On the recent national budget

Any economy is driven by three industries which are the primary, secondary and tertiary industries. The contribution to economic growth from these industries depends on the level of development of the country. For the case of Zimbabwe, primary industry such as mining and quarrying and agriculture and forestry plays a crucial role in economic growth. While the contribution from the manufacturing sector went down recently but it is very central for improving peoples income. For example, if Zimbabwe is to come out of this long period of economic decline, construction, manufacturing, electricity and water sectors need to be supported significantly. Tertiary industry has been growing but at a much slower pace that its true potential. To achieve economic growth and development, the Zimbabwean fiscal and monetary authorities should devote resources towards the development of these sectors in a more transparent and accountable way.

Looking at the fiscal policy, the finance organ should have allocated the resources in such a way that would encourage the growth of these sectors. However, much of the spending is allocated to recurrent expenditure and this is problematic and unsustainable. Recurrent expenditure is the spending mainly allocated to the operations (travelling and accommodation, telephone, electricity and water bills), wages and salaries, purchases of goods and services, and current grants, subsidies without much contribution to capital expenditure – payments for acquisition of fixed capital assets, stock, land or intangible assets.

The 2019 proposed budget has addressed some of the critical points the economy requires, but, to a greater extent, overlooked the most imperative areas the economy needs addressed urgently. I will go through what the budget positively addresses, before examining what is omitted. The good points proposed in the 2019 budget are as the follows:

• The recognition of monetary policy and fiscal policy as complementary
• Coming up with structural and supply side policies such as, improving on accountability; respect of property rights and international treaties; public enterprises reforms, support to productive sectors of agriculture, mining, manufacturing and tourism
• Gradual exit from exchange controls to market based mechanisms for foreign currency allocation.
• Coming up with reasonable forecast for economic growth for 2019. This helps in anchoring expectations and build trust.

On the downside, Zimbabwe has been continuously running budget deficits in past years and its domestic debt and external debt has now been ballooning at an astonishing rate. The degree of the austerity measures proposed are not enough. Running a budget deficit of 5% is reasonable but what is this deficit (US$1.57 billion) financing? Does it help in creating more income in the future or increasing the standard of living for the Zimbabweans? Given the disproportionately large civil service workforce, existing of ghost works, poor policy planning and implementation, only means, in the future, the Zimbabweans would have to fund, not only, the deficit but also the interest on borrowing to fund the deficit. Even though the budget deficit is at US$1.57 billion, the total expenditure and net lending, including Loan repayment is projected at US$10.3 billion.

Recurrent expenditure is huge; for example, the amount of fund going to the soldiers and police is relatively high. The proportion of the budget going to defence and war veterans and home affairs and cultural heritage is about 13 % of the total budget, while transport and infrastructural development combined is a mere 4.9%. There is need to fund more capital expenditure, like resuscitating the ailing industry, support the poor performing agricultural sector (based on ability on political network), revamping the cities, schools, roads, street lighting, parks, clinic and hospitals, among other indispensable organs of the economy.

The ministry of Finance and Economic Development expects the economy to almost double by 2021 from the 2007 figure. Nominal gross domestic product (GDP) at market prices for 2017 stood at US$22, 041.3M and forecasted to increase to US$42, 757.7M. No policies have been clearly articulated on how this is to be achieved. In addition, there is need for an explanation on the significant decrease in overall GDP and GDP components growth rates from 2018 to 2019. For example, the growth rate of contribution of agriculture and forestry to GDP is at 12.4% in 2018 before falling to 3% in 2019 and then pick up in 2020 to 19%, the same is with mining and quarrying that starts at 13% in 2018 before falling to 7.5% in 2019 and then pick up in 2020 to 9.3%. The majority of all other components have the same trend. What are the economic fundamentals behind that? That needs answers.

By Dr. Tutsirai Sakutukwa

    Dr. Marshall Makate

http://econanalysispolicy.blogspot.com/

https://sites.google.com/site/tutsisakutukwa/

Zimbabwe current currency crisis - what needs to be done!

Zimbabwe is in a currency crisis. Arguably, and to a larger extent, a contributing factor to this crisis is the government’s insatiable drive to printing the local currency in the form of bond notes without economic backing – a simple violation of the very basic economic principle. It goes without mentioning that failure to acknowledge, address and implement the necessary and fundamental economic principles will only keep on taking the economy down. As a follow-up to the budget presentation, and unfortunately, the introduction of a 10-year jail sentence is not going to help in any way in ameliorating the currency crisis. Well, you can arrest citizens, but you cannot arrest economic principles simply because you choose to go against them. Failure to address fundamentals in the economy is going to lead to high inflation in 2019, more severe cash shortages, high uncertainty, low economic growth (if not negative growth), wide current account deficit, further increases in unemployment and more social and economic unrest. The first thing that ought to be addressed as a matter of urgency is the currency crisis.

The current use of multi-foreign currency system is weighing down on the economy, besides high transaction costs, it creates a conducive environment for speculation in the currency market which, in turn, induces high volatility and uncertainty. High uncertainty leads to poor economic performance. In very recent times, fuel shortages, poor economic growth, high inflation, high unemployment, poor export performance, low production and productivity in the agricultural sector, manufacturing, poor road system can all be directly or indirectly linked to the current central bank currency stance.

Zimbabwe is currently not using its own currency after a collapse of the local currency a few years ago. The move to use foreign currency as legal tender in Zimbabwe, was driven by fiscal deficits through the actions of economic agents trying to evade from the inflation tax imposed by the financing of the deficit. Adopting a foreign currency as your own legal tender (dollarization) tend to come at a cost. Dollarization is associated with slower economic growth, primarily due to external disturbances, such as major terms of trade and capital flow shocks. In addition, it reduces the effectiveness of the interest channel since changes in interest rates have almost no influence on the rates of loans and deposits denominated in foreign currencies. It also increases the probability of foreign exchange liquidity deficit in the financial system in stress situations. However, after weighing the pros and cons, currently adopting a foreign currency as Zimbabwe’s legal tender makes a lot of sense as it stabilizes the economy and makes it less volatile. Research in economics shows that countries that have dollarized tend to have lower inflation rates.

To enhance credibility, reduce transaction cost, reduce inflation rate and address uncertainty, the central bank should completely abandon the bond notes – “bad money”, which has only contributed to increased speculative tendencies in the economy. The idea that bond notes are bad money is linked to Gresham's law, a well-known law in economics that simply states that "bad money drives out good”. This notion is supported by both theory and empirics.  If low quality and high quality currencies are used concurrently in a country, people will hoard the high quality currency for themselves and only use the low quality currency to conduct transactions.  This creates currency shortages and induces a lot of speculation in the currency market. Ever since the introduction of the bond notes the US$ has become more and more scarce. Anybody who is interested in seeing a better Zimbabwe should see the necessity to abandon the bond notes forthwith. This is supported by empirical evidence: To benefit from dollarization, dollarization should be implemented in full. For example, the experiences of Panama, Ecuador and El Salvador show that full dollarization can help countries achieve lower inflation, economic stability and growth. Full dollarization enhances policy credibility and encourages foreign investment. It promotes fiscal discipline, a competitive financial system and economic integration with international markets. However, countries implementing full dollarization must establish structural programs and institutional reforms to ensure that short-term stability develops into long-term economic growth. Sadly, the current monetary and fiscal authorities have been reluctant to do so since the initial dollarization in 2008.

Again, the use of multi-currency system, including the US$ should be dropped without delay, in favour of adopting the South African Rand as the sole currency. The Rand is preferred because of factors I mentioned in my previous article:

• Zimbabwe trade highly with South Africa (SA). This is fundamental when choosing which currency to use. For example, most of the Caribbean islands (Aruba, Bahamas, Barbados, and Bermuda, to name a few), peg to the U.S. dollar because their main source of income is derived from tourism paid in dollars. Does Zimbabwe highly trade highly with the US? NO!
• Countries ought to be geographically close to allow easy flow of goods, services and factor mobility. Countries whose official currency is the US$  which include Ecuador, El Salvador, Timor-Leste, Micronesia, Palau, the Marshall Islands, Puerto Rico and Guam, Turks and Caicos and the British Virgin Islands are all geographically close to the US. Is Zimbabwe geographically close to the US? NO!
• Both countries should share similar economic exogenous shocks (business cycles). Does Zimbabwe share similar business cycles with the US? NO!
•  The two countries should have high labour and capital flows between them. Does Zimbabwe have high factor mobility with the US? NO!

The SA Rand is without its demerits. First, high uncertainty around the SA Rand, driven mainly by the echoes of land redistribution without compensation will increase volatility and likely lead to low exchange rate value of the SA Rand against its major trading partners. This might trigger an increase in inflation in SA which will be imported to Zimbabwe which is not good for the economy. Second, there are costs associated with formally adopting the Rand. For Zimbabwe to adopt the Rand, Zimbabwe needs to negotiate with SA for it to join the currency union or some other terms for it to use the Rand. However, weighing the costs of using the SA Rand, multi-currency or the US$, the SA Rand has lower overall costs and should be the preferred currency.

Using a foreign currency instead of the domestic currency as legal tender should only be temporary in nature. It should be a very short-run measure a country is forced to adopt while the country takes  appropriate measures to increase its productive capacity, reduce unemployment, creates a sound and credible monetary system, fosters confidence, increases the overall economic growth and anchors inflation expectation to below 5%.  The most critical component of a de-dollarization strategy is bringing back confidence in the value of the domestic currency by implementing policies aimed at reducing inflation and making fiscal policy sustainable. This can be achieved with the help of fiscal policy,therefore, 5 years is a plenty a time for a government that is committed to economic development.

In conclusion, the Zimbabwean authorities should renounce and desert the use of the bond note immediately and adopt the SA fully. This is supposed to be done as a short-term measure and start crafting policies aimed at giving people confidence on the government’s ability to achieve low inflation and making fiscal policy sustainable  and reassure people that arbitrary printing of money will never take place. Failure to do so, there is going to be high inflation in 2019, severe cash shortages, high uncertain, low economic growth, wide current account deficit, further increase in unemployment and more social and economic unrest.

Uncertainty and the current state of the Zimbabwean Economy

Zimbabwe is a country endowed with numerous resources from human capital to precious stones such as gold, diamonds, platinum among plenty others, yet the country still struggles to meet even the very basic economic fundamentals. But, what exactly is driving the economy in the unintended direction and where are we getting it wrong? In this article, we get very basic and focus on one of the crucial and yet deeply overlooked economic concept – “Economic Uncertainty” which is amongst the chief culprits veering off the Zimbabwe economy. That economic uncertainty is bad for business and the economy in general is a well-established theory in economics.  

Economic uncertainty refers to the indefinite and indeterminate of the future course of an economy. This is to say the path the economy takes is not known beyond a doubt, implying that the path the economy takes is completely unpredictable. This economic concept is totally different from risk which is the possibility of loss and is known with some degree of certainty.

The terrible thing about uncertainty is that it can drive an economy down and even exacerbate numerous other problems like inflation, unemployment and slow to negative economic growth. Zimbabwe’s government policies, fiscal and monetary authorities have been driving uncertainty, perhaps unintentionally or intentionally, for the past several years now. For example, the recent sharp increase in prices, commodity shortages, temporary closure of some companies, cash shortages and the blooming of the black market (both currency and commodity) are primarily driven by economic uncertainty. Uncertainty mainly affects two distinct sets of economic agents, namely, the investors and the consumers. It may not be difficult to note that when the level of uncertainty increases, investors and consumers reduce their investment in the economy.

So where is the uncertainty coming from?

First, the Zimbabwe government’s capriciousness and erratic introduction and reversal of government policies are at the centre of the increasing uncertainty in the economy. For the relationship between government and economic agents to be less complicated and hence be for the greater good of everyone, it must solely be rooted or based on trust, integrity, transparency, consistency (on good governance) and respect. What our government seriously lacks at the moment is the ability to be consistent especially on the policymaking and implementation front. We sternly believe that it is this policy inconsistence that creates the economic uncertainty to levels harming the overall economy. For example, policies on land, mining, manufacturing, foreign currency retention on exports, to mention just but a few, have not only been very inconsistent and arbitrary but also unpredictable. It’s worth repeating that “when policies are of that nature (inconsistent), they crease a good breeding ground for uncertainty. 

Second, fiscal policy is another element which has been driving uncertainty and this is broadly in two ways. First, the government stance regarding taxation of its citizens has been changing numerously, particularly with the ZIMRA import duty. We are certainly not insinuating that import duties are bad or good, but rather commenting on the nature of the execution of that particular policy. Another good example pertains to the 2% tax on electronic or mobile money transfer transactions enacted at one point and within few days or weeks of implementation, there were discussions around reversing the policy and then amending it into something else. This conduct by the responsible authorities only points to one thing – less thought out or inadequate evaluation of the policy’s implications or consequences both in the short, medium and longer term. Second, economic agents, not only in Zimbabwe, but elsewhere on the globe, want to have faith that the tax revenue collected by their government is being used on activities that benefit the general populace. In other words, the priorities set by the government have to be on point at the very least. But, how does one explain the recent surge in government expenditures with no tangible developments on the economy, except a few of course, like the recent chartered plane for the former first lady and the acquisition/proposed acquisition of high-tech cars for the law makers, ministers and village chiefs. High levels of public debt combined with significant ad hoc fiscal expenditure risk leaving little room for fiscal policy to tame economic business cycles or to drive economic growth. In return, there can only be one consequence associated with such policies – fuelling economic uncertainty and hence inhibiting economic growth.

Lastly, the monetary policy: There has been large inconsistencies on the conduct of monetary policy since the days of Dr, Gideon Gono and the rate at which this discordant and volatility of the monetary policy has significantly increased lately. The monetary stance (contractionary or expansionary) and the currency stance keeps on changing. On the currency stance, it is not clear what exactly the central bank’s current stance is. There are several exchange rates prevailing in the economy and the central bank is adamant that there is only one exchange rate, i.e. 1 bond note to 1 US dollar. The exchange rate policy is marred by a lot of grey areas that are subject to manipulation so as to surprise economic agents. In an earlier article, we asked the simple question as to why the black market is flooded with plenty of freshly printed bond notes and yet the central bank, being the custodian of the local currency, is silent or doing nothing about it? All these factors contribute to more economic uncertainty which in turn is harming the overall economy.

How uncertainty affects the economy?

When high uncertainty exists, naturally, firm's profits become uncertain as well. Uncertainty affects business decision making predominantly through increased additions to the capital stock (fixed investment) and hiring of workers. Macro-level factors—such as unexpected changes in oil prices, changes in monetary and fiscal policies, are important for a firm's decision to invest. This decision takes on increased importance for long-lived investment projects that are economically costly to reverse. Thus, as new information arrives, the business (or bank or investor) may find that the odds of making a better, more-informed decision increase by waiting for additional information. In other words, the firm finds that there is an option value for waiting to invest. This option value will become more or less valuable to the firm depending on the level of uncertainty it perceives in the economy. Increased uncertainty arising from macro-level factors, then, can become an important factor for business investment and, thus, for the economy. When the cost or value of waiting is large, investors are willing to give up current additional profits in order to receive more information and as a result, uncertainty and the possibility that new information will change the profitability of current investment reduces the appetite to invest.

On the other hand, consumption is a very important driver of economic growth. For all developed countries and most of emerging countries, consumption is the largest component of gross domestic product (GDP). Yet, consumption in any economy is subject to uncertainty.  Consumers prefer to smooth consumption over time, this is to say, consumers are forced to take active steps or precautionary steps to make the future predictable. Faced by high economic uncertainty, consumers tend to withhold or delay their consumption. Consumption is high when confidence is strong and low when confidence is weak. Because of the uncertainty effect on consumption, consumer confidence exerts a significant influence on macroeconomic activity in general.

Another obvious consequence of Zimbabwe’s uncertain economic environment has been “brain drain” – the massive exodus of the human capital base of the country to perhaps more stable futures or economies. In our opinion, this has been amongst the most damaging consequence of the uncertainty and has negatively influenced the performance of several sectors of the economy from tech industry, education, government parastatals, health, and agriculture, among others. A brain drain basically leaves a skills gap that the remaining personnel in the country cannot immediately service leading to a decline in the overall GDP. Given the persistence of economic uncertainty in Zimbabwe, the overall effects have become more apparent now and continue to play havoc on the economy.     

   

What do we propose?

We recommend that the Zimbabwean government take the necessary steps to address or at the very least minimise the level of economic uncertainty as a matter of urgency so as to create a conducive environment for economic growth. It’s important to note that a change of course towards addressing economic uncertainty will not yield immediate results but might take some time to materialise since with some aspects like trust, they don’t take effect in an instant but are gradually built over time. The following three propositions should in the interim help in minimising the negative influence of uncertainty.

• Government policies should be clearly articulated to the general public and they should not be subject to change throughout the life of the policy.
• The Zimbabwe taxation system is archaic and should be revamped as a matter of priority and once the new system is in place it should not frequently be changed. Also, the amount of revenue collected and how it is used should be transparent.
• The monetary policy should be transparent, accountable and independent from political influence. The currency issue should be addressed as a matter of emergence and should not be subject to short-term changes. We have given suggestion for the direction to take on currency issue in our previous article.

If these factors are addressed economic uncertainty would decrease and an environment conducive for economic growth would be created through increased trust, confidence and general positivity. Also, it’s worth mentioning that the preconditions for Zimbabwe to make positive economic change or meaningful progress will depend on an unreserved willingness by the government to change at least three things: (1) Perspectives; (2) Purpose; and (3) Priorities. These three Ps, which we will explore in a later post are critical to building the much-needed trust, confidence and general positivity in economic agents and hence lower economic uncertainty – Zimbabwe’s number one hindrance to economic success at the moment.  

Dissecting the recent Monetary Policy Statement

Summary

•   The central bank policies on safeguarding financial stability through monitoring and increasing capital adequacy is commendable
•   The central bank is running out of foreign reserves and the introduction of two separate accounts (Nostro foreign accounts and local RTGS or Bond) is aimed at achieving two objectives:

i.                     Encourage the inflow of foreign currency into the country.

ii.                   Allow the printing of the local currency at a greater level

•     The recent increase in money supply will only translate into higher prices.
•     The current currency policy is not sustainable.

According to the Reserve Bank Act of 1964, the reserve bank of Zimbabwe has a mandate to regulate and or create monetary policies, protect the currency in the interest of balanced and sustainable economic growth as well as regulating the circulation of money. With the main goals of monetary policy being to achieve full employment in the labour force, ensure stability of the Zimbabwean currency and to achieve economic prosperity and welfare for the people of Zimbabwe.

Looking at the recent Monetary Policy Statement (MPS), RBZ should be applauded for pursuing the goal to maintain financial system and efficient payments system. Zimbabwe currently has a sound and well performing banking sector as measured by adequate capitalisation, earnings performance and asset quality. The recent MPS proposes to raise capital requirements of all financial institutions so as to cushion the financial sector from bank run and financial crisis. The policies and encouragement on the use of e-money are commendable from the economic perspective. This helps in reducing transaction costs and increase in efficiency.

However, apart from that, the main objectives that RBZ should meet are, so far, either absent from the monetary policy or are inadequately treated. An efficacious Central Bank needs to be:

a)      Independent from politics, policy makers and anything outside what is stated in Reserve Bank Act. Politicians are mainly concerned about short term gains in the economy to ensure re-election. Failure to make the central bank independent will lead to an excessive money creation which will always translate into high inflation. Reading through the governor’s executive summary or preface to the proposed MPS measures hints on the extent of the bank’s lack of independence from politics.  

b)      Transparent with its policies. The policies the central bank makes should be communicated to the public in a clear and truthful manner. Failure to craft the policies in a clear and easy to understand way will result in the unsuccessfulness of the central bank in achieving its core objectives.

c)       Accountable for its policies and decisions. The RBZ governor and his team should be responsible and answerable for any policy action they make. Without consequences to face after implementation of policies (good or bad) creates “moral hazard” which leads to the failure in delivering the objectives of the central bank as outlined in the Reserve Bank Act of 1964.

d)      The decision making process has to be made by a committee. The committee should be made up of people with the right qualifications and experience to hold such an office. This need no further clarification.

These four pillars help in building trust with the public. Failure to communicate with the public and instead surprise economic agents with abruptly crafted policies, only serve to cause panic and create a long-lasting uncertainty within the economy.

There has been an issue on the precedence of monetary policy and fiscal policy. These two policies are not substitutes per se, but instead should complement each other. Monetary and fiscal policies are relatively more efficient at dealing with different macro-economic objectives. So the assignment of these two policies should be based on efficiency. In that regard, there need to be coordination of fiscal and monetary policy.

There has been excessive credit creation in the economy ever since the reintroduction of local currency in the form of bond notes. Since 2013, the domestic money supply has increased by more than $5 billion from about $3.9 billion to $9.1 billion translating to about 135% increase in money supply. As of June 2018, annual growth rate of broad money stood at 40.8%. While the stock of bond notes and coins in circulation also increased by 14.2% from $331.94 million in December 2017 to US$379.20 million by June 2018. In comparison, GDP grew by 14% since 2013. It is a well-known axiom among macroeconomists that when growth in money supply out-pace GDP growth, the result is an accelerating inflation at a rate equivalent to the relative growth rates. With the rate at which the central bank is creating money we dispute RBZ’s inflation rate forecast of 7% and instead suggest that the inflation rate will move to double digit figures by the end of 2018.

Government has been out muscling the private sector out of the little loanable funds available in the market. Since 2013, government borrowing has increased by an estimated 67%. This has been crowding out private investment.

The MPS acknowledges the shortage of foreign exchange in the economy. The economy is too desperate for foreign currency and now the government is in a frantic effort to raise foreign currency, by any means possible. This is witnessed by even proposing to charge long distance trucks in foreign currency. The shortage of foreign currency is the driving force behind the splitting of the foreign currency and local currency accounts. Even though, this policy is aimed at raising foreign currency, conducted together with printing of money can only exacerbate the situation. As we have always argued, the introduction of the Zimbabwean currency is still pre-mature and yet the use of the US dollar is also undesirable. The US dollar has been appreciating against major currencies and has appreciated by about 32% against the Rand since 2014 and by 20% since the turn of this year. When the exchange rate appreciates, this makes imports cheaper and exports more expensive. Given that South Africa is Zimbabwe’s major trading partner, this explains why imports have increased so drastically while exports have not performed so well.

It is argued that adopting the Rand given the current uncertainty in South Africa (SA) and the cost associated with negotiating a deal to use the South African Rand is high. These are very valid points and should be really taken into consideration. However, let us weigh the options: return to local currency or using the US dollar have far more costs on the economy than the introduction of the Rand. The value of the South Africa rand has taken a downward trajectory and we forecast that it will continue to do so. Macroeconomic indicators in SA have all been on a downward spiral. We anticipate that in the short term, economic growth and employment levels in SA will continue to under-perform. We still contest for the use of the SA rand. In addition, to the points we raised in our previous publication, adopting a foreign currency (i.e. dollarization) should be construed as a short-term stabilization measure in the interim. Likewise, decision makers in Zimbabwe should prioritise crafting of appropriate and sustainable long-term measures on the monetary front that will reinstall confidence in the economy. It is against this background that we recommend complete abandonment of the bond notes and the US dollar in favour of the SA Rand.

The monetary policy dwelled significantly on the exports and imports aspect of the economy. Also the introduction of the Bond note was put forward as an export scheme. However, for anybody to sell anything, production should come first. Zimbabwe is significantly failing to produce enough output to sustain herself, let alone enough to export. We therefore, recommend that, instead of focusing on selling what we do not have, the policies should be directed at stimulating production in the primary, secondary and tertiary sectors.

A focus on monetary policy - whatever Zimbabwe was doing, it's clearly not working

It has become a common theme among Zimbabwean politicians echoing the mantra “Zimbabwe is open for business”. This mantra is similarly reverberated in the most recent monetary policy statement of January 2018. The idea and concept is great but, is the country really or truly open for business? Let’s find potential clues/answers to this question by scrutinising the country’s recent monetary policy stance which in large part focused on the “Zimbabwe is open for business” theme.

The primary goal of monetary policy as set forth by the Reserve Bank of Zimbabwe (RBZ) Act [Chapter 22:15] is to promote stable prices and the proper functioning of the financial system. In its recent January 2018 monetary policy statement, the bank explains in more detail what opening up the economy for business entails. Surprisingly, the bank makes no serious mention or at the very least, acknowledge the negative influence of the parallel exchange market that seem to flourish given the salient cash shortages in the country.

In our view, as long as the parallel exchange market continues to flourish and the multiple exchange rate system exists - driven by the current cash shortages, it is difficult for any investor to want to work within the country. Given the differential exchange rates fuelling the speculative tendencies in the economy, the bank should tackle and address the underlying root causes of the cash shortages to help boost investor confidence. There is no economy that prosper on economic growth, balance of payment, low inflation and employment without liquidity.

The current Reserve Bank of Zimbabwe policies are detriment to the economic success of the country. It’s either that a change in policies or a change in personnel is required to make good progress. For instance, if one is to go in Harare’s central business district (CBD) to buy bond notes today, the bond notes are offered at a premium of about 22%, while the US$ is going for way over 60%. Worryingly, these notes look so brand new as if coming directly from the printing machine itself. The question is, where do these cash dealers get the money? And why is the central bank doing absolutely nothing about this? We all know Gresham's law – “bad money drives out good money” – a very basic and yet important economics principle which ought not to be forgotten. The bond notes should simply go. In an earlier article, we argued in favour of the introduction of the rand as a temporary currency solution, but we should also note that a return to the USD will also be a welcome move. What is important is to have a plan put in place to see the return of our own currency – i.e. a return to monetary policy independency so to speak.

With the renewed hope instilled in many Zimbabweans following the new cabinet appointments, one can only hope for the best. For instance, the appointment of Professor Mthuli Ncube as the new Finance Minister is arguable a positive and welcome move which should see Zimbabwe get back to the very basic economic fundamentals. However, it is imperative to note that, a precondition for economic progress during his tenure will be a total and absolute willingness by government to listen and support his policy initiatives. We anticipate a combination of some radical / very bold and not so bold policy initiatives looming on the horizon, which government would have to be supportive of and shun their “business as usual” approach of doing things.       

In our view, the free market should be allowed to prevail, regardless on whether the conditions are conducive for a “free to do business” environment, and not some government official in some office somewhere try to verbally convince people. It’s time to get to some serious work and re-store the proper legacy for Zimbabwe as once the “bread basket” of Africa.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of the organisations of affiliation.

The US Dollar or the South African Rand - Let’s examine the facts

Dollarization, it has come as a popular term for currency substitution. This is a term mostly used when a foreign currency is used instead of the domestic currency as legal tender. In this instance, the foreign currency takes over all functions of domestic money: unit of account, medium of exchange, and as a store of value. Zimbabwe dollarized its economy on the premise of halting inflation, uncertainty, and at the same time encouraging stability and growth. The idea is a noble one, however, for successful dollarization there are two major conditions that ought to be met. The first is the formulation of right policies to prepare for a successful reintroduction of the domestic currency. Then, the second is the choice of which foreign currency to take - which is going to be a focus for this article. We raise points in support of the use of South African Rand over the currently widely circulated US Dollar.

Allowing the foreign currency to freely circulate in the domestic economy is a strong commitment to pegging the domestic currency to the foreign currency at one-to-one exchange rate. To successfully peg domestic currency to a foreign currency, requires that the two countries have a high degree of economic integration, that is to say, the two economies should be closely linked by trade in goods and services and by factor mobility. Factor mobility entails the free flow of labor and capital between the two economies. Second, the two countries should exhibit economically similar exogenous shocks, including “symmetric” growth and recession. At the very least favorable end, they should face more symmetric shocks and fewer asymmetric shocks. Since the idea of dollarization entails that two countries are subject to a uniform monetary policy, then a common monetary policy is appropriate when the booms and bursts are similar. If a country chooses to peg its currency to that of a country that doesn’t share similar economic shocks with her, that means that the two countries would not share similar business cycles and hence a common monetary policy would be destabilizing.

To allow the easiness of the flow of goods, services and factor mobility, the two countries ought to be geographically close. In addition, to reduce transaction costs, increase cooperation and reduction in uncertainty, the bulk of a country’s trade should be undertaken with the trading partner(s) to whose currency it plans to peg. Otherwise, there will be an increase in uncertainty, calculation and transaction costs that arise when exchange rates float are a more serious issue for the country’s balance of payment and hence economic growth.

Tying a country’s currency to a foreign currency is similar to a firm acceptance of a fixed exchange rate system. Having a fixed exchange rate means that a country is susceptible to the importation of foreign macro-economic shocks into the domestic economy. This may lead to financial crises that have an adverse impact on the balance of payment, price stability, output and employment. Zimbabwe is using the US dollar as its main currency, which implies that the domestic interest rates are always tied to the foreign interest rates. Thus, an increase in interest rates in the US will have an adverse effect on the competitiveness of the domestic exports and employment. In particular, a fiscal expansion in the US coupled with the trade protectionism implies that there is a significant compromisation of the independence of the monetary economy. Assuming the host country is adopting a transparency, accountable and sound monetary policy system, the only major advantage of a fixed exchange rate is that it acts as nominal anchor that helps to keep domestic inflation low.

Given the points raised above, mainly focusing on the need for cooperation on currency adoption between the two nations, high factor mobility i.e. Labor and capital mobility in response to a shock in one of the two countries. There is compelling support to ditch the American dollar in favor of the South African rand.

Zimbabwe in numbers: Part 2

Zimbabwe’s Gross Domestic Product (GDP) has been on a decrease since the turn of the 21^st century. As can been seen from the graph, the ratio of exports to GDP has a downward trend after a peak just before the year 2000, implying that both exports and GDP have been declining. To make matters worse, exports have been decreasing at a much faster pace than the decrease in GDP, hence a much steeper downward trend. Starting in 1975, the trade balance (i.e. exports minus imports) has at times been positive suggesting that the country has been exporting much more than it has been buying from other countries. However, after the early 2000s, the trade balance has continuously been negative and reaching as low as -30% of GDP, an indication that the country has been living beyond its means.

The major exports for Zimbabwe are all from the primary industry, mostly mining and agriculture.  Zimbabwe’s top 10 exports and listed in their decreasing order are Gems, precious metals, Tobacco and tobacco scrap, Ores, slag, ash, Iron, steel, Sugar and sugar confectionery, Salt and sulphur, stone, cement, Nickel, Raw hides, skins not fur-skins, leather, Cotton and Wood. Recent policies on the mining sector, for example, the 51% local ownership and the land redistribution strategy have contributed to a dramatic decrease in this export base.

On the other hand, given a decline in output in manufacturing and primary industries, imports have surged. The major imports for Zimbabwe are Mineral fuels including oil, Cereals, Machinery including computers, Vehicles, Electrical Equipment, Pharmaceuticals, Plastics/plastic articles, Animal/Vegetable fats, oils and waxes, Iron and steel and Other chemicals. 

The graph above shows that, despite the decrease in economic activities in Zimbabwe over the last few decades, foreign direct investment as a proportion of GDP has been on an upward trend reaching its highest in 2015. 

There has been a huge outcry over the decrease in foreign aid to Zimbabwe. A country should be able to generate its resources rather than depend on other countries to fund its recurrent expenditure as this brings with it a lot of problems (which will shall discuss in another article).  From 1965 to Zimbabwe’s independence in 1980, Zimbabwe’s international aid flows were near zero and increased through the early 1990s before declining for a decade until the early 2000s. However, it increased drastically peaking in 2012. The observed increase signifies a 38% increase from the previous peak of 1992.

Website link for Tutsirai Sakutukwa: https://sites.google.com/site/tutsisakutukwa/home

Website link for Marshal Makate: https://econmakfaraim.wordpress.com/

Zimbabwe in numbers: Part 1

Zimbabwe’s Real Gross Domestic Product (GDP) increased from about US$4bn in 1965 to above US$16bn on the turn of the century (adjusted for inflation). The droughts of the early 1980s and early 1990s saw GDP in levels decreasing, however, between early 1980s and 1990s, GDP accelerated significantly. After a couple of wrong policies coupled with mismanagement of the economy, GDP fell by about half (from around US$16bn to about US$8nb) in 9 years to 2008. Economic and political stability that came after the inclusive government saw capacity utilization increasing in nearly all sectors of the economy and with it GDP increased significantly from a low of about US$8bn in 2008 to about US$14bn in 2013 and it has stagnated thereafter.

If the Zimbabwean income, measured by GDP, is to be equally divided amongst all Zimbabwean we will get what we call GDP per capita (income per person). GDP per capita was at its pick in 1974 at about US$1,400 per person per annum.  Between this period and the year 2000, GDP per capita revolved between US$1,100 and below US1,400. After 2000, this income per person decreased drastically to levels below US$600. Like what happened with GDP, after the inclusive government, the GDP per capita took an upward trend. However, the increase was short-lived as the trend turned downwards after 2014.  What these numbers tell us is that an average Zimbabwean is much poorer today (in relative terms) than a person who lived in 1975 (by about 35%). This is to say, if an average Zimbabwean earned US$1,000 in 1975, the same person is now earning US$650.

The recent decline in economic growth is attributed to poor land redistribution policies that greatly contributed to a decrease in agriculture output’s contribution to GDP from about a high of 24% to about 13% in 2015. Manufacturing (in general) contributes about 28% to GDP saw a dramatic decline due to a drop in capacity utilisation driven by falling demand and increased uncertainty. The service sector has managed to strive contributing about 59%. This goes to show that in a period of more than 50 years, the leaders of the country and the policy makers were busy crafting and implementing policies that were not only unsuccessful but highly effective at running down the economy

After independence from Britain in 1980, the gross capital formation (GCF) as a percentage of GDP ranged between 15% and 24% for the years up to and including 1995. The Zimbabwe government led by Robert Gabriel Mugabe gave less priority towards physical infrastructure investment which saw GCF tumble from a high of 24% of GDP in 1994 to about 3% of GDP in 2006. However, when the economy showed some signs of improvement after 2008, GCF to GDP ratio increased but that was also short-lived as the ratio significantly decreased in 2012 to only 12% and the ratio has been hovering around 11-12% for the past 6 years.

If one is to walk down the streets of Zimbabwe, it is impossible for one not to notice the depth at which physical assets have depreciated in the country, let alone, a stagnant accumulation of capital investment in the country. The roads are in extremely poor state, the buildings (housing and office infrastructure) have depreciated beyond suitability for human occupation (at least most of them). The railway lines and railway transport are near non-existence, the electricity generation for the country has failed to increase the required capacity to meet the country’s electricity needs. Moreover, the existing methods or equipment currently being used at the power station are not only using archaic technology, but also are in very poor shape that disruption of electricity generation is a daily norm. The distribution system is in sheer need of a facelift. Waterborne diseases such as cholera are on an increase due to poor water purification systems across many (if not all) cities/towns in the country. Zimbabwe still uses the same old pipes from the 1970s to distribute its water and water supply interruptions are the order of the day. Investments in internet technology have also been lagging behind most developing economies.

Notwithstanding the 1982-83 and the 1992 drought, the value added as a proportion of GDP went down, on the average, compared to their 1960 levels. The value added as a percentage of GDP was at its worst level in 1992 due to the likely effects of the worst drought in living memory of Zimbabwe. The figure for that year is very close to that of 2014, even in the absence of drought, which explains how the economy has deteriorated over the years.

Except a significant decrease in expenditure in 2007-2008, the government expenditure has been trending upwards, increasing from a low of 11% in 1965 to 25% in 2016. Given the decrease in capital expenditure by the Zimbabwe government, it indicates that most of government expenditure is funding recurrent expenditure, something which is not sustainable over the longer term.

Website link for Tutsirai Sakutukwa: https://sites.google.com/site/tutsisakutukwa/home

Website link for Marshall Makate: https://econmakfaraim.wordpress.com/

On why the rural vote matters for Zimbabwe

On 30 July 2018, Zimbabwe will be getting to the polls to decide the leadership it entrusts to move its nation forward. In this short article, we re-iterate the significance of this election from a public health policy perspective, focusing on the health and well-being of the next generation. We briefly highlight the key and current statistics regarding child health outcomes (i.e. in terms of neonatal, infant, and under-five mortality). These child health outcomes, are globally considered essential markers of the overall health of a society (especially the infant mortality rate) as highlighted in the Sustainable Development Goal – # 3.

Neonatal mortality is the probability that an infant dies before reaching the age of one month while infant mortality is the probability that a child dies before reaching the age of one year (12 months). Under-five mortality on the other hand represents the likelihood of a child dying before celebrating their fifth birthday of life (i.e. dying before reaching the age of five years). Below, we provide a brief summary of the current state of our child mortality outcomes as extracted from the nationally representative Zimbabwe Demographic and Health Survey (ZDHS) 2015 report.

First, we show how child mortality has evolved over time since the 1980s for the country as a whole. The graph below is extracted from the ZDHS, 2015 report, and is shown as Figure 8.1 on page 132 of the report.

As the above figure shows, child mortality is still a big problem in Zimbabwe. Looking at neonatal and infant mortality, we can see that the current levels are actually worse than they were in the 1980s, which clearly signifies that we have not really progressed at all. For example, while 27 children for every 1,000 live births died within their first month of life in 1988, about 29 children per every 1,000 live births did not make it to their first month birthday in 2015. These statistics are still unacceptably high by any standards. Of course, looking at the data at the province level will reveal a completely different picture especially if we just focus on under-five mortality. Zooming into the data at the province level unmasks an even worrying and sad reality facing our very own children, the future of Zimbabwe.

Second, we show the distribution of under-five deaths across Zimbabwe’s ten provinces as reported in the 2015 ZDHS (i.e. figure 8.2 on page 133 of the ZDHS 2015 report).

The graph shows that, in terms of under-five mortality, the situation in the provinces is much dire. It is imperative to note that five of the ten provinces are well above the national under-five mortality average. For example, under-five mortality in Manicaland province stands at a staggering 112 deaths per 1,000 live births in 2015, a figure that is 62% above the national average. The question is why do we still have this many children dying before they even reach the age of five? If in some industrialized nations such as the United States for example, an under-five mortality rate of just 2.49 deaths per every 1,000 live births is considered totally unacceptable (Centres for Disease Control and Prevention), why should we (Zimbabwe) tolerate a child mortality rate that is about 30 times higher?

A careful review of the data also shows that child mortality is highly concentrated among Zimbabwe’s rural population (92 vs 60 deaths per every 1,000 live births in rural and urban, respectively) (see Table 8.2 on page 136 of the ZDHS 2015 report)  and among the very poor segments of the population. Given that about 60% or higher of Zimbabwe’s population resides in the rural areas, it is important that Zimbabwe vote wisely as we get to the polls. As can be seen from the figures above, the data suggests that, as a nation (in terms of child health), we are actually worse-off than we were more than 30 years ago. More specifically, the fact that our children are actually dying at a much faster rate before they even reach the age of 12 months than they did more than 30 years ago, before Zimbabwe’s Independence, speaks volumes and should not be acceptable.

From a public health policy perspective, we need the rural vote more than ever before, since we just cannot afford to continue on the above trajectories for child health outcomes. Children are the leaders of the future and any public policies that are not sensitive to the needs of this vulnerable and yet essential group is just not acceptable. This clearly highlights why the rural vote is so much pertinent, given that more than 60 percent of Zimbabwe's population resides here, the future of these children will be dictated by what the rural vote will decide. Now, is the time, Zimbabwe should awaken from its slumber, decide and be in control of its own destiny. If the premature (and otherwise preventable) deaths of many young and innocent children in  our beloved Zimbabwe does not move your heart and mind to at least vote wisely as a Zimbabwean citizen, then nothing will ever move you. Children are the future, and as such, deserve nothing but the very best of our care! A new and prosperous Zimbabwe is possible and must be judged on how best it will respond and address the delicate health needs of these children (what we call the voiceless). That is what we will call, in own humble opinions, a truly successful and progressive Zimbabwe, which is possible in our lifetime.

Website link for Marshall Makate: https://econmakfaraim.wordpress.com/ 
Website link for Tutsirai Sakutukwa: https://sites.google.com/site/tutsisakutukwa/home

Economic Growth and Drivers of Economic growth

Why is economic growth important and what propels it?

A country’s growth and level of national income, measured by real gross domestic product (GDP), is used as an indicator of development. A higher GDP is correlated with low crime rates, higher life expectancy, and general good health, higher education levels, less poverty, low levels of conflicts and a higher public service delivery, among others. Improvements in the level of GDP become central to improving the well-being of the society. Before going into the drivers of GDP, let’s briefly examine its components first.

National income captured by GDP has four components which are personal consumption, investment, government spending and net exports (exports minus imports). Each of these components plays a crucial role in determining the growth in GDP and subsequently the economy. An increase in autonomous consumption stimulates the economy in a ripple manner that causes income to increase by a significantly greater proportion than the initial increase in consumption. Investment increases the country’s productive capacity leading to an increase in income via production. Government consumption/purchases increases GDP through the multiplier effect where a smaller proportion of spending results in significant increases in income. For simplicity, we just assume that the government is forward looking and thus engages in productive spending which positively contributes to economic growth. In later posts, we will relax this assumption and discuss the implications to national income in the instance when the government lacks that foresight.  Lastly, exports inject income into the economy while imports act as a leakage of income. As a country grows, it generally spends more on investment and at later stages it re-balances by leaning heavily on private consumption.

Another important avenue to increasing national income is through increasing productivity.  Productivity – generated through what’s called an aggregate production function is the process whereby an economy as a whole turns economic inputs into output measured as GDP. The components of a production function are human capital, workforce, physical capital, and technology. Human capital the accumulated skills and education of workers and increases output per worker. Workforce is the total number of people in a country or region who are physically able to do a job and are available for work and the higher the number the higher is output. Physical capital consists of man-made goods such as machinery, computers, and other equipment that are needed for the production of goods and services. A higher investment in physical capital increases labour productivity. Lastly, technical knowledge refers to society’s understanding about how the world works, hence, how goods can be produced in the best way possible by combining all the production inputs. Constantly, acquiring new technology increases the ability to produce more output per each resource a country has.

Another major thing that also influences economic growth in developing countries is the quality of governance as measured by the following six components: (1) Government effectiveness - measures the perceptions of the quality of public services, civil service and the extent of their independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policy strategies. , regulatory quality, voice and accountability, political stability, control of corruption, and the rule of law; (2) Regulatory quality – captures the perceptions of the ability of the government to formulate and implement sound policies and regulations to promote private sector development; (3) Rule of law – encompasses the extent to which economic agents abide by societal rules and trust the government including contract enforcement, property rights, police, judicial system and the likelihood of crime and violence; (4) Voice and accountability – captures the views and extent to which economic agents partake in electing their own government, are free to express themselves, and have free access to the media; (5) Political stability – measures the degree to which a country is susceptible to the likelihood of politically-motivated violence  including terrorism; and (6) Control of corruption – captures the perceptions of the extent to which public power is exercised for private gain including petty and larger forms of corruption. It’s important to note that the failure of any one or all of the governance indicators will contribute to market failure or inefficiency which will inevitably have a negative impact on the country’s economic growth.

Economic Analysis and Policy

Our mission and capabilities:

Given the current social and economic challenges facing Zimbabwe and Africa at large, it is more vital than ever that we promote the intellectual case for informed economic policy based on optimal taxes, promotion of education, enhancing the health and welfare system and lower levels of direct government regulation. It is imperative that appropriate policies be implemented leading to the reduction of poverty, the alleviation of the suffering and the achievement of sustainable livelihoods in these countries. Economic analysis plays a key role both in the commercial world and in public policy.

Our mission is to carry out research and analysis that resonates with the ordinary citizen and give advice on economic and social forces that affect people’s lives, to improve the understanding of those forces and the ways in which right policies could bring about change. We are here to inspire and challenge people to critically think about the correct roles of political office, institutions, property rights and the rule of law in creating a society that fosters innovation, entrepreneurship and the efficient use of resources. In particular for Zimbabwe, our objective is to enhance the quality of economic policy-making by fostering high quality, policy-relevant economic analysis, and disseminating it widely to decision-makers in the public and private sectors so as to promote the next generation of thinking and prosperity for a rising economy.

Our team comprises of experts in macroeconomic analysis and modelling, regulatory and competition issues, cost/benefit and financial analysis, health economics, business case development, public policy and general economic policy management. We have a genuine commitment and passion to providing rigorous expert research, commentary, analysis and advice on a growing and diverse range of economic problems. In our analysis, we blend theoretically-oriented economic research with the empirical work in the most understandable ways possible, hoping to inspire and empower the ordinary citizen.   We hope to investigate and explore about the Zimbabwean/African story with an African perspective combined with first world experiences.

We are only people-driven.