August 4, 2008.

NEED FOR ECONOMIC STABILITY AND GROWTH

The stiffest challenge for any government that emerges from the post-March 29, 2008 harmonised presidential, parliamentary and local government elections is achieving the main objective of restoration of economic stability and growth in an economy which has shrunk by 60% within a decade. There is a need to come up with a roadmap that would address the economic problems that the country has been facing since 1998. Economic analysts blame the economic meltdown on repression and economic mismanagement by Robert Mugabe, who has ruled Zimbabwe since independence from Britain in April 1980.

The MDC will come in to a government which is virtually broke and heavily indebted with a foreign debt of US$4 billion as at March 31 this year, and a domestic debt of Z$790.6 quadrillion ($79.6 million new currency) as at July 15. Poor performance in the mainstay agricultural sector has had far reaching consequences as hundreds of thousands have lost jobs while the manufacturing sector, starved of inputs from the farming sector, is operating below 30% capacity.

The Zimbabwean dollar was trading above Z$1.3 trillion to the United States dollar on July 23, but the maximum withdrawal limit from banks of Z$100 billion was not enough to buy half a loaf of bread, if available.

Zimbabwe's economic collapse has resulted largely from poor policies, incompetence and corruption on the part of the ZANU (PF) government. However, in later years it also suffered heavily from financial and economic ostracisation in the international community. Although the mantra is that Zimbabwe is subjected only to targeted travel and financial sanctions against select members of the Mugabe government, the reality is that Zimbabwe as a country has largely been ostracised by the international financial institutions and multi-lateral development banks.

From 1998, international financial institutions and multi-lateral development banks, including the IMF, had effectively shut avenues for financial support and credit to Zimbabwe, except, perhaps for humanitarian purposes. They certainly had their good reasons for taking those measures but this exclusion combined with local incompetence and corruption lead to a brutally slow and painful demise of the Zimbabwean economy.

ZANU (PF)'s economic and monetary policies fuelled the situation as they are bereft of sound economic solutions mainly owing to the Reserve Bank of Zimbabwe's quasi-fiscal engagements and continued money supply growth, which are inflationary. The RBZ governor Gideon Gono's intermittent fire-fighting strategies over the past four years have proved largely disastrous mainly as the result of the lack of political commitment to democratic change on the part of Robert Mugabe's government.

There was need for the new government to restore the credibility and discipline of the central bank and financial sector as a whole. It is obvious that it is going to take some time for hyperinflation standing at more than 10,000,000% (according to independent analysts) to come down. Unemployment is running at more than 85% and it is going to be difficult to prioritise what to tackle first. In the short-term it is important for the new government to introduce "crisis management" as a way of running the economy. Getting some foreign currency flowing again should be a priority although money alone is not going to help.

There is also the problem of price controls and distortions, and the relevance of organisations like the National Incomes and Pricing Commission (NIPC). Nearly half of Zimbabwean industrial firms are on the verge of collapse because of the impact of government-imposed price controls, which have forced many companies, already battling escalating production costs, to trade at a loss. Most manufacturing firms are struggling to import raw materials, machinery and spare parts because of an acute foreign currency crisis partly caused by a severe decline in Zimbabwe's export sector.

The country's Reserve Bank is said to be technically insolvent and has incurred huge losses in the region of US$2.5 billion through quasi-fiscal operations. In addition, more money is owed in United States dollar terms to exporters, non-governmental organisations and individual foreign currency holders.

The government itself is broke with an escalating domestic debt which soared to Z$790.6 quadrillion on July 15 from Z$7.1 quadrillion on May 5. Government's propensity to rely on borrowed funds in order to meet its patronage system has pushed the domestic debt up. It is evident that the solvency of the government is already seriously compromised.

The government's huge appetite for cash is also likely to spur increased money printing, pushing money supply (M3) growth. Money supply is the total supply of money in circulation in a given country's economy at a given time. It is considered an important instrument for controlling inflation. Money supply growth continued on an upward trend, increasing to a new record of 81,143.1% in January from the December figure of 64,113%, official figures revealed on June 12, 2008.

For the international community to give Zimbabwe financial support, the new administration has to prove that the economic policies emerging from the new dispensation are worthy of that support. The revenue authority has reportedly been prejudiced of almost 60% of potential earnings which had been generated by the informal sector, which was virtually destroyed during the senseless programme of mass forced evictions and demolition of homes during the 2005 Murambatsvina (Drive Out Filth).

ZANU (PF) should be aware of the gravity with which the economy has declined since 1998. Thousands of companies have shut down, scaled down operations or relocated to neighbouring countries as the economic environment becomes ever more untenable. The new government will inherit corrupt government structures and institutions, a situation that might be difficult to undo at short notice.

The MDC put together a comprehensive plan - Reconstruction, Stabilisation, Recovery and Transformation (Restart) - to deal with problems but analysts said it will be an uphill task to reverse the damage that has been largely caused by the ZANU (PF) government. In their political manifesto, the opposition has said it will restructure government companies and institutions. It is essential that the emerging transitional government should come up with a feasible "rescue economic package".

Restart is an ambitious economic plan to address "the country's immediate stabilisation and reconstruction needs" and to launch the MDC's "industrialisation strategy, through which jobs and economic growth will be sustained in the long term".

Economic growth and economic expansion can be powered by the engine of a sound industrial base, i.e. the establishment of new industrial enterprises and related economic activities. A competitive and self-sustaining domestic private sector is the driving force for economic growth and industrial development. It is crucial for the industrialisation of the economy, and for the creation of tangible wealth and employment. On the basis of this industrial development, economic expansion should result in employment creation and poverty eradication, expansion of the domestic market and widening of the tax base.

Private investment must be increased, in conjunction with industrial development. This would be achieved through the encouragement of tangible incentives to those with viable projects. The door should be open to people with ideas irrespective of their political affiliation. It is possible to establish new indigenous enterprises and new joint ventures that promote the transfer of technology; by buying shares in existing non-indigenous companies by indigenous people; by privatisation of state enterprises; take-overs; employee stock ownership schemes; subcontracting and outsourcing. Transparency is essential in order to encourage investors to direct their resources to Zimbabwe.

Thus, the economic policies should be centred on two categories, i.e. the immediate/short-term and the long-term issues. The set of immediate issues encapsulate the problems that people are facing on a daily basis. These are inter alia, the food shortages, transport blues, sky-rocketing prices, unavailability of basic commodities and services such as electricity, fuel, access to healthcare and medicinal drugs, etc. These are problems that manifest on a daily basis - they are visible, they are felt each day and they are escalating, with no end in sight.

The long-term issues, though not fully divorced from the short-term ones, are not always immediately apparent or relevant to the general public. They are often framed by the economic strategists within the leadership and brought to the people for consultation but ultimately the leadership has the onus of raising awareness and demonstrating their importance as far as solving the existing problems is concerned. They require more patience, thought and properly tailored strategies and are generally leadership-driven.

These long-term issues refer to creating a proper land distribution programme and carefully tailored agricultural policy; developing a long-term economic policy that promotes investment and growth; rebuilding the image of the country in order to attract multinational investors; developing an appropriate ideology; revamping the political and economic culture.

Meanwhile, it is pertinent to note that the MDC took over the administration of all urban councils in the country after the local government elections of March 29. Since 60% of the population lives in the urban areas, this means that the majority of the people now live under an MDC controlled administration. The MDC also controls a significant number of the Rural District Councils and in all hold 700 of these posts throughout the country. Where ZANU (PF) controls the councils in the rural areas, they will soon discover that they are under new management from a central government point of view.

This is a very significant shift in power and gives the MDC its first real chance to implement its "Restart" economic blueprint. Local government, in many ways, is quite important to people's lives as it is the local authority that delivers water, effluent and waste management, housing, electricity and roads. It is the local authority that manages primary health care and educational and social amenities.

The transitional government has huge challenges - many urban centres are short of water, roads are in an appalling state, mass transit systems non-functional, effluent systems broken down and a threat to public health. About 40% of the urban population is not properly housed; there is a backlog of a million housing units. Staff is demoralized; financial systems have broken down and assets looted. There are many municipal ghost workers, a situation that has enabled ZANU (PF) cronies to siphon resources from local councils.

Meanwhile, the possibility of the formation of a transitional government has sent jitters among ZANU (PF)'s political elite. As the signing of the Memorandum of Understanding on July 21 brought some euphoria among many Zimbabweans, reliable sources said top government officials were scrambling to loot state resources as uncertainty over their careers mounted. Luxury vehicles belonging to some government ministries and parastatals were being offloaded to individuals at book value in an unprecedented asset stripping exercise. The phenomenon was said to have spilled into the judiciary, where some judges received luxury vehicles with the option of purchasing those they received last year at way below market rates. Senior ZANU (PF) officials were reported to have been implicated in the looting of farm equipment as uncertainty grips the rank and file of the ruling party.

It appears people's ambitions will take long to fulfil. However, to accomplish people's aspirations, mobilisation of financial resources, particularly medium- to long-term finance, would be crucial for increasing indigenous private investment in the economy and for economic expansion. In order to create an enabling environment for the mobilisation of financial resources, the government should further reduce its consumption expenditure and accelerate the commercialisation and privatisation processes so as to reduce the budget deficit.

The ZANU (PF) government has been operating on a budget deficit since independence. All budgets should be reviewed against current and projected income and adjusted where required. Strict limits should be imposed on the budget deficit by way of fiscal discipline and tight budgetary controls. All parties to the process must observe these.

The government cannot continue to spend money it did not have funded by running the printing press, while also borrowing from the banks. In the absence of external financial support to fund the expanded government spending, the state has resorted to domestic borrowing and in the process crowding out the productive sector.

Thus, by the reduction of the budget deficit the incoming administration would foster macro-economic stability, which is conducive for productive investment and mobilisation of financial resources.

Review of the tender system which governs the operations of the different sectors of the economy should be undertaken, to make sure it does not have a constraining effect on the indigenisation process. Government Tender Board (GTB) procedures should be designed to foster indigenisation of the economy through preferences and stipulations that favour indigenisation openly and transparently. Quasi-government organisations, parastatal corporations and local authorities should also be subject to directives on preferential procurement from indigenous enterprises. Tenders won by non-indigenous companies should be subject to sub-contracting requirements to indigenous companies.

Low and stable inflation and interest rates would help companies to invest in new ventures and expand their existing concerns. However, the budget deficit has pushed up inflation, which stood at 7,634.8% as of July 2006 and nudged 2,200,000% in July 2008. Interest rates, which were pegged between 66.33% (TB - 91 days) and 8,500.00% (Overnight) as of July 27, 2008, are both a product of and a tool for combating this problem. However, both inflation and the high interest rates placed tremendous demands on the average individual as well as businesses and further compounds the difficulties of marginalised blacks seeking loans.

The MDC has no intention of reversing the land-reform programme. What an MDC government intends to do is to carry out an audit to correct the chaotic and corrupt land distribution. According to Restart, "The MDC's agriculture sector policies aim to restore and enhance the productivity of the agriculture sector as a whole, assuring its contribution to the national fiscus, export revenues and food self-sufficiency."

A commercial-farm settlement scheme must be designed to promote the development of indigenous commercial agriculture, and the government should introduce a long-term lease scheme (with option to buy after a period of, say, ten years). Preferably, these two schemes should favour those who have qualifications in agricultural science. The principle of one-person, one-farm should be enforced. The prohibition of land ownership by foreigners and companies (except in special circumstances) should be adhered to. Last but not least, a limit on farm size and a land tax for under-utilised land in general and agricultural land in particular should be introduced.

Skills development is crucial for economic development. Zimbabwe particularly requires entrepreneurial skills, technological know-how and economic development management skills. Technological know-how is needed for research and development as well as for the manufacture and marketing of products in the newly established enterprises. Skilled manpower is needed for developing a strong indigenous technological base for industrialisation. Economic development management skills are needed for designing of appropriate policies that will promote indigenisation of the economy as well as economic growth and development. Financial management skills like planning, buying, costing, pricing, stock control, record-keeping, cash flow projections and marketing are essential for success in any business venture. Skills in public management and economics can contribute to the much-needed increase in efficiency of resource use.

Good governance is an important part of an environment conducive to the attraction of investment. As far as the investor is concerned, good governance encourages investment and the transfer of technology. In 2001 Zimbabwe attracted just US$5.4 million of direct investment, the Reserve Bank of Zimbabwe said. In contrast, 1998 - the best year on record - produced investments totalling US$436 million. A World Bank report on conditions for doing business around the world ranks Zimbabwe 152 out of 178 countries in terms of conditions in place for investment, down from 144 in 2007.

It is because of the need to stimulate investment that the transitional government will have close ties to a group of western donor nations known as the Fishmongers Group, set up a year ago on Britain's initiative. It includes the United States, Japan, Germany, France, Sweden, Holland, Norway, Canada and Australia. China declined an invitation to join.

It is quite apparent that economic growth and national development cannot be sustained if there is no effective transparency and accountability. Investors are willing to invest in countries where not only the infrastructure is developed, but where the game is played straight. Hand-in-hand with this is the need for greater participation of the people in their governance. Whatever the form of government that exists in the country, appropriate mechanisms must link rulers to ruled, and vice versa. Reforms to bring more genuine democracy should overcome the de facto one-party system, end legal and material constraints to forming and running political parties, and end state repression of the opposition and the independent media.

It is significant to come up with a programme that is essential to provide various tangible solutions to Zimbabwe's burning economic problems. The over-riding criteria should be the approval of the international community and the willingness of the donor countries to fund projects tailored towards the creation of wealth and employment. In this crisis, essential measures that should be taken include:

1.      Creation of an autonomous RBZ, which would curb financing of government expenditure and quasi-fiscal engagements;

2.      Devaluation of the Zimbabwe dollar whose external value has been very unstable since 1997;

3.      Increase in interest rates, coupled with accompanying measures to curb money supply growth;

4.      Scrapping of state-administered price controls would ease shortages and restore private sector confidence;

5.      Comprehensive liberalisation of the economy to attract foreign trade and capital movements;

6.      Urgent reduction of the cabinet and public sector, including reductions in the number of civil servants - especially soldiers;

7.      Urgent establishment of an independent anti-corruption commission which should start a cleanup of both the public and private sectors;

8.      Accelerated privatisation of parastatals which have contributed to an increase of the domestic debt;

9.      Collective bargaining to be accompanied by agreements on productivity by social-contract partners (government, employers and labour); and

10.  An orderly land-reform programme in line with international norms where the rule of law applies.

The Reserve Bank of Zimbabwe's introduction of a new currency as well as slashing of 10 zeroes from all monetary values as of August 1 will do little to revive the country's comatose economy. While acknowledging that the removal of zeros from all monetary values would be of great convenience to the public, economists said Gideon Gono's new measures fell far shot of the full package of wide-sweeping political and economic reforms required to resuscitate an economy that has been in freefall since 2000.

The revaluation comes two years after the last such exercise, when three zeros were taken off the currency in a move dubbed "Operation Sunrise". It proved to be a false dawn because it did not address the root cause of the problem. For as long as an active drive towards stimulating an increase in actual production is not undertaken then any slashing of zeroes would be of little effect. Already, by August 4 prices had doubled: a 2-litre bottle of cooking oil went up to Z$120 in new currency, which is Z$1.2 trillion in old currency. A 2-kg packet of sugar is now selling at an average of Z$50 from Z$25, a loaf of bread is now Z$25 i.e. Z$250 billion in old currency from an average of Z$15.

The supply side remains largely ignored (with the decrease in retention ratio doing little to encourage production). The status quo should remain largely unchanged with inflation expected to gallop away at an even faster pace. Many economic analysts expect this move alone to have an inflationary impact but one would think Zimbabwe's economy is past the stage where rounding up prices would make a significant contribution to inflation figures. Give it a few months and expect fresh calls for another round of zero slashing.

Chopping zeros off banknotes was tried in Germany in the 1920s when people shopped with wheelbarrows full of money - but other measures need to be introduced as well. Germany - the most frequently cited example of hyperinflation - finally got to grips with the problem when it produced a currency - the Rentenmark - backed with American gold. In 1924, the US' Dawes plan, named after the American banker Charles Dawes, set realistic targets for German reparation payments and gave Germany a US$200 million loan.

Zimbabwe needs to address issues around production and foreign currency generation as a means to sorting out the hyperinflationary environment it is in. Accompanying reforms to prevent the government continuing to print extra currency to pay its own bills are essential. It is obvious one cannot change the currency where government expenditure continues to increase, capacity utilization is still at its lowest, where there is little or no foreign direct investment, no balance of payment support and a stable exchange rate and without the normalization of international relations.

A monetary policy cannot be implemented in isolation from a financial policy. Resolution of the current socio-economic crisis will require nothing short of a full package, made up of simultaneous adjustment actions in government management; professional ethics at the central bank; transparency in the financial sector and in the private sector; an input by labour, civic society and NGOs; and co-operation by international organisations.

However, a regime that brutalises labour leaders, civic society leaders, business leaders, and political activists, has no capacity to facilitate the requisite discourse that will lead to reconstruction, stabilisation, recovery and transformation of the Zimbabwean socio-economic status.