Restoring economic fundamentals key to economic resuscitation

MAY I begin by welcoming the wisdom of the Government that has been demonstrated through heeding to the calls for temporal suspension of the import restriction measures in the prevailing economic circumstances.

In a full cabinet resolution that was taken last Tuesday, the Statutory Instrument 122 of 2017 — Control of Goods (Open General Import Licence) will be temporarily repealed until the situation normalises.

“Cabinet notes with concern that the basic commodities continued to be in short supply despite increased production by suppliers‚ thereby reflecting persistent panic and speculative buying‚” reads the resolution.

What it means is that products such as cement‚ bottled water‚ animal oils‚ body creams‚ cheese‚ cereals‚ ice cream‚ wheat flour and cooking oil‚ just to mention a few can now be brought into the country by individuals.

This follows a spate of shortages of some basic commodities in the market, particularly cooking oil which normally retails for $3,35 (bond notes) for two litres but has been surfacing on the black market for $15 (bond notes) or an equivalent of US$4 in either South African rand or Botswana pula.

We raised the need for the suspension of these import measures in last Sunday’s instalment. Be that as it may, the culmination of economic meltdown resulting in hyperinflation in 2008 was a clear result of economic policies gone awry.

I remember the debates that I used to have with my MBA students at Solusi University in the business environment class lectures.

Controversially though, the argument is that the general African problem is politics that takes precedence over the economy. In Africa, politics leads and detects how the economy operates.

While elsewhere, the economy directs the political philosophies, with minimal political influence on the economy and the direction it should take.

Politics tends to come with too much Government bureaucracy and protective measures even in situations where they are not applicable or become counterproductive.

With politics, it is easy to dismiss economic developments such as ones that are happening in the country.

I remember in the height of our class discussions for example, was the impact of the indigenous policy and how it scared the potential foreign investors.

Nevertheless, without losing focus here, the argument is that there is a need to restore economic fundamentals, the economic fundamentals that went awry leading to the hyperinflation in 2008.

Too much focus on politics at the expense of the economy made us as a nation fail to seize an opportunity to restore the economic fundamentals that were and are still the missing link in the cogs of the economic resuscitation engine following the economic meltdown and hyperinflation of the 2008.

The post hyperinflation era saw the continued inheritance of unsustainable Government expenditure and budget deficit, where in an average $4 billion national budget about 80 percent of the budget vote finances recurrent expenditure in a multicurrency system environment, bearing in mind that the adoption of the multicurrency system hamstrung the monetary authorities’ ability to control the supply of the multi-currencies.

Monetary policy sovereignty was lost from the day we abandoned our sovereign currency. It would have been prudent for the country to maintain a streamlined post hyperinflation Government expenditure or fiscus in order to free much of the financial resources towards the resuscitation of the economy-post hyperinflation.

The impact of Government expenditure is strongly felt now when the country is facing liquidity crisis and dwindling revenues because of increasing unemployment levels as the economy continues to informalise.

Government revenues and income continues to fall while Government expenditure is rising, widening the budget deficit, a situation that is not healthy for a struggling economy such as ours.

The recently introduced two percent tax on online monetary transactions, though hitting on the consumers would see Government revenues improving to a certain extent.

The post hyperinflation era saw the import bill ballooning to unsustainable levels pushing pressure and strain on the country’s trade deficit.

Unfortunately, not much has been done to resuscitate the industry and manufacturing sector in order to reduce the imports to sustainable levels post hyperinflation.

ZimStat indicates that the country’s trade deficit has risen by 28 percent to $1,6 billion over the period February to August 2018 from $1,25 billion recorded during the same period last year, further depleting the country’s precarious import cover, which has remained around two weeks since 2015.

The current developments in the economy and the market are vindicating and justifying what these figures portray.

The two salient economic devils famously known as the twin deficits have wrecked havoc in the country’s economy. From a purely economics perspective the two structural economic in balances are directly and attributable to most of the economy’s financial problems.

The Government has been financing the budget deficit through domestic borrowing crowding out and bottle necking the private productive sector and further fuelling inflation. The trade deficit shows the excess of imports over exports, while the budget deficit reflects an expenditure overrun relative to revenue.

The two economic fundamentals have an impact on the country’s gross domestic product. In a normal functioning economy, exports are expected to cover the country’s import needs like in business, trade debtors (accounts receivables) are expected to cover the trade creditors (accounts payables).

That is the import of those goods and services that the country does not have comparative advantage. In our situation just as simple example, Zimbabwe does not possess oil for example, as a result; it cannot produce its needed fuels. Thus, the country will continue importing the commodity because it does not have a comparative advantage.

The latest ZimStat trade report shows that between February and August 2018, the country imported goods and services worth $4,01 billion against exports of $2,41 billion compared to last year same period, imports of $3,18 billion against exports of $1,93 billion. The report further shows that imports remain heavily skewed towards consumption goods.

In conclusion, this structural problem could have been reversed if the posthyperinflation era seriously focused on the resuscitation of the industry and the country’s manufacturing sector. While the suspension of the SI 122 of 2017 and the proposed consumer protection bill are welcome developments in the circumstances, there is a need to seriously restore the economic fundamentals, that is, reverse the current unfavourable twin deficit trends, as they are significantly impacting negatively on the current economic developments in the country.

Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at nbongani@ gmail.com