Pre-budget prognosis: Template for useful economic reforms

via Pre-budget prognosis: Template for useful economic reforms – The Zimbabwe Independent November 20, 2015

A TIME of economic policy announcement presents an opportunity to reflect on how well policies are working to address existent economic challenges. It is also an opportune time to test our understanding of the real problems that Zimbabwe faces.

Persistence Gwanyanya

This second aspect is particularly important to me because analysts and policy makers alike are more focused on the immediate challenges without a clear understanding of their origin, nature and with limited reflection on the aspect of path dependence. To me, path dependence(the idea that history matters for current decision-making situations and has a strong influence on strategic planning) is important because it shapes a country’s economic discourse and deserves equal attention.

Zimbabwe is where it is today because of its past. Therefore, what Zimbabwe went through from the Unilateral Declaration of Independence in 1965 to Independence in 1980, the economic reform period of the 1990s, the land reform period in the 2000s and then dollarisation and Government of National Unity in 2009 played a significant role in shaping its socio-economic landscape. Importantly, the structural makeup of the economy largely owes it to this path dependence issue.

Over the 50-year trajectory highlighted above, the World Bank estimates that the Zimbabwean economy grew by an average of 1,5% annually, while its population grew much faster, meaning that an ordinary Zimbabwean today is poorer than in the 1960s. It is estimated that two thirds of Zimbabweans today live in poverty, with 16% of these in extreme poverty. High poverty levels are associated with a widening gap between the poor and rich, as well as erosion of the middle class.

This economic picture demonstrates the extent to which policies in Zimbabwe should be directed towards addressing poverty through inclusive growth and thus the need for implementation of economic reforms. Successful implementation of economic reforms in the 1950s saw Japan rise from economic ruins after Second World War in the 1950s to become the world’s second largest economy in the 1970s. Similarly, with implementation of economic reforms in the late 1970s, China managed to grow its economy to become the second largest in the world, hence the talk of the new millennium.

The same goes for the Asian Tiger economies namely South Korea, Hong Kong, Singapore and Taiwan, whose GDPs in the 1960s could be equated to the likes of Sudan and DRC, but by the 1990s their living standards had matched those of the Western countries. These examples just demonstrate that there is scope for successful economic reforms to turn around the Zimbabwe economy.

For an economy to grow there must be investment. A country that consumes everything it produces will not grow.

Zimbabwe finds itself in this predicament today. It is a consumptive economy with very low levels of investment and therefore has to rebalance by reducing consumption as a share of GDP and increasing investment. This fact may be difficult to swallow especially now when we are experiencing deflation which is largely believed to be a result of demand deficiency.

But the truth is demand constraints today are a result of a cyclical downturn and propensity to consume has remained high, which is Zimbabwe’s structural problem today. The major problem with structural challenges is that they get more entrenched if they go on unsolved for a long time.

In China for example, policy-makers could not easily buy the proposition that their economy was suffering from a structural imbalance due to low domestic demand, heavy reliance on external demand and over investment and therefore should rebalance. We now know better that this structural imbalance was a reality as the Chinese economy is faced with a slow down.

It is estimated that Zimbabwe’s consumption levels are around 80% of GDP and the country invests less than 20% of GDP. The high levels of consumption are reflected in huge budget deficits and private sector dissaving. Low levels of investment and de-industrialisation has resulted in huge dependence on imports and thus mounting BOP deficit.

Since dollarisation, the country has accumulated a balance of payment (BOP) deficit in excess of US$15 billion and this was funded from foreign capital in the form of foreign loans, diaspora remittances and foreign aid simply because of lack of savings locally. This structural imbalance where a greater portion of GDP pours into imports and excess imports are funded through creation of mainly short term debt is undesirable and no economy in this predicament can hope to grow. To put this into context, let’s assume that the country receives a significant inflow of say of US$20 billion today, ceteris paribus (with other conditions remaining the same), it will take at least seven years to consume this amount into imports assuming the BOP deficit remains at an average of US$3 billion per annum. This highlights the extent to which this structural imbalance will weigh down growth and should be addressed sooner rather than letter.

Lopsided consumption propensity in Zimbabwe can be traced back to the socialist ideology that guided our country’s economic history for a long period. In this system, the government assumed role prominence in the provision of public goods mainly education and health care. This largely explains the bloated civil service sector in Zimbabwe today. Because public goods were highly subsidised, there was little incentive for the private sector to save and could afford to live from hand to mouth. There was little incentive to address this structural imbalance because foreign direct investment (FDI) flows and other forms of foreign flows were high and filled the gap left by low savings levels and thus high consumption was desirable as it created the necessary growth stimulus.

Today this model no longer applies as the country’s foreign flows dry up in the wake of frosty relationships with the foreign investors, especially the West. The country should now save, invest and export so as to generate income for growth. This is what I mean by rebalancing the economy.

Rationalisation of public expenditure and employment costs is considered the lynchpin of this economic rebalancing notion.

The IMF Staff-Monitored Programme recommends that to generate desirable growth in Zimbabwe employment costs should be reduced to 40% of budget from the current level of 73%. This could be achieved through restricting wage increase, hiring and promotion freeze, and eliminating redundancies.

However, my view is that government is severely compromised in this area because rationalisation of labour is viewed as unpopular given the high unemployment and poverty levels. This means other options to rationalise public expenditure, mainly privatisation and commercialisation of state enterprises and parastatals , should be considered.

It is said that only five out of the 70 or so parastatals and state enterprises in Zimbabwe are operating viably.

As such, this sector remains an albatross on fiscus. Given the budgetary constraints, these parastatals need to be privatised sooner rather than later. However, the indigenisation laws are seen as a threat to privatisation, and as such these laws should be radically amended.

It is clear that fiscal consolidation measures cannot produce enough financial resources to lift this country from the current depression. An economy with an infrastructure deficit of US$14-US$20 billion definitely need significant inflows of FDI.

Given well over a decade of economic decay, the country needs to retool and rebuild its infrastructure to keep up with the world.

As such, there is need to create an investor-friendly environment, but indigenisation laws are seen as the elephant in the room.

The recent request by Aliko Dankote of Nigeria to have the indigenisation laws waived for him before he commits his US$1,2 billion investment into Zimbabwe bears testimony to this fact. The post-crises world is characterised by home bias and financial de-globalisation, hence the limited flow of international capital. As countries try to recover from crises they tend to be more cautious about foreign investments and pay more consideration to the investment climate. As such, Zimbabwe can only attract meaningful FDI if it improving the easy of doing business reforms sooner rather than later.

The constrained FDI flows will increase Zimbabwe’s reliance on debt. However, in light of the huge and mounting debt levels estimated at around US$10,8 billion, it is questionable whether borrowing is a sustainable growth path for Zimbabwe. Recent progress on Zimbabwe’s debt resolution strategy and the successful meeting with international financiers on the sidelines of the Lima conference in Peru will pave way for debt restructuring and/or rescheduling with the World Bank, IMF and Africa Development Bank, thus creating some breathing space for the fiscus.

However, it is my recommendation that any new debt should be deployed towards the productive sector and not consumption. This makes my recommendation towards rebalancing the economy more imperative.

As the economy rebalances towards more investment, competitiveness issues will assume an increasingly important role.

The current competitive situation where Zimbabwe is ranked 125th out of 142 countries by the World Economic Forum demonstrate the urgency of implementing measures to bolster competitiveness. Prior to dollarisation the country used to solve its competitiveness issues through devaluing the Zimbabwe dollar. However, this option no longer applies under dollarisation.

There is need to boost productivity. It is estimated that the US dollar in Zimbabwe is 45% overvalued, meaning there is need for productivity gain of the same magnitude to remain competitive.

You may have noticed from the above that this article proffers no new recommendations on rebuilding the Zimbabwean economy. But the reason why Zimbabwe has remained in the current economic predicament is attributable to the tendency of avoiding bold action by taking half measures on fundamental issues.

Successful implementation of the highlighted measures will set the stage for growth in the region of 5% (own projection). In business we know that the best strategies do not work where implementation and delivery are poor, and if this shortcoming remains the economy will continue to muddle through and growth will be contained below 2% in my projection.

Gwanyanya is an economist. These New Perspectives weekly articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail:, cell: +263 772 382 852.