Zim needs a critical mass approach to turnaround

Preamble:

THIS week’s economic focus is a continuation of last week’s, “Economic reform key to turnaround”, article. Structural economic challenges and problems require structural economic solutions. Expectations about reviving the economy need to be modest and must start with a more effective Government will, acting in a unified manner as if the country faced a national emergency. As I have alluded in the past, that the good effort by Finance Minister Patrick Chinamasa can only be achieved through full Government support and commitment.

The lazes’ fare or business-asusual approaches by some arms of Government and the industry will not succeed in reviving the economy. This brief puts forward some outside-thebox ideas, which, combined with greater Government effort and effectiveness and, hopefully, reductions in policy interpretation inconsistencies, may help turn the economy around. Key proposals include stimulating local or domestic production through similar export incentives and lines of credit, generating and promoting exports of high-value cash crops and minerals through export promotion grants and incentives in real money, reducing the import bill, creating fiscal space through modest Government borrowing after clearing the debt arrears, curbing externalisation of foreign currency, and investing in a few sizable economic infrastructure projects.

Critical mass and donor support A modest economic revival in Zimbabwe will come about not as a result of any individual measure but through a combination of actions that, taken together, achieve a critical mass that may be able to break through the severe headwinds the economy is facing. Restoring confidence will be critical to raising domestic and external demand and, over time, unlocking the large amounts of liquidity potentially available for private domestic investment as well. If the Government does take serious action to revive the economy — including paying off debt arrears — donors and multilateral financial institutions should respond proactively, not with the business-as-usual attitude. The international community will need to be supportive of responsible Government future borrowing, provide advisory and technical support for macro-economic management similar to economic structural adjustment programme and to help design and implement the economic programmes described as been successful in other developing countries, for example in the Sub-Saharan region and China. The international community would be willing to reallocate and front-load aid to support these promising initiatives by the Minister of Finance as they are developed. Working closely with the Government, international financial lenders and donors should review and restructure their aid portfolios to shift funding toward activities that would disburse more quickly and achieve faster economic and development results that Zimbabwe needs immediately.

More fiscal space, as well as providing greater resources for economic and social development programmes, will help address the fiscal crisis that the country is going through. Increasing revenues, lowering and restructuring Government expenditures in favour of higher-priority spending, and future Government borrowing after normalising relationships with the multi-lateral donor financial institutions can create fiscal space. The International Monetary Fund (IMF) and the World Bank will certainly be willing to financially support Zimbabwe once again. In a stagnant economy with low inflation or negative inflation like our economy is experiencing and recurrent balance of payment deficit problems, tight fiscal policy is a harmful contractionary force that may not be sustainable in the long term. In the current situation, modest Government borrowing would be necessary once the debt arrears have been cleared — associated fiscal deficits would moderately stimulate the economy, and at least would not make the situation worse than it is at the moment. In a normally functioning economy, deficits are a necessary evil. The Government-run monetised fiscal deficits on the order of unsustainable percentages of the GDP for the past several years now has caused a running down of Government deposits with the Reserve Bank of Zimbabwe. However, this is no longer possible since such deposits have been largely exhausted. The Government therefore would have to borrow directly from the central bank like what used to happen in the past, and could also issue real bonds (e.g. treasury bonds) for sale to the Zimbabwean public. Indeed, if the Government starts acting in a unified manner, these “sovereign bonds” would potentially mop up a part of the enormous wealth accrued by the informal sector over the years — and thus help increase financial inclusion, which is becoming a serious challenge as the economy continues to informalise. Any future Government borrowing would need to be limited and responsible. Borrowing from the Reserve or Central bank would have to be limited to no more than around two percent of the GDP in order for it to be sustainable, and the negative inflation would need to be monitored. Government borrowing in the domestic market would have to be resuscitated in the future, however, would require debt sustainability analysis and management to minimise the crowding out or bottle necking effect on the private sector of the economy.

Shifting demand from imports to domestic supply and stimulating exports

Currently in our ultra-open economy, measures to increase demand would not necessarily translate into higher domestic production and incomes because a large part of higher demand is met by imports, unless the situation reverses.

A promising but little considered option would be to nudge the composition of demand away from imports and towards domestic production, provided this is done in sectors where a domestic supply response is possible, such as in the food production — agricultural produce being a supply of raw material inputs for food processing. Increasing exports likewise would stimulate domestic production and incomes. Both Government and the industry would have to engage in spending programmes that target the poor to increase domestic demand or aggregate demand since the poor tend to spend a larger part of their budgets on domestic goods and services. These types of programmes would have both macro-economic and poverty reduction benefits and could be funded by increased public resources (including through aid) and or by shifting resources from lower-priority activities. Increasing local procurement through greater preference for Zimbabwean companies Buy Zimbabwe campaign, especially in Government tenders, as well as domestic content requirements incorporated in contracts, is another option that was being pursued in the past, but perhaps could be taken further.

Such measures would need to be supported over the medium term by efforts to enhance the supply capabilities of the Zimbabwean economy, such as infrastructure investments, building human capital in a demand-responsive manner, improving the business climate for the private sector, and developing business support services — lines of credit.

The Zimbabwean business sector at some point in time comprised of the country’s sustainable comparative advantage, but its potential has not yet been realised and is threatened by low cost competing imports of food staffs in particular. Once the domestic productive capacity has been resuscitated, then a modest, broadbased, and undifferentiated import tariffs would have to be imposed on imports of mainly food staffs, because the local production would be now able to meet all the domestic demand. The balance of trade would then naturally correct itself.

In conclusion some countries take advantage of their economic downturns, painful as they may be, to be an afforded opportunity to root out waste and inefficient spending both in the public and private sectors. This is because the opportunity cost of making fundamental reforms is lower during downturns. This opportunity to reassess processes and undertake reforms that make better use of resources should not be wasted. Our own experience of economic downturn is an opportunity for us making fundamental economic reform.

Dr Bongani Ngwenya is Bulawayo based Economist and Senior Lecturer at Solusi University`s Post Graduate School of Business. mailto:ngwenyab@ solusi.ac.zw/ nbongani@gmail.com