Boosting economic growth through bold structural reforms
The overall economic outlook in the short to medium term is sluggish or not good at all, owing mainly to the continued liquidity crunch, continued deflation, policy inconsistency and the unsustainable external account (trade deficit) and debt situation. Every time I sit down on my computer to write the next instalment of my article contribution to the Sunday News’ Economic Focus, rest assured I do it with a heavy heart.
The appreciation of the fact that Zimbabwe like any other country belongs to the global world does not take away our “sovereign national” status at all, instead it strengthens the very reason of our existence as a country. Maybe, politically we can exist in isolation. However, economically we cannot. There has been so much talk about the need for reforms, as I reiterate this need in this article once again, I do it with a lot of emotions. We have tinkered for too long, tried this and that, yet the solution is very clear. Zimbabwe requires bold structural reforms to boost its economic growth once and for all.
Why bold structural reforms are needed: For almost the past two decades, Zimbabwe’s economic growth has been sluggish, and severely hit by hyper-inflation during the period 2007-2008, reducing the country’s relative per capita income from a level matching the top half of the African continent countries in the early 1990s to be counted among the poorest now. Weak growth has contributed to the country’s serious fiscal problem by limiting the growth of Government revenue. The country continued to experience rising spending, driven by population growth and frequent fiscal stimulus packages that might have not been budgeted for, has been financed largely by domestic borrowing that continued to bottleneck the private sector, boosting gross Government debt to unsustainable levels to date, the highest ever recorded in the Sub-Saharan region at some point. The country has maintained a net debt ratio that has run almost above half of the Gross Domestic Product (GDP) on average. The upward pressure on the debt ratio continues, with a primary budget deficit of nearly three percent of the GDP. Persistent deflation has also contributed to the run-up in the debt ratio by reducing the nominal GDP, while acting as a headwind to output growth.
A run-up in interest rates has a potential to increase debt rapidly and eventually destabilise the financial sector and the real economy. Zimbabwe requires largescale revenue inflow increases to match increasing expenditure. Constraining spending is difficult but crucial, given upward pressure on social outlays, notably for health and long-term care of the citizens of this country and the need to promote social cohesion. The need for social spending is increasing in Zimbabwe as more and more people are thrown out of formal employment as companies close increasing the relative poverty rate.
The Government needs to implement bold structural policy reforms to reverse the negative economic performance trend highlighted above. The structural reforms should be targeted at easing the high cost of doing business, attracting Development finance institutions (DFI), achieving fiscal and external sustainability, reducing financial weaknesses and unlocking the potential for inclusive and pro-poor economic growth. As I have mentioned before in the previous articles, the reforms should target public enterprises as well to improve their efficiency and profitability in addition to reducing Government debt and expenditure as top fiscal priority measure.
Persistent deflation has been a headwind to economic growth in our country and has exacerbated the fiscal situation by steadily reducing the nominal GDP. Like I have suggested before, that the current situation can be remedied by aggregate demand stimulation in the economy, the Reserve Bank of Zimbabwe should set an inflation target and launch both “quantitative and qualitative monetary easing” in the economy and boost the country’s balance sheet to some percentage of the GDP. Deflation lowers the nominal GDP, thereby boosting the Government debt ratio and threatening fiscal sustainability.The GDP deflator continues to fall, helping to drive down the nominal GDP, even to negative levels. There is a high chance that the 2016 GDP growth rate will be negative. If annual inflation rate could be set to steadily increase by a nominal percentage over a given period, the debt ratio would decrease by some percentage points as a measure of the GDP, based on this simple mechanical calculation. It is clear that reducing the debt ratio in a deflationary context is, however, very difficult. Deflation also has a negative impact on growth, partly because it keeps the real interest rate positive at times when ample slack would call for negative real rates.
Given the deleterious effects of deflation in our economy right now, achieving at least a one percent inflation target should remain a top priority.Once the word inflation is mentioned in Zimbabwe, I know that it sends some cold shiver down some people’s spines. Zimbabweans are taken aback at the thought of the 2008 hyper inflationary experience.
I am not in any way referring to the need for such inflation in the economy. However, in order to come out of this current deflation, which by the way can be worse than the hyper inflation, Zimbabwe needs some measure of inflation target over a foreseeable period of time, that is, some time horizon, say two years. This is part of the quantitative and qualitative monetary easing measures that need to be taken as a bold structural reform policy.
In conclusion, fundamental structural reforms are urgently needed to be stepped up to raise output growth, which is essential for fiscal consolidation and improved living standards. Zimbabwe remains internationally isolated with the lowest share of inward foreign direct investment (as a percent of GDP) in the South African Development Community region. Low rates of business creation reflect a lack of economic dynamism in the business sector in Zimbabwe. Venture capital investment does not exist any more in Zimbabwe, for example and the small and mediumsized enterprise sector growth is lagging or is dead.
Dr Bongani Ngwenya is Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. Feedback: ngwenyab@solusi.ac.zw/nbongani@gmail.com