Have Chinamasa and Mangudya been saying the right things to the market?
The fiscal and monetary chiefs of our economy have recently both been at the receiving end of critical perspectives.
The criticism against Finance Minister Chinamasa has largely flowed from recently published World Bank and IMF economic reports warning against his growing appetite for fiscal expansion, with critics arguing the sustainability of this policy direction, particularly in terms of central government debt capacity and the banking sector’s Treasury bill stock.
On governor John Mangudya’s part, the RBZ has equally been cautioned against encouraging further Government debt monetisation through offering credit financing. The central bank has been spurring on debt monetisation by expanding money supply to enable Government to meet its invoices.
However, most critics both internal and external, have somewhat rigidly pointed out their criticism within a context of risk — is the central government growing a debt balloon likely to blow up, and will the RBZ induce inflation by increased money supply?
While such concern can be warranted, fear of risk alone is inadequate without a context of productivity. Perhaps this is where Chinamasa and Mangudya can still win over stakeholder support. It is difficult to refute any fiscal and monetary policy direction that stimulates economic growth through productivity!
Fundamentally, productivity is what creates the money for debt payback! By a Government going out to borrow, it should be a calculation on whether or not accumulated debt stimulates enough productivity to create revenues that surpass that level of debt. Simply, debt that does not bring you more money than you owe makes no sense. This is key logic, as often-times debt in itself is perceived by fiscal governance in an absolute connotation, at best referenced to Government invoices and obligations.
For instance, Government needs this amount for such and such activities or obligations, so let’s borrow that. This is an inadequate means of computation and poor understanding of the purpose of debt itself. More astute fiscal authorities place greater emphasis on the right metrics which weigh debt to its productivity potential. For instance, a debt to GDP ratio is a smart guiding stick, historically and prospectively.
Regrettably, little convincing reference of debt is made to productivity in Minister Chinamasa’s budget review, thus its fair criticism to say our fiscal authorities are impulsively referencing debt to its expenditures and obligations; the context of productivity is secondary, if at all it exists.
Under Chapter 7 of the budget review, Government deficit that stood at $1,4 billion, against an initial target of $150 million, is said to be caused by “a combination of inescapable expenditure requirements and revenue underperformance”.
This is poor contextualisation of public debt. Philosophically Minister Chinamasa has conducted his fiscal planning as an accountant and not as progressive economic mind. Unfortunately, there’s enough stakeholder convention to give him encouragement for his current means of fiscal management.
Reducing the fiscal deficit and consistent effort towards what is termed “fiscal consolidation” — where just like an accountant the left side of expenditures must balance with the right side of revenues — are the guiding stick for his public debt management strategy, as supported by the IMF and esteemed economic intellects in Zimbabwe. But, this is absurd if you think about it! Fiscal spending and income are inherently uncertain.
For instance, if there is a sudden negative shock to the economy — say drop in chrome prices like experienced within the first three months of this year, or climate change patterns that affect rainfall — tax revenues fall as mining and agriculture are significant contributors to revenue.
Conversely, higher rainfalls or commodity prices can yield greater revenues unexpectedly. Moreover, micro-business cycles that take place in an economy are just as uncertain. So it lacks credible rationale to base fiscal management along evening revenues to expenditures alone, when both are subjective to such variable uncertainty.
Under Zimbabwe’s circumstances, this is futile strategy and will hardly incite the utility of debt to an extent where we realise a potent growth trajectory! We cannot sustain the anemic growth of hovering around 1 percent to 3 percent any longer.
We have had such figures for the last four years. Economic growth must spike to double digits; for socio-economic and debt relief purposes. The 1,7 percent growth projection of this year is insufficient to justify deficit financing.
Minister Chinamasa must pursue his debt management strategy with a focus on greater productivity. This does not always lend obedience to fiscal consolidation, and in a case of irony, it is where the further borrowing and credit financing direction taken by Minister Chinamasa is actually warranted!
The nuance is just that his borrowing should not be for inescapable expenditures and obligations, but for potent productivity stimulus. This is where he has always left himself vulnerable to critics who deride his spending on recurrent civil service wages, as other than satisfying an income and consumption demand imperative into the economy, these recurrent expenditures ultimately lack the potency of growth stimulus.
High debt and fiscal deficits are not to be feared, if anything they are short term circumstances that bold fiscal strategy should tolerate — but only in a case where fiscal authorities have identified the financing potential for productivity stimulus.
Similarly, governor Mangudya has to match the expansion of money supply caused by his credit financing to government with the likelihood of productivity growth. By printing or creating digital money, that increased money supply should be productivity focused. Indeed his credit financing to Minister Chinamasa is fundamentally good in that the economy requires stimulus; however, without a productivity emphasis central bank credit financing to government will embarrass both chiefs by bringing about inflation into the economy.
Expanding money supply causes inflation when it is done without an effective productivity boost; a case of “more money chasing fewer goods”. The central bank then should only be called upon to finance Government expenditures that influence the competitive production of goods, which result in enhanced workforce welfare.
With this productivity context consciousness in mind, Minister Chinamasa and governor Mangudya should ask themselves; have they identified any productivity strategy on which to bet their chosen debt monetisation and money supply expansion direction?
This is the only ultimate assurance of fiscal and monetary policy to the debt market, and to incite confidence in the macro-economy. Productivity strategy is a comparative game. It is about competitiveness and measuring against regional or international benchmarks.
Thus, in the context of productivity spending, fiscal expansion and money supply must focus to strike potency in areas such as enhancing trade competitiveness, ability to attract technology transfer, labour force skills and innovation enhancement.
This is soft societal infrastructural development that Zimbabwe has been trailing behind our regional peers, as indicated by a report called “Manufacturing sector productivity growth drivers: Evidence from SADC member states” compiled by Douglas Chikabwi, Clainos Chidoko and Calvin Mudzingiri, published in March 2017.
According to what’s called a Cobb-Douglas function, where productivity is traced to a combination of physical capital and labour, Zimbabwe has not contested impressively with regional peers over the past 15 years. Conceded, the need for foreign capital has been well versed in popular rhetoric, but our labour deficiency is also significantly understated.
Sure, we churn out graduates every year, but perhaps skills and innovation development are lagging behind. So, in terms of Government deficit spending and expanding money supply; vocational programs and aligning formal value chains that make use of this labour should be the target!
To his credit, Minister Chinamasa has tried to target his deficit spending towards infrastructure projects. However, slow traction due to structural and poor administrative fluidity have stunted pace of productivity and given government a bad reputation. This is a matter of which Government has been its own creator of critique and low confidence.
If Minister Chinamasa can win credibility in the allocation of debt to infrastructure spending, then he would boost confidence. A point to consider is that while Government borrowing is risk free and a viable option for banks facing unprofitable lending channels to private sector, debt markets internally and externally would be more attracted to finance infrastructure projects if we had a reputation of vibrant and dynamic projects.
For instance, energy and transport financing that create near term mass employment and long terms structural dividend (more power generation in the economy) are attractive to investors when they are visibly efficient and functional. Central Government loses out a lot by not having the kind of reputation that other regional peers have garnered in terms of their execution of such projects. There is capital in hype!
Infrastructure projects are the best window dressing when central government looks to attract debt financing. The criticism that Minister Chinamasa has received for his debt financing is also coming from the bad reputation of government in terms of slow, overly priced, tender-poached infrastructure projects.
Conclusively, debt monetisation and expanding money supply are what the economy need right now.
However, through a combination of bad reputation, a lack of oratory conviction, and poorly versed policy statements, Minister Chinamasa and governor Mangudya have struggled to convince the market and investors on the productivity imperative of their taken policy direction.
As such, for now, debt monetisation and money supply are merely perceived in their expedient form and the criticism will only add more heat.