RENOWNED economist Tony Hawkins says Finance minister Mthuli Ncube’s strategy for economic recovery is completely in tatters as the economy has shrunk by a quarter over the last two years.
In his infamous letter to international financial institutions in April, Ncube admitted that government policy missteps and failure to implement the International Monetary Fund’s (IMF) Staff-Monitored Programme were to blame for the country’s accelerated economic decline.
As a result, he sounded the alarm bell by stating without an urgent international bailout, Zimbabwe’s economy would contract by 20% by year-end.
In his economic outlook released on Wednesday, Hawkins said despite a small budget surplus of ZW$443 million in the first quarter, spending was rising faster at 825% than revenue at 635% and that when adjusted for inflation reduces to just 39% and 10%, respectively.
“Ncube’s strategy is in tatters if there ever was a strategy. The plan was to control money supply and government spending in the belief this would reduce inflation and stabilise the exchange rate. And whatever little chance that had of success was blown out of the water by Covid-19 and the lockdown, especially the lockdown abroad which cut off an awful lot of business for Zimbabwe,” Hawkins said.
“Looking ahead, the promises of political as well as economic reform have not been honoured. Zanu PF is already amending the 2013 constitution even before it is fully implemented. And in recent months, many economic reforms ‘so called’ have already been abandoned or reversed. Hardly do we go by without the Reserve Bank using some kind of measures, usually statutory instruments, to tighten up on one aspect of business or another.”
He said the economy was in a state of stagflation of escalating inflation, a collapsing exchange rate, falling employment, declining real wages and consumer spending. The economy has shrunk by a quarter in just two years, he noted.
According to prominent American economist Steve Hanke, Zimbabwe is facing its worst economic crisis in more than a decade.
“Inflation skyrocketed from 1 190% per year to 1 302% per year in two days by my measure, which employs high-frequency data and is the only accurate inflation measure for Zimbabwe. Other rates that appear in the press are rubbish,” he tweeted recently.
Driving inflation is the fall of the Zimbabwean dollar as it lacks adequate foreign currency, commodity or market confidence backing. The consequence of the depreciating local unit is that government, business and personal incomes are being constantly decimated.
This has seen the government missing growth targets, preventing businesses from increasing production and forcing consumers to prioritise spending leading to economic activity being reduced drastically.
Yet, despite these genuine economic failures, the government has decided to resort to forceful economic tactics instead of dealing with underlying causes.
For example, on June 26, 2020, the government embarked on a police campaign code-named “Accept Zimbabwe Currency as Legal Tender” wherein any business or person who does not accept the local currency would be arrested.
In a statement this week, the Zimbabwe Republic Police said 102 suspects had so far been arrested, as the authorities continue paying scant regard to Gersham’s Law, an economics principle which postulates that “bad money drives out good”.
As such, instead of addressing the root cause of the failings of the Zimdollar, the government is accelerating inflation by seeking to force the market into accepting the unstable currency. This is because businesses are turning to pricing that matches the parallel market if they are charging using the local currency to maintain the value of their goods or services.
Another major policy misstep is banning trading on the Zimbabwe Stock Exchange, a move that has left stock brokers scrambling to explain to investors why they cannot access their ZW$228,87 billion (US$3,6 billion) on the main bourse.
The consequence is that more investors, who are already shunning Zimbabwe as an investment destination, will steer clear of the country.
This comes at a time the United Nations Conference on Trade and Development (UNCTAD) forecasts a 40% drop in global foreign direct investment, worsened by the impact of Covid-19.
In its World Investment Report for 2020 titled International Production Beyond the Pandemic released last month, UNCTAD said of Zimbabwe:
“That country continues to suffer from general economic decline and instability, making it a challenging location in which to invest.”
Hawkins said the mix of currency exchange controls, curbing the use of mobile money and banning the publication of parallel market rates all aimed at trying to stabilise the exchange rate shows that the government is missing the point.
“The authorities believe somehow that this is a public relations exercise that people really do want to hold Zimbabwean dollars and if you can just take away the idea that there is an alternative that they would greatly accept the bond note system.”
He added: “Now this is clearly not working for two reasons, one is that the demand for foreign currency vastly exceeds the supply and the second is that for all of us the US dollar is the currency of choice”.
He said nobody wants to hold on to the freefalling local currency.“In April, after Covid-19 struck, the government appealed to the IMF for help and was rejected. More recently, it wrote to the major donors in what is called the Paris Club and they also declined to help.
“Government’s failure to implement its shadow IMF programme (Staff-Monitored Programme) that it negotiated about a year ago plus its record on human rights has quite honestly alienated the donor community.”
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