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.