Economy on a wing and prayer

Source: Economy on a wing and prayer – The Zimbabwe Independent August 9, 2019

METAPHORICALLY, the economy is on a wing and a prayer.

The evidence to support this assertion is abundant.

For starters, the likely massive decline in tobacco output sketches the perilous path the economy is taking.

The reports that tobacco seedling sales are 50% of previous years’ levels is an ominous sign. The average price as of July 26 is US$1,99 per kg, the lowest price since the 1999-2000 tobacco marketing season — the lowest price before this was US$2,91 recorded in the 1999-2000 marketing season. There has been a massive structural shift in the nature and composition of tobacco growers.

The average size of land under tobacco has dramatically dropped from a peak of 10,69 hectares (ha) per farmer in the 2000-2001 season to the record low of 0,52 ha per farmer. This trend shows that Zimbabwe’s increasing tobacco output and record yields in the past two years have come through hundreds of thousands of small-scale farmers planting tobacco on pieces of land 20 times smaller than was the norm pre-land reform.

Tobacco farming is now dominated by small-scale farmers in the A1 sector and the ordinary rural household. Tobacco growers have increased from 8 537 in the 1999-2000 tobacco growing season to 200 000 in the 2018-2019 season. The tobacco yields per ha have picked up dramatically from the measly 792kg/ha recorded in 2007/2008 to 2 280kg/ha in the 2018-2019 season, an almost three-fold increase. This level of improvement is just 19% shy of the record peak of 2 729 kg/ha reached just before the beginning of land reform.

With this structural shift, each grower, on average, is now producing 1,26 tonnes of tobacco. This means each farmer will get US$2 500, split as US$1 250 hard currency and the other half retained by the Reserve Bank of Zimbabwe (RBZ) given at the inter-market bank rate. The 50% reduction in tobacco seed sales is worrisome in the context of the spiraling cost of inputs and the skyrocketing cost of living which have dramatically reduced the small-scale tobacco farmer’s ability to re-invest. This will likely see the small-scale farmer reducing the area under tobacco way, way below the established average of 0,52 ha even under a scenario of a good 2019-2020 rainfall season.

If the rains are poor, it will spell serious economic disaster. Whatever the rainfall out-turn for 2019-2020, we are likely to experience an oversized effect in terms of a reduction in tobacco export yields for the 2019-2020 tobacco season.

The RBZ has been using tobacco output as collateral (structured trade finance deal) to convince one pan-African bank to extend a credit facility that has seen the credit extended to Zimbabwe by the bank reaching US$1,2 billion.
The future of this facility is in jeopardy due to tobacco’s poor performance. Such a likely massive reduction in tobacco output will increase our trade deficit significantly, resulting in a serious weakening of the local currency. One would have thought that government would have extended a helping hand to the tobacco farmers who now have a good track record of production by lowering the RBZ forex retention to 10% from the current 50%. It is poor economics to milk dry the cow that feeds the family.

The story of tanking tobacco productivity is the story of the economy. Rolling power cuts are reducing both production and productivity in the farming, mining and manufacturing, raising the spectre of massive price increases as unit production costs rise in multiples.

Finance minister Mthuli Ncube has budgeted an extra ZW$3,2 billion to fund command agriculture (ZW$2,8 billion) and the Presidential Inputs Scheme (ZW$400 million). He is banking on a normal rainfall season and an implied maize productivity mediocrity of one tonne per ha for the Presidential Inputs Scheme and five tonnes per ha for command agriculture (good farmers do 10 tonnes per ha of maize).

The scenario of a poor rainfall season cannot be ruled out. Without irrigation, the ZW$3,2 billon scheme is a lottery. The question is: who will pick up the tab when the loans given to the farmers cannot be repaid due to poor output? We are on a wing and a prayer.

The suspension of year-on-year inflation publication tells a huge story; the monster is roaming and is seeking whom he may devour, economically speaking. The suspension of these inflation figures is very disingenuous because there is nothing technically sound to justify the suspension.

Inflation calculation is straightforward mathematics based on the standard Laspeyre and Paasche methods. You need a base period. You need a basket of goods. You need prices and quantities for the base period. You need prices and quantities for a current period. That is all you need. The formula is straightforward — it is not complicated at all — the mathematical operations needed are just addition, multiplication and division.
Given the formula and figures, a form two student can calculate the inflation figure. Year-on-year inflation figures if continued would have likely given figures that show multiple jumps, triggering panic.
Ncube’s argument that the new currency makes it difficult to compare like-for-like, in my opinion, is not sound because there was always an implied exchange rate between the US dollar and RTGS dollar/bond 12 months ago. The month-on-month inflation figures that will be used will give “small” numbers and for the ordinary person it will not be psychologically frightening.
However, month-on-month inflation statistics will not hide the explosive inflation growth from discerning analysts; month-on-month inflation is an exponential mathematical function — the same function that governs the growth of cattle and goats. The simple question to ask is: when will the inflation cow give birth to another cow and how many cows will be birthed in a year. Month-on-month inflation jumped from 12,54% in May to 39,26% in June.
This is frightening.
At 12,54% month-on-month, if this rate persists, it means the basket of goods will cost 4,12 times in May next year. A month-on-month inflation rate of 39,26% spells Armageddon—if that rate of “acceleration” persists—God forbid—it means that the basket of goods will cost 53,25 times in June next year. That month-on-month rate means that if the rate remains at that level, the basket of goods doubles every two months.

Metaphorically speaking, your inflation cow is expected to give birth every two months! Holy cow! (no pun intended). We are on a wing and a prayer. We do not know the month-on-month figures for July—but a higher figure is expected. The farmer’s definition of hyperinflation is when the cow called inflation gives birth every month — this is umhlolo or mashura. There has been a heavy bout of price increases in fuel, government fees and food prices following the announcement of the supplementary budget.

It is my considered opinion that the powers that be could have divined that continuing with year-on-year inflation figures when we could soon reach the level of inflation where the “inflation cow” gives birth every month would give a shocking year-on-year figure, sending the country into panic mode. The “low” month-on-month increasing inflation figures would hide the gravity of the inflation level from the ordinary publics, hence preventing a deadly inflationary growth spiral fuelled by inflationary expectations.

Ncube cites the twin deficits of the budget or fiscal deficit and the trade deficit. He told us last week that he has tamed one of the two wild twins, fiscal. He also indicated that the other naughty twin, trade, is about to be disciplined. Ncube forgot to tell us about the third twin, called the confidence deficit. He is mum on how far this unchained twin is doing.

We are on a wing and a prayer. I believe in miracles.

Brett Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.