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A framework for currency reforms

28 Sep, 2018 - 00:09 0 Views

eBusiness Weekly

Clive Mphambela
I have written at length about the need for a currency reform strategy that will put Zimbabwe’s economy on a sustainable path to recovery. My submission this week seeks to contextualise the current macro-economic and business environment and propose various scenarios for Zimbabwe’s economy in the post-election period.

It is imperative that the Government of Zimbabwe quickly adopts a comprehensive macro-economic reform programme that is all encompassing and inclusive.

Critically, it is important to understand that Zimbabwe’s economic challenges are structural and long term in nature and are no longer amenable to short term solutions.

Zimbabwe being part of a regional economic block, it will be important for us to also paint an important regional context before zeroing in on Zimbabwe economic situation.

The Sub-Regional Economy offers both opportunity and challenge

Southern Africa’s economic environment in 2018 has been no less challenging than it was in 2017, even as economic prospects are improving somewhat.

The region continues to face issues such as the disorderly global financial system, the rising spectre of the US inspired trade wars, Eurozone trade policy uncertainties in the face of Brexit, geo-political re-alignment, and the Sub-region’s own economic policy uncertainties on such matters as land reforms, mining and energy sector laws realignment.

The agricultural sector has not performed as well as it could have, undermining food security and increasing the likelihood of a resurgence inflation.

SADC economies are fast running out of fiscal space for countercyclical expansion, and access to global capital markets has become extremely limited due to rising global interest rates and tightening market conditions.

The public debt spiral, largely induced by poorly performing economic fundamentals as well as fiscal drain by state-owned enterprises, continue to threaten the regional economies to pre-HIPC and Multilateral Debt Relief Initiative era, and have severely undermine expenditure on SDG-related outlays.

On the positive side, even though very slowly, the raw commodity product demand (and prices) continue to rise, giving some hope to the resource-intensive region that the economic prospects for 2018 will be brighter.

Furthermore, SADC member States are now taking rapid and credible steps to achieve fiscal consolidation, while striving to retain reasonable levels of social infrastructure expenditure levels.

SADC economies have also become very mindful of the critical importance of improving the business environment in order to energise private investment, and this has been supported by relatively peaceful leadership transitions in a number of countries, including Zimbabwe.

The AfCFTA is rightly deemed to represent an opportunity for accelerated deepening of regional trade and integration, expanding markets, increasing production, thus generating needed revenue to address poverty and inequality.

Reforming tax policy and administration needs to be one of the key priority areas in the economic turnaround strategy for the sub regional economies and thus presents an area of major opportunity.

In the same vein, some measurable successes in domestic resource mobilization efforts by sub Saharan economies, promise to insulate the regional economies from wildly fluctuating resource-based revenues, and are a more reassuring funding source for socioeconomic development programmes.

Contextualisation of Zimbabwe’s post-election economy
The economic environment has deteriorated sharply since 2016, and appears to be retracing the 2007-08 crisis cycle. Striking similarities of the hyperinflation challenges have invoked memories of economic meltdown which led to the eventual abandonment of the Zimbabwean dollar in 2008.

Inflation Outlook is now very negative
That being the case, US cash and foreign currency (FX) shortages started emerging in 2016 and have since worsened. The emergence of parallel market exchange rates for RTGS and bond notes has been fuelling inflation which is set to continue rising in the coming months. Industrial capacity utilisation will be negatively affected by FX shortges.

Money supply growth is unsustainable
Huge fiscal deficits of $1,42 billion in 2016 and $2,66 billion and the domestic financing thereof have been a major source macroeconomic imbalances over the recent years.

High fiscal deficit are being financed through domestic borrowings and RBZ overdraft facility (money printing). This resulted in the creation of bank deposits or RTGS balances without the commensurate increase in the quantity of USDs.

Government targeted budget deficit compared to actual deficit out-turn is a cause of concern.

In 2016 and 2017, Government targeted fiscal deficits of $150 million and $400 million, were a far cry of the actual deficits of $1,42 billion and $2,66 million, respectively.

Similarly, the target fiscal deficit of $672 million in 2018 will likely be missed by a wide margin, which does not inspire confidence as it points to laxity in expenditure controls.

Proposed macro-economic reforms
In order to address the current challenges and lay foundations for future sustainable growth of the economy, there is need to undertake comprehensive reforms.

The reforms should tackle the fundamental causes of the problems that are visibly manifesting themselves in terms of foreign currency shortages and low production, among                                                                        others.

The current FX and cash shortages are symptoms of the swirling imbalances in the economy.

Zimbabwe requires the support of the international community, in particular the IMF and the World Bank in carrying out large scale comprehensive macroeconomic reforms, as necessary for the economy to gain confidence and traction.

This requires that the country makes progress on debt and arrears clearance, in particular multilateral debt clearance, which will enable Zimbabwe to access medium and long term financing, critical for liquidity and the recovery of the economy. The following macroeconomic reforms are necessary.

Fiscal Consolidation and Civil Service Reforms
The high fiscal deficits, recurrently financed through the RBZ Overdraft and Treasury bills issuance is the greatest source of imbalances in the economy.

Addressing underlying imbalances in the economy will require elevated focus on the root cause of the problem — high and recurrent budget deficits that are monetized through the Reserve Bank of Zimbabwe.

It is important that comprehensive fiscal consolidation and austerity measures be put in place to reduce the fiscal deficit and control money supply growth.

Fiscal and state enterprise reforms by their nature, cannot be done overnight. Accordingly, a medium term reform programme, typically 3-5 years would be required to guide the fiscal consolidation framework with specific quarterly targets.

The objective would be to reduce the budget deficit from current levels in excess of 10 percent of GDP to levels below 2 or 3 percent of GDP over five years.

Such overarching and comprehensive reforms, will require a context to buttress macroeconomic credibility and usually the context is an IMF supported Macro-economic reform program that has clear and agreed benchmarks and performance targets.

Within the context of an internationally agreed reform program, it will be immensely beneficial of such a program came with Balance of payments and budget support — as part of the macroeconomic reform package.

The macroeconomic reforms framework should prioritise policy sequencing — unless a concrete budget framework, or a roadmap for reduction of the budget deficit is in place, within the context of an internationally agreed macroeconomic framework, that addresses both domestic debt and external debt and arrears — any peripheral measures outside these core will yield sub optimal results.

Currency reforms in particular, must be located within the context of broader macro reforms, once the fundamentals and credibility issues are addressed.

The following fiscal reforms are proposed:

(i) Fiscal Consolidation and Civil Service Reforms;

  • State enterprises reforms, commercialisation and privatisation;
  • Address domestic debt burden & Treasury bills debt;
  • Address printing via issuance of TBs;
  • Expenditure deduction and rationalisation;
  • Tax Revenue measures;
  • Review of Subsidies (e.g. Maize subsidies);
  • Removal of inter-ministerial duplications and ghost workers;
  • Addressing operational inefficiencies and waste.

(ii) Removal of all distortions in the economy (pricing and policy distortions).

(iii) Business Costs Alignment (Review of all major business costs)

(iv) Labour Law Reforms (Flexible Labour markets)

(v) Re- engagement programme with the international community;

  • To address external debt and arrears clearance;
  • Reform Programme Financing.

The above reforms will be associated with significant costs of adjustment and in particular the pain of adjustment, with potential for social unrest, unless delicately and comprehensively addressed, with equity and fairness.

Communication will be critical, especially the steady communication by Government that the costs of adjustment will be borne evenly by all stakeholders, including Government, business and labour.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.

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