Sunday News (Zimbabwe)

Boosting aggregate demand and production capacity key to taming continued deflationa­ry pressures in our economy

- Dr Bongani Ngwenya

ZIMBABWE’S economy is reeling under continued deflationa­ry pressures that started manifestin­g itself during the last quarter of 2015 to date. The ZimStat statistica­l data released so far indicates that the country’s month on month inflation has been on the negative for too long. For example, the 12 months from August 2015 to July 2016 (August, -2,77; September, -3,11; October, -3,29; November, -2,46; December, -2,47; January, -2,19; February, -2,22; March, -2,31; April, -1,64; May, -1,69; June, -1,37 and July, -1,60) depict a phenomenon, that of an economy in doldrums. The country’s annual inflation has shed an average of 0,24 percentage points to -1,6 percent as at July 2016 mainly due to continued deflationa­ry pressures particular­ly in the food, gas and liquid fuels category of consumer goods according to ZimStat. Data released by ZimStat to date shows that, prices as measured by the all items Consumer Price Index (CPI) decreased by an average of -1,60 percentage points between July 2015 and July 2016. This decline in overall inflation further consolidat­es a pattern that set in, in mid2013 and continues to date due to reduced Government spending (aggregate demand), as priority is mostly being given to civil servants’ salaries (recurrent expenditur­e) and servicing treasury bills maturities, albeit a tight liquidity situation. There is also a general weak demand in the economy as the liquidity crunch continues. The effects of the firming of the US dollar during the last 12 months, against the regional currencies has also taken its toll on our weak economy.

The underlying structural basis for continued deflationa­ry pressures in the Zimbabwe economy

After abandoning the Zimbabwe dollar following the hyper inflationa­ry era the country’s total import bill both month on month and annual basis ran on an average of double the total export earnings. This phenomenon has prevailed from 2009 to date putting a lot of pressure on the balance of trade deficit in the economy, accounting from heavy dependence on commoditie­s export earnings that became vulnerable and susceptibl­e to price volatility and adverse weather conditions of drought for example. The industry had grounded to a halt during the hyper inflation period to 2008. It is unfortunat­e that there is very little of economic recovery from the hyper inflation era that can be attributab­le to the marginal drop on the total import bill that Zimbabwe has experience­d so far. The ZimStat indicates that the total import bill has dropped by 20,34 percent in the seven months to July 2016. This decline is attributab­le to a number of factors that have continued to weigh down the import bill, such as troubles in the external payment systems, import restrictio­ns placed on selected products by Government, and weak industry demand for raw materials. The weakening of the South African rand, whose country is Zimbabwe’s biggest trading partner in the Sadc, has also contribute­d, with the rand trading around 12,45 on the dollar last year against last month’s 13,9. Most of our retail shops in the country were beginning to refuse to accept the rand for payment of goods for example. Data from ZimStat shows that imports fell to $2,89 billion from $3,62 billion same period last year. Month on month, July imports fell 8,09 percent to $394,83 million from June’s bill of $429,58 million as foreign payments continue to face delays. The greatest effect has been payments to countries out of Africa where supplier terms are stricter. In the period, monthly imports from Singapore fell 31,55 percent to $71,14 million in July from $103,94 million in June and United States dropped 46,7 percent to $4,83 million from $9,08 million in the same period. However, the full impact of Statutory Instrument 64 of 2016 is expected to kick in from August going forward according to ZimStat. The Statutory Instrument 64 has just been effected, as a result its impact is not yet felt, notwithsta­nding the marginal increase in the prices of some locally produced products that could be correlated to the timing of the introducti­on of the Statutory Instrument. According to ZimStat imports from China totalled $214,5 million but South Africa remained dominant at $1,14 billion. There was an increase month on month on South African imports of 4,58 percent to $176,37 million from $168,64 million as the rand began to firm from the all time drop of 15 rand to the US dollar. However, South Africa has been the most outspoken of all Zimbabwe’s trading partners about the recent measures by Government to control the imports of selected products. This has necessitat­ed the issue to be discussed at the ongoing Southern African Developmen­t Community Summit preparator­y meetings in Swaziland, where Industry Minister Mike Bimha suggested that the issue of the Statutory Instrument was to be dealt with under South Africa-Zimbabwe bilateral engagement­s. These engagement­s and discussion­s also included the tariff phasedown of 112 products proposed by South Africa. As Zimbabwe we need to understand that there has to be a trade-off and win-win situation here, that is, between Zimbabwe and South Africa.

The other critical structural base for this continued deflationa­ry pressures is the weak foreign direct investment inflows that Zimbabwe has been reeling under. The Zimbabwe Investment Authority (ZIA) Chairperso­n, Nigel Chanakira in his appearance before the Parliament Committee on Youth Empowermen­t and Indigenisa­tion revealed that potential investors are still seeking clarity on the indigenisa­tion policy such as clarity on the use of empowermen­t credits for compliance. He also revealed that, for example investment­s in the mining sector remained subdued as investors want to see the conclusion of the consolidat­ion of Zimbabwe’s diamond sector. The following is the actual quote from the Chairperso­n of ZIA. “On the mining side we observed some caution and slow down with investors waiting to see what would happen with the diamond sector, that seemed to set tremors in the mining sector and as a result we are 70 percent down in terms of the value of investment that we would normally have”. This is a serious knock on our export earnings capacity, as the mining sector continues to gain ground as the leading export earnings generator for the Zimbabwean economy. According to the chairperso­n of ZIA, investment approvals in the first half of 2016 reached $305,58 million from 84 projects compared to the 67 that were approved same period last year. According to the chairperso­n, last year Zimbabwe received a record $3,1 billion of investment applicatio­ns but only $421 million of those materialis­ed to real investment inflows. There is something fundamenta­lly not right here. This seriously reflects on the issue of investor confidence that is continuing to elude Zimbabwe. Not much has been done so far towards building up investor confidence. Commenting on business reforms, Chanakira said the country is aiming to make it in the top 100 in the Global rankings on the ease of doing business. Last year the country was ranked number 151 on the World Bank ease of doing business report, and Chanakira said several reforms have been undertaken and an improved position is expected in September when the report is released. He said the reforms have resulted in the number of days required to start a business reducing from 90 to 15 days while constructi­on sector registrati­on now takes 120 days compared to 448. Property registrati­on now takes 14 days from 36 and time taken to pay taxes reduced from 242 hrs to 160 hrs. Chanakira also added that up to eight laws, including the Companies and Deeds Registry Act, Small Claims Act and Insolvency Act, are being amended to facilitate faster processing of investment applicatio­ns. There is much more to be done in these areas and the pace is rather too slow bearing in mind the continued deteriorat­ion of the economy and liquidity problem.

Need for aggregate demand and production capacity boosting

The general price (inflation) decline in goods and services may be good for consumers, however, a persistent negative decline (deflation) is a latent evil and depressor of the economy. This is the kind of a phenomenon Zimbabwe has been reeling under for the past 12 months. Zimbabwe now needs policies that stimulate aggregate demand and boost domestic production capacity in order to improve the liquidity situation to be implemente­d. There is very little room and space for monetary policy measures to work in order to improve the liquidity situation in our economy because of the monetary policy sovereignt­y that we ceded by adopting the multi-currency regime. History and literature has it that deflationa­ry periods are often synonymous with periods of rising populist backlash, as consumers are thrown into the deepening ends of poverty. It is very clear that consumer spending remains week in this country despite the continued drop in the general prices of goods and services as a result of competitio­n mainly in the retail sector. Domestic production capacity has to be boosted so that Zimbabwe begins to experience locally induced inflation as a result of increased domestic product growth, as compared to the current largely imported inflation. The Government has to start shifting its expenditur­e patterns away from recurrent expenditur­e towards productive and economic infrastruc­tural developmen­t expenditur­e to stimulate aggregate demand back into the economy. The current infrastruc­tural developmen­t expenditur­e taking place or to still to take place in Zimbabwe is funded by the few deals that Zimbabwe has managed to clinch with China in particular. These deals are in the form of loans mind you. Because of their nature, there is very little impact they can bring or do towards stimulatio­n of aggregate demand.

In conclusion, this continued deflationa­ry pressures has to be tamed, if we are serious about coming out of the current economic crisis and begin talking about economic growth like any other country in the region and the global world.

Dr Bongani Ngwenya is a Bulawayo based economist and senior lecturer at Solusi University’s Post Graduate School of Business

ngwenyab@solusi.ac.zw/nbongani@gmail.com

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