eBusiness Weekly
We all hoped that the new Government would take seriously the promises of President E. D. Mnangagwa to fix the economy to ensure sustainable and high levels of growth for the next decade as Zimbabwe drove hard towards middle-income status and that politics would take the back seat to economics, in other words we would do what was right for continuous long-term growth rather than respond to short-term political pressure and proceed in lurches interposed with periods of near destruction.
We also hoped that for the first time in decades, fiscal and monetary policies would be aligned and that both would be modified or created in ways that followed the dismal laws of economics rather than have continuing unviable responses to crises that we largely created ourselves.
Well this week we got our answers with more promised today.
For a start Reserve Bank Governor Dr John Mangudya and Finance and Economic Development Minister Professor Mthuli Ncube appear to be using the same hymn book and they announced this with the presence of the Minister among the guests at the Governor’s monetary policy statement. Yes, it was a gesture, but it is something we have not seen before and this was a case where the gesture announced a change.
The Governor concentrated on one of the two major problems facing Zimbabwe, the growing balance of payments deficit. He formalised what had been a recommendation at the beginning of the year and now insists on a system that gives serious incentives to Zimbabwean businesses to find export markets. While not quite telling manufacturers and others in the productive sectors to export or die, he did make it clear that if they want to grow production they must export, and that if they do export they can use those forex earnings to supplement what the RBZ allocates. He has arranged a bit more import cover but basically wants a longer-term solution, which he thinks is attainable and sustainable.
The Governor also became a lot firmer about how he saw Government debt being funded in a less destructive and more sustainable way, something that is required but seemed slightly pie in the sky considering the way the second major problem, the budget deficit, was being handled or rather not being handled.
But then the Minister came in with the biggest move of the week, a sweeping reform that will eliminate the overwhelming bulk of the deficit, and certainly the entire deficit in recurrent expenditure. Now the Governor’s comments made sense; presumably neither officer’s proposals was a surprise to the other.
The Minister’s move was, of course, that 2 percent tax on electronic transactions, which in Zimbabwe basically means all transactions bar kombi fares. This is something new in the economics world and is only possible now because Zimbabwe is the first country in the world to abandon banknotes for all practical purposes. That tax is steep and already the Minister must have noticed that no one likes new taxes. But he sold it to his Cabinet colleagues and as the President had already mentioned the need for belt tightening while we fixed the fiscal and monetary mess, the Minister had presumably won the most crucial political backing.
On the positive side the move brings in around $3 billion a year in new tax revenue. Large budget cuts were clearly out; you cannot fire all your teachers for example and little cuts are helpful but do not solve the problem.
The tax will give a one-off boost to inflation, not large, probably around 3 percent, but on the other hand the growing risks of demand-push inflation, and much of the sudden return of modest inflation has been significantly cut by reducing consumer demand and by ending the need to expand the total of Treasury Bills in the system, and cutting back on the Government’s overdraft at the Reserve Bank. When the Government started issuing treasury bills this move, which amounted to quantitative easing, was positive. The banking sector after the hyperinflation meltdown was far too illiquid. But the growth, especially in the last year or two, has been dangerous. That vast amount of excess liquidity, coupled with a jump in demand is what has been financing the pressure on limited forex.
Growth in money supply and liquidity have to be built on growth in production, not on financial instruments. Those have to be returned to their intended purposes, evening out ups and downs, and Zimbabwe needs to embrace policies that will create that real growth rather than lurch from crisis to crisis by using short-term solutions that do not really work.
None of what has already been done or is in the pipeline is possible without political backing at the highest level and without being able to explain and sell the programmes to the people.
The first condition the Governor and Minister appear to have. President Mnangagwa has made it clear that he wants proper solutions and is prepared to support workable solutions even if there is short-term pain. He has also made it clear that he is ready to accept the price for the other condition of fast economic growth, zero tolerance of corruption and inefficiency. A leader prepared to fire his friends and ready to remove any shielding for a political ally who has messed up is being serious.
The second condition, selling the policies and programmes, probably needs more work. While economists understand what is happening, and largely approve, it is clear that ordinary people will need to be involved as well. The Government and its financial advisors are not being secretive, but do need to explain in ordinary language why they have to follow certain courses and how and when benefits flow. The President has been upgrading and strengthening the information team, which should help.
