US$18bn stimulus package commendable
NEARLY all countries in the world have adopted stimulus packages aimed at minimising the negative impact of the Covid-19 pandemic on their economies.
It is estimated that global GDP will contract by 3 percent in 2020, according to the International Monetary Fund (IMF).
Using the G20 countries as an example of global response to the Covid-19 pandemic, a total stimulus package of US$5 trillion (7,4 percent of GDP) has been adopted.
This is in response to the area’s forecast GDP contraction of 0,4 percent.
Notable examples include Japan being the biggest at 21 percent of its GDP; the United States of America with 11 percent; Australia 9,9 percent; Canada 9,8 percent; the European Union 4 percent; Germany 4,9 percent; France 5 percent; Russia and Indonesia both with 2,8 percent of GDP.
Closer to home, within the SADC region, using South Africa in similar fashion, the neighbouring country has announced a R500 billion (US$26 billion) stimulus package (10 percent of GDP). Additional measures include a cut of the repo rate by 200 basis points by the South African Reserve Bank, thereby releasing R80 billion in reserves.
The case for South Africa, being Zimbabwe’s biggest trading partner accounting for about 40 percent, is of keen interest. The package is being funded from a reprioritisation of R230 billion from the current budget, while the rest is debt and grants from local and international partners including the World Bank, IMF, the BRICS new development bank and the AfDB.
The country’s unemployment rate is 29 percent. In line with this global trend, Zimbabwe announced a stimulus package of $18 billion (9 percent of GDP). This included a cut of the reserve ratio by 500 basis points, releasing $2 billion in reserves. Notably though, Zimbabwe cannot rely on the same sources of funding as SA and indeed as any other neighbouring countries within the SADC region. The country has to be more innovative from both the funding and utilisation perspectives. The summary distribution of the package is: agriculture $6,08 billion, working capital fund $3,02 billion, mining sector $1 billion, SME sector $500 million, tourism sector $500 million, arts $20 million, statutory reserves liquidity release $2 billion, health $1 billion, food grant $2,4 billion and broad relief measures $1,5 billion.
Unlike its South African counterpart, where about 50 percent of the stimulus package is funded from foreign aid, Zimbabwe has to rely largely on internal sources. It is important to highlight the country’s high unemployment rate, a negative real interest environment characterised by high inflation at 676 percent and a bank rate of 20 percent that leaves no room to manoeuvre.
The country has to internally fund almost the whole package due to the dearth of foreign donor aid. This places it uniquely where, given the already unstable macro-economic environment, the risk of using inappropriate funding sources can result in a further deterioration of the economic fundamentals. It is imperative, therefore, that the authorities place more reliance on a reprioritisation of some aspects of the current budget.
In addition, the authorities are urged to structure a bigger part of the package outside the social grants and health areas in a nonfunded form. It is in this regard that allocations to mining, tourism, industry, SMEs sector and agriculture — totalling about $11 billion — can be provided in the form of guarantees as a way of risk sharing with financial institutions, in particular the banking sector.
The above measure calls for an active participation of the banking sector in transmitting the package in a non-inflationary way to the targeted sectors. They must use the normal credit skills to ensure an efficient application of the funds granted under guarantee but with related pricing models that take into consideration the Government guarantees.
The pricing should be no more than what would ordinarily be Treasury Bills bid prices by the banks.
By providing guarantees through the banks and supported by the liquidity release covered under the statutory reserves above, the Government has enabled credit growth to the productive sectors of the economy.
This mechanism should be extended to cover all the productive sectors, chief of which are agriculture, mining and the SMEs.
Industrial re-capacitation requires longerterm structures to enable retooling, although there is a stimulus working capital grant of $3 billion that should be accessed under similar conditions and boost immediate production.
While the social-related grants unavoidably are funded, this should be from reprioritisation of budget provisions as well as adopting creative and focused measures that limit the extent to which this is only channelled into consumptive purposes. An example, among others, is increasing the allocation under the BEAM schools assistance programme and even allocating funds for the Government schools infrastructure maintenance to preserve it because many parents are not be able to meet their fees obligations. By extension, school administrations will not be able to maintain infrastructure without assistance from parents.
Given the high unemployment rate of the country, the SMEs sector is well covered to participate under this package and should be a significant driver of a turnaround strategy.
It is important for the authorities to also use this opportunity to broaden this sector by capturing the informal operators through incentivising a painless entry into the formal sector. The $500 million targeted for the SMEs sector should be used as a draw card to on-board more players that are in fact providing jobs in the underground economy.
A brief survey of the urban landscape, including growth points, shows multiple little shops with multiple products and services ranging from electronic gadgets (especially cellphones and computers) repairs and reconditioning, electrical installations, motor mechanics and spare parts, transport services and even fashion clothing and cosmetics.
Most of these operations are unrecorded and outside the tax bracket. They generate significant employment and incomes. The authorities are urged to innovatively design a policy framework that on-boards these operators painlessly. The SMEs grant provides this opportunity and value chains tied to the big industrial operators that could be developed and provide a mechanism for growing the sector.
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