as the proof necessary to encourage private investment into productivity and can take as long as several years as was the case in Greece. Only then can Zimbabwe start to create a credit record notable for global capital markets. Only then can private financiers invest into the infrastructure, technology, and human capital development that will start to decrease the productivity gap we have with other economies resulting in traction to fix the liquidity crisis.

Greece and Haiti should serve as illustration of two differing fates; the first, whereby there is the risk of chaos amongst a perturbed citizenry, holding back a government from acting; the second, whereby a nation commits to go through a period of prolonged painful reforms, and eventually emerges as a credibly competitive entity recognized in the global economy. Our politicians and policymakers may hide this truth for now, but this will be an inevitable crossroads that Zimbabwe will reach after July 30.


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