Monetary, fiscal policies: The equivalent of a two legged stool?

Tapiwa Nyandoro

ON October 1, 2018, the Reserve Bank of Zimbabwe (RBZ) issued its rather long monetary policy statement (MPS).
Empirical evidence has shown that ordinarily, the length of such a statement is inversely proportional to its importance or usefulness, and directly proportional to its confusion making capability. This was no exception.
Pandemonium reigned soon afterwards, as the markets became disoriented, dizzy and confused.

guest column: Tapiwa Nyandoro

At the centre of the confusion was the belated admission by the RBZ that among the multi-currencies in use in Zimbabwe was a local one with two or three pseudonyms viz the bond note, plastic money and the mouthful “Real Time Gross Settlement Foreign Currency Account — RTGS FCA! No wonder the markets were literally throwing up, with the local currency in vertigo inducing free fall. But in denial, the RBZ was insisting that the exchange rate of this currency or “token money” was still 1:1 to the United States dollar. No one believed the Bank. Its reputation is not the best in the World.

On the same fateful day, by way of treatment, the Treasury Chief, Finance and Economic Development Minister Muthuli Ncube, prescribed a 2% electronic money transaction tax, to balance government books. His intention was to tax the informal sector, which now is arguably larger than the formal sector. It may turn out to be a master stroke.

Developmental economists have argued for decades that the informal sector in developing countries competes unfairly with the tax paying formal sector, and also denies government of funds for social services and other public goods.
Critics, however, point out that the informal sector in countries such as Zimbabwe is a hand-to-mouth affair, and taxing it is akin to milking a starving cow. They further observe that such a sadistic and regressive tax regime is what the capitalistic world wants to see before riding to the rescue.

The theory is that there must be wailing and gnashing of teeth, plus blood on the floor, so that the consequences of fiscal profligacy be permanently etched on the psychic of the nation- permanently embedded in the national memory, while arousing international sympathy necessary for the rest of the World to assist. The hope is that when it comes to selecting national leadership in future, the populace will do so diligently. Critics further noted, however, that the dubbing of the 2% transaction tax as an “austerity measure” was deception at its worst.

Government, to save its own skin, was sacrificing the poor and out of work to keep its fiscal profligacy, bloated ranks and obscene perquisites enjoyed by its senior corps intact. Its overriding ambition is to stay in power, and therefore in possession of the keys to the cookie jar, which jar happens to house both Treasury and the RBZ.

There is some truth, of course, to all these unkind and negative sentiments. Belatedly, the minister was forced to suggest that proceeds from the 2% tax would be ring-fenced for social services, such as healthcare and education, accessed by the poor as the elite prefer better quality services offered abroad.

The minister dubbed the MPS and his fiscal strategy, with its 2% transaction tax, the Transitional Stabilisation Programme (TSP) running from October 2018 to December 2020. The enthusiastic tax raising and half hearted cost reducing exercises read together with the MPS, however, looked like a two legged stool, not exactly the foundation of a piece of sound economic growth engineering project.

A fire sale of State-owned enterprises and parastatals is on the cards, as part of the treatment. But the political and economic landscapes are so confused and volatile that very little cash or investment may be raised from the exercise. Generally, FDI is not guaranteed.

The toxic fundamentals, if not personalities too, also attract the worst forms of vulture investors, the asset strippers. It is debatable whether or not in its state of mind, and given the constrained time frame, the government of Zimbabwe is able to navigate its way diligently, without corruption, through the minefield that is the disposal of national assets and awarding of mining concessions. The fact that the World Bank is involved in these activities may be some consolation.

The stabilisation period may also see the small manufacturing industrial base, in the country, going down the tube as demand shrinks in sympathy to decreasing disposable income.

The operating environment is further worsened by distorted costs, expensive money, high taxes, poor services, and high levels of arbitrage in the economy. It is important, therefore, that by the second year of the TSP, at least a third of the national balanced budget be directed at hard currency generating or genuine, high value adding, and import substitution investments.

Such Public Sector Investment Programmes or Domestic Direct Investment is a vital component to the success of the TSP, and thereafter to wooing FDI. That this will be the way forward will become apparent should the minister table before Parliament this November 2018 a three-year budget for the period January 2019 to December 2021, as he ought to do in line with good governance and the quest for transparency. Investors need the information going forward.

Key to strengthening the third leg of the stool, the innovation, investment, production and increasing productivity leg, apart of the above narrative, is conclusion of the land reform program. More than $10 billion remains locked in the dead asset that is A2 and A1 farm land. The British seem willing and keen to see the issue resolved in a civilised way through arbitration. The Minister of Lands and Agriculture seems happy with that strategy, recently telling parliament that beneficiaries of the land reform program were duty and morally bound to compensate any farmer dispossessed of their property in the land reform programme.

Accordingly, therefore, it is the hope of the nation that the arbitration referred to above will lead to a $5 billion grant to be disbursed over five years for use as a revolving mortgage fund for the purchase of farms by eligible farmers, be they black, yellow or white.

That would see some white farmers compensated for their land, some buying new farms, alongside their colleagues of colour, and some restored to their farms. With 50% of those dispossessed of their farms, or those offered such farms, now retired or deceased, the legacy issues to the programme should be concluded easily and swiftly.

Closure of the land reform programme is the third leg, and sine quo none of the TSP. Without that, there is no salvation.

 Tapiwa Nyandoro writes in his personal capacity