Seize chance to align fiscal, monetary policy

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Zimbabwe now has a rare chance to do what best practice demands, getting the fiscal, economic and monetary policies into alignment with the Minister of Finance and Economic Development, Prof Mthuli Ncube, and the Governor of the Reserve Bank of Zimbabwe, Dr John Mangudya, working together to craft and implement the required policies.

For far too much of Zimbabwe’s post-independence history we have not seen the required pairing work. At times one of the partners was over-dominant and interfered, with disastrous results, in the sphere of the other. So we have suffered runaway debt financing, money printing and hyperinflation, and non-sustainable quasi-fiscal policies among a host of evils.

The Finance Minister and the RBZ Governor have different roles, although there can be some overlap. The central bank governor works under an Act of Parliament, has a narrower but well-defined ambit and, thanks to his fixed-term contract, a modest degree of independence.

He is designated as the lead person in setting monetary policy. The Finance Minister has a wider sphere of operations, especially if he is the central figure in setting and implementing Government economic policies, but has to retain the confidence of the President and at least some support from Cabinet colleagues. He is the leader in setting fiscal policies and frequently the Government’s main economic advisor.

Prof Ncube and Dr Mangudya go back a long way. They are almost exact contemporaries, born just three days apart (Dr Mangudya is the elder but by just those three days) and they must have come into contact with each other as top-end students studying for their first degrees at the University of Zimbabwe in the same faculty but with slightly different majors. And their paths must have occasionally crossed since. It does not matter whether they see each other as friends, rivals or whatever. What does matter is that thanks to their educational and career backgrounds they should be able to communicate effectively at a very high level, for the benefit of Zimbabwe.

Many, including ourselves, have listed the critical problems. First The Government at present needs to spend more than we pay in taxes, a problem facing Prof Ncube. He has already indicated that he needs to keep tight control of Government spending and ensure that all taxes are actually collected. The budget deficit needs to be substantially reduced. Tax collection should be simpler in our near cashless economy since almost every transaction is now recorded on someone’s database. The streamlining of the Government with the new smaller Cabinet means that controls can be more effective without crippling services.

The second major problem is that Zimbabweans want to import more than we export, creating a serious gap in the balance of payments. Temporary solutions are possible, basically bridging loans, but there are limits Fiscal, monetary and economic policies all need to be used to boost exports so we have the money we need to buy the capital goods and raw materials we need to grow the economy; consumptive imports have been falling while input imports have been rising.

The third element of potential instability is the way we have been financing deficits. Treasury bills and overdrafts have their uses, especially for short-term smoothing of cash flows; and in Zimbabwe they had the useful extra benefit of restoring market liquidity after the currency meltdown. But most think we have moved beyond the beneficial stages and the Governor and the Minister now need to jointly find a better long-term set of solutions. Bond notes belong in this category as well, a good idea that should have worked to create a stable additional medium of exchange but which, unfortunately, rotate through tin trunks under beds rather than through the banking system.

None of these problems is insoluble. Solid economic growth, almost any growth, coupled with good fiscal control solves the budget deficit. Seven percent growth a year for three years will grow the economy by around 25 percent and even a moderately competent Finance Minister can convert that to a 25 percent plus growth in tax revenue without any new taxes, with a highly competent Minister managing to keep spending growth significantly below that figure as he eliminates the operational deficit and relegates Government borrowing to where it belongs in a developing country, long term capital funding of infrastructure.

The balance of payments gap requires that a substantial portion of this growth has to be in export sectors. This means, basically, mining, tourism and agriculture. Industry can chip in with more import substitution and some agricultural sectors can reduce imports of items like wheat and soya beans. But a permanent solution means we need to sell a lot more metal, tobacco, flowers, cotton and the like on international markets and attract a lot more free-spending foreigners to enjoy our lovely country. Again this requires some smart alignment of economic, fiscal and monetary policies so that we earn more and are more careful how we spend it.

What we do not need is any repeat of potential rivalry across Sam Nujoma Street. Everyone in the private sector knows that when a viable business and its bankers are good buddies a great deal of benefit flows and a lot of real wealth is created.

On a far larger and far more complex scale the same happens when a Government and its central bankers are working together according to accepted best practices. And there are many examples around the world of sustainable and respectable economic growth when the heads of a finance ministry and a central bank are on the same wavelength pursuing complementary and viable policies. We hope to see the same in Zimbabwe.

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