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.