via Govt clueless, stuck on the economy – The Zimbabwe Independent February 14, 2014 by Tendai Biti
SEVEN months into the new Zanu PF administration, the country is slowly but surely grinding to a debilitating halt while the economy sinks into a comatose position in the midst of clueless hand-wringing by authorities, indicating a clear lack of leadership and direction.
After the elections, the economy was always going to be the centre-piece of delivery or its lack thereof. It was always going to be the point of reference and the yardstick of measuring Zanu PF’s capacity to govern.
That President Robert Mugabe and his new government are not fit to government is becoming clear by the day. The past seven months of his administration have provided proof beyond a shadow of doubt about the dearth of capacity and understanding of how to the steer the country forward.
Within a short period of time, a dramatic collapse in confidence has seen a massive contraction of the economy. Any realistic projection of 2013 Gross Domestic Product (GDP) cannot exceed 2,4% while the most optimist figure of GDP growth rate for 2014 is the World Bank’s 4,2%.
According to the World Bank, since 2009 and before the elections, Zimbabwe’s economy had started to recover from the 1999-2008 meltdown that saw economic output cumulatively declining by more than 45%.
Supported by a strong recovery of domestic demand and government consumption, real GDP grew by 20,1% in 2009-2011. GDP growth was led by strong growth in mining (107%), agriculture (35%) and services (51%) while recovery in manufacturing sector (22%) has been less vigorous. Despite the strong 2009-2011 economic rebound, GDP growth in 2012 has moderated to an estimated 5%, largely supported by mining.
“The agricultural sector went down by 3,5% as the production of maize declined due to adverse weather conditions, lower hectarage and subdued yields. Uncertainty about the implementation of the indigenisation programme negatively affected overall growth in the mining sector, beyond the growth in diamonds and gold. Growth in manufacturing (5%) performed below expectations, dampened by credit constraints and declining competitiveness. The manufacturing sector contributed 16% to GDP while the services sector remained the biggest contributor to GDP, at 39%,” the World Bank noted.
Annual average inflation remained moderated at 3,7% in 2012 despite rising international prices of grain and oil. The external position remained under pressure as merchandise exports slumped by 10,5% to reach US$4 billion in 2012, while imports reached US$6,7 billion in 2012, driven by fuel (20%), food (11%), and machinery (13%) and manufactured goods (15%) (Reserve Bank of Zimbabwe statistics).
The current account deficit in 2012 remained elevated at 22% of GDP, largely financed by short-term capital inflows and accumulation of arrears.
Foreign exchange reserves remained low at 0,6 months of import cover in 2012, while errors and omissions remain high at US$938 million, reflecting persistent unregistered remittances, unreported exports and unidentified financing.
The strong fiscal recovery which characterised the 2009-2011 period is moderating. Government revenues reached US$4,5 billion (36% of GDP), while expenditure totalled US$3,61 billion in 2012.
However, expenditure remained heavily skewed towards employment costs, which absorbed US$2,17 billion (68% of current expenditure), blighting critical social and capital expenditures. The government ran a primary deficit estimated at 1,2% of GDP in 2012, largely composed of domestic arrears (US$208 million as at October 2012), and accessed non-concessional external loans.
The September 2012 debt sustainability analysis confirmed that Zimbabwe was in debt distress, with total external debt at the end of 2011 estimated at US$10,7 billion (113,5% of GDP). Most of the overdue obligations are owed to the World Bank (US$911 million), AfDB (US$587 million), EIB (US$244 million) and IMF (US$138 million).
While signs of decline in the economy started showing in 2013 before the elections it became clear that going forward, sustaining high growth would require determined efforts at economic reform.
In this regard, envisaged important reforms in public financial management, financial sector regulation, and other areas needed to be sustained.
Zimbabwe’s external debt is high and largely in arrears, cutting off the country from access to most external financing sources, and this also needs to be dealt with. In particular, Zimbabwe remains unable to access IMF resources because of its continued arrears to the fund.
Strong track record of maintaining macro-economic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners, will be essential for resolving Zimbabwe’s large debt overhang.
However, what we are seeing now after the economy rebound during the inclusive government days it is a fresh phase of “depression economics” and sharp down ward spikes that have characterised this economy since the 1960s.
More than anything else, the greatest threat to the economy remains the strong signs of deflation which are there for everyone to see. The rate of inflation, more appropriately collapsing companies, retrenchments, the collapse in aggregate demand all point to this accelerated level of deflation.
There is simply no sustainable economic activity going on and the figures prove this.
Revenues have contracted sharply. Monthly revenues can no longer meet the bloated monthly wage bill.
At the same time there is no coherent strategy for expenditure management. The net result is that government is in de facto shut down while at the same time arrears are accumulating exponentially.
The biggest mistake of the new administration has been to transit from cash- budgeting to deficit financing under circumstances where the deficit cannot be monetised through printing of money.
The elementary rule of economics is that you cannot eat that which you have not killed. It will always catch up with you.
Nowhere is the disaster more aptly captured than in the country’s parlous balance-of-payments position. The trade deficit, even in the face of a depreciating rand, continues to spiral out of control.
At the same time thanks to muddled positions on the murky indigenisation, the capital account remains a big yawn.
Beyond this, with minimum disposable incomes, banking sector vulnerabilities and grinding liquidity crunch, prospects of domestic resource mobilisation through savings are next to nothing.
Thus in a very short seven months, the country is gliding into the abyss courtesy of tin-pot leadership and incompetence. Government officials, always shouting the ill-defined economic blueprint Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimAsset) as if that is all what is actually needed to fix the economy, are short on delivery long on slogans.
ZimAsset has become the end in itself and not the means to an end, something which is revealing about government officials’ capacity fix the economy.
Poverty and depravation have become the order of the day at a time when the gap between the rich and poor is growing at a rate only bettered by Nigeria and South Africa on the African continent.
At the same time public sector corruption, at least now firmly in the public domain, has become the principal haemorrhage of scarce public resources. But as with everything else from the current regime, no decisive action will ever be taken to deal with the corrupt officials and their networks to clear the rot.
It is clear that an independent and full commission of inquiry chaired by a retired judge is required. At the same time forensic audits must be carried in many of these state enterprises and quasi-government bodies.
Further the Public Finance Management Act must be amended to allow Treasury to approve and oversee even the recurrent budgets of parastatals. Constitutional requirement of two-term limits on parastatal heads must be made law through an Act of Parliament, while corporate governance must be enforced.
The sad reality is that this government has no capacity or clues on how to fix the economy beyond empty slogans and ill-informed and impractical references to ZimAsset.
Thus resolving the root cause of the problem — which is political — must be a necessary precondition. In the meantime it is self-evident that some form of an emergency rescue package on the economy is needed. The country urgently requires a stimulus. However, this government seems to be lacking the credibility and a bankable programme to get funding.
Stemming the chronic deindustrialisation must surely be top priority so too addressing the deficit in gross capital formation. None of these issues will ever be addressed by a government run by officials always absorbed in power struggles and succession battles.
The current lot running government are like catfish which cannot survive in clean running waters of a modern inclusive democratic state. Like catfish, which even if found in freshwater environments, though most inhabit shallow, running water, they can only hunt in muddy waters.
Yet the truth of the matter is, as Albert Einstein once said, problems are never solved at the same mindset and level of thinking that created them in the first place.
Biti is former finance minister, MDC-T MP and lawyer.