ECONOMIC TALK: The next govt will still be a transitional one 

Source: ECONOMIC TALK: The next govt will still be a transitional one | The Financial Gazette May 3, 2018

By Own Correspondent

By Munyaradzi Mugowo

Historical experience shows that the transition leadership is usually as unpopular as its predecessors, either because of unpopular reforms, or because the costs of adjustment bring with them considerable pain.

Some of the unpopular reformists who come to mind are Benjamin Mkapa who succeeded Julius Nyerere, Tanzania’s longest-serving leader and godfather of the struggle for independence and David Moyes,  who took over from Sir Alex Ferguson at Old Trafford. The two are still hated or disliked up to today for committing the sin of trying to “change things” in a period longer than what stakeholders were prepared to tolerate.

ED has run into a similar public relations crisis. The general Zimbabwean citizenry is the least prepared to wait for another day to see an end to the unemployment crisis, inflation, cash shortages and infrastructure decay.

Yet, the economy has virtually lost the capacity to overcome current macro-economic imbalances, which are both multiple and severe, and rebalance to strong and sustained economic growth.

And here is the worst part: The longer it takes to address current imbalances, the sooner they will aggravate structural challenges and the more difficult it will be to stabilise the economy in the future.

My first intervention is that the next government — whichever choice the electorate makes — will still be a transitional government in pretty much the same way as the current administration battling with the financial and structural imbalances which built up to unsustainable levels under the government of  Robert Mugabe.

Regardless of political and economic philosophy, the assignment remains one of addressing financial and structural vulnerabilities, and building a resilient economy which can forestall, counteract, withstand and prevent severe fluctuations in employment, output, prices, trade and financial markets.
The slowdown in economic growth seen in the last three years demonstrates that headwinds have progressively built up their muscles, signaling that a breaking point if not too distant.
Take away dollarisation, and we are back in turmoil.

Even though it marked an end to Zimbabwe’s longest economic decline, post-hyperinflation growth has failed to keep the prices stable, create formal employment, reduce the trade deficit or correct the liquidity crisis.

The macro-economic imbalances and vulnerabilities are more detrimental now than when Mugabe was deposed mainly because they were not addressed at an early stage and have consequently grown into structural drags, which call for urgent structural reforms.

My second intervention is that the next 10 years will be an age of reform, implying that the next two governments would still be transitional administrations, perhaps no less unpopular than the current administration since they cannot avoid structural reforms and austerity policies, which make any government unpopular. The recent Greek crisis saw governments changing, yet popularity levels remained more or less the same.

The transitional agenda is all about economic stabilisation and structural transformation, starting with the restoration of liquidity in the economy and the elimination of market distortions to make the economy more competitive, both of which should be buttressed by structural reforms.

The crisis is problematic in that what started off as inter-temporal financial imbalances have taken a structural dimension nature even if its effects and drivers are financial.

But at the present policy crossroads, government’s best bet is to control the adverse effects of the crisis with liquidity restoration measures and hope to rebalance the economy towards a more resilient structure with structural reforms over an extended period of, say, five to ten years.

As the most prominent dimension of the post-hyperinflation crisis, the liquidity crisis has attracted disproportionate policy attention, even though it is only an offshoot of persistent external and internal macro-economic imbalances.

Following delays in correcting the causes and stabilising the effects, the liquidity crisis has subsequently given rise to a cash crisis, currency crisis and debt crisis.

Liquidity restoration is required to stabilise the fiscus, foreign currency reserves and financial markets in order to restore confidence and certainty undermined by government’s wanton measures to obtain liquidity to run its operations, particularly the abuse of RBZ overdraft facilities and excessive debt acquisition, following inexorable deterioration in the public finances and he drying up of alternative sources of financing.

One of the most urgent reforms in the first year of transition is to unwind Mugabe’s unsustainable fiscal policies currently driving inflation and public debt growth, and swiftly return to fiscal prudence, which lays the foundation for recovery and places the economy on a more stable path in the future.

The fiscal discipline required to service rapidly growing public domestic debt, now over 25 percent of GDP, and to honour the country’s commitments to the IMF, World Bank and other foreign creditors.
More critically, additional liquidity will be required to finance public investment in infrastructure, which is a key input in production.

It is important to underscore that successful stabilisation will remain a pipe dream if government does not abandon its inflationary fiscal activities or expand spending on infrastructure and social services.

Other priority actions include rebalancing the economy away from the informal sector and rebuilding diversified domestic sources of growth as a way of reducing external commodity dependence.
From hyperinflation, Zimbabwe emerged with a highly concentrated export structure. The burden of driving and sustaining economic recovery has been offloaded on six primary commodities because of the structure of exports.

Besides, the growth in merchandise trade has not been strong enough to correct financial market imbalances and has contributed relatively little to the stabilisation of the current account, fiscus and prices.

Policies to support private savings and investment are also urgent.

The reforms that are needed at this economic juncture closely resemble the stabilisation policies prescribed by the IMF and the World Bank under the auspices of economic structural adjustment programmes of the 1980s and 1990s. Of course, the costs of adjustment will not be significantly different.

But the post-election government is damned if it implements structural reforms, and more so if it doesn’t.

Historical experience suggests that it normally takes at least 10 years for countries in Zimbabwe’s situation to overcome fragility, according to the IMF Article IV Consultation report on Zimbabwe of 2017.

Part of the report reads:

“IMF studies suggest that on average it takes around a decade for fragile countries to overcome fragility. The fiscal situation of fragile states tends to be characterised by a poor revenue base, large expenditure pressures, poor public financial governance, and a long list of reform needs in a context of generalized capacity challenges, which can undermine efforts to build well-functioning states.”

However, the success factors identified in the report are Zimbabwe’s problem areas driving the crisis — fiscal discipline, mobilization of domestic revenue, tight control of current expenditure notably wages, increased public investment spending, exchange rate reforms and high-level political commitment.
The scope for significant revenue mobilisation to restore fiscal liquidity is currently limited by rising economic informality and persistent shrinkage in the revenue base while tax rates are already high “for a low income country” to grow any further.

The period of transition is likely to be lengthy and painful, regardless of which political party comes to power.