Zimbabwe President Emmerson Mnangagwa and his Finance Minister Patrick Chinamasa.
LIKE it or hate it, the crisis in the economy is not a short-term stabilisation challenge that can be addressed through countercyclical policies without regard for the more persistent obstacles to sustainable growth.
Actually, public expectations and the mission of the current and next governments converge on the need to find ways not just to stabilise prices, cash shortages and other financial imbalances, but also to stimulate growth, build economic resilience and promote sustainable, more inclusive growth supportive of long-term investment, job creation and an improvement in the quality of life of the generality of Zimbabweans.
Short-term imbalances are not unusual and, when they do occur, a resilient and growing economy is ordinarily expected to adjust quickly to stabilisation interventions designed to restrain the short-term disturbances from aggravating to excessive and semi-permanent levels.
Unfortunately for Zimbabwe, macroeconomic imbalances such as unsustainable economic informality; excessive unemployment; disproportionate sectoral distribution of national output; high export concentration; trade deficit and public debt have been left to build up to unsustainable levels over many years of bad economic management, the impact of which begun to weigh on growth, triggering a self-sustaining crisis.
The crisis would be much less graver and not as persistent had manufacturing and agriculture, sectors that buttressed growth prior to the crisis, been more stable and resilient.
The manufacturing sector share of gross domestic product (GDP) has slumped from a high of 25 percent in 1980 to about 10 percent over the last 10 years, while agriculture’s contribution to national output has fallen from a post-independence all-time peak of about 23 percent to just above 10 percent in recent years.
This deterioration in performance of the twin bastions of the economy, a measure of the output gap in the economy, is related more to overregulation of markets; the pursuit of nationalisation policies by Robert Mugabe’s government which undermined private investment; over-taxation of businesses and labour; the destruction of economic institutions policy-induced economic challenges such as fiscal indiscipline than to periodic fluctuations in the business cycle.
The contraction in the manufacturing sector, for instance, can be traced back to policy-induced macro-factors such as foreign currency shortages, hyperinflation, price controls and other market distortions, which eroded competitiveness and led to corporate financial distress.
In the case of agriculture, the decline in output and export receipts is a direct side-shoot of the land reform, which destroyed commercial farming and output; caused loss of export markets, cut off agricultures traditional linkages with other sectors particularly manufacturing to which it supplied about 60 percent of input requirements; triggered massive job losses and undermined land title security against which farmers used to borrow to meet their financing needs.
It is apparent, from this analysis of the main obstacles to growth, that the prospects for sustainable growth are unlikely to improve if options for reform don’t priorities the revival of agriculture and manufacturing; diversification of the economy and its export base; the rebalancing of the economy away from the informal sector, the deregulation of markets; the dismantlement of the State economy; the promotion of private investment; the reform of economic governance and the rebuilding of institutions.
These changes are technically referred to as structural reform or, to use a term that most Zimbabweans hate, they are what I meant by a second economic structural adjustment programme (ESAP).
There is absolutely nothing scary about restructuring the economy to position it for better performance and resilience if the reforms are properly designed, timed and sequenced.
Although many people may not readily accept this, the state of structural imbalances — twin deficits, sovereign debt, liquidity crisis, foreign currency shortages; financial market fragilities; inflation; unemployment; economic informality; commodity dependence; sectoral distribution of growth, poverty and vulnerabilities in infrastructure and social services — are far graver now than in the 1990s when Government voluntarily approached the International Monetary Fund and the World Bank for ESAP, implying that the case for structural reform is even more imperative in relative terms.
Below is a list of 10 structural reforms, which I consider not just as a top priority, but also as very urgent.
• Fiscal reforms
• Civil service and parastatal reform
• SoE reform
• Public spending reform
• Public financial management reform
• Sectoral economic rebalancing
• Markets deregulation
• Trade liberalisation and export development
• Investment and tax reforms
• Labour market reforms
Owing to space constraints, this paper will just look at the first three structural reform options and analyse the rest next week.
The sovereign debt crisis and attendant inflation arising directly from persistent and excessively high Budget deficits, estimated to have exceeded 10 percent of GDP at the end of 2017 from 8,7 percent in 2016 and 2,4 percent in 2015, have given impetus to re-establish fiscal sustainability and restore the credibility of government.
The structural reforms of the 1990s delivered negative results, not necessarily because of inherent design flaws but largely because Mugabe’s government, typically, selectively implemented the reforms and typically did not cut government expenditure and the Budget deficit, which were the most pressing imbalances of the time.
As a result, he made the monumental blunder of cutting explicit tax rates and liberalising interest rates before downsizing civil service and cutting budgetary allocations to parastatals and State-owned Enterprises (SOEs), leading to a fall in fiscal revenue, phenomenal growth in the Budget deficit, a rise in inflation and a surge domestic debt since the budget was financed through domestic borrowings.
Such was Zimbabwe fiscal position when Emmerson Mnangagwa (ED) took over the economy’s administration in November last year. As expected, he has pledged to cut government spending and bring the deficit in line with international best practice of no more than 2,5 percent of GDP.
Compared with other structural fragilities, fiscal reform is the most urgent challenge as other imbalances notably sovereign debt, inflation and infrastructure and social service provision cannot be addressed if they are not preceded by a prompt return to fiscal prudence.
The adjustment process should encompass fiscal consolidation; first and foremost, the elimination of off-budget financing of government operations, programmes and projects; then with the incorporation local authorities and public institutions that receive budgetary allocations into the national budget.
One of the structural stumbling blocks to reform is the problematic political issue of civil service bonuses, which are traditionally paid off the budget through inflationary means such as domestic borrowing and an unwarranted abuse of the Reserve Bank of Zimbabwe overdraft facility. By Munyaradzi Mugowo
Munyaradzi Mugowo is an economist, sociologist, researcher and consultant on mineral economics, industrial policy, development economics, social policy and business strategy. He is the Managing Consultant of Ziopra Consulting Group P/L and can be reached at: email@example.com
This article was first published by the Financial Gazette