The crisis recorded in 2008 and the one currently unfolding share almost the same umbilical cord and are structurally the same and most of the lessons call for the application of the same principles either in the short, medium or long term.
BY FREEMAN GUTSA
The current crisis is literally evidence to prove that failure to initiate and sustain a growth process that is robust and inclusive is very costly.
The past regime failed to develop a credible economic strategy, which then resulted in deteriorating economic developments and ultimately paralysis in 2018.
It should be noted that the current and past crises can be traced to a myriad of violations over the years to key economic fundamentals, including poor monetary policies, failure to control budget deficit (fiscal deficit), and unsustainable strategies to retire both internal and external debts.
The current developments characterising the economy, just like in 2008, culminated into a serious shortage of cash and basic commodities from groceries to fuel, general increase in prices of commodities, fall in the purchasing value of money, as well as increasing opportunistic and speculative behaviour among the general populace.
Although the face value of the key violations on basic economic fundamentals which led to serious economic challenges around 2008 seem different from those leading to the current challenges, these require the same broad, more focused and comprehensive solutions.
Notwithstanding that, there are countless violations which then mould together, form a web and impact on the economy.
The banking populace has lost confidence in the banks. The general populace considers banks as lions ready to munch anything entrusted to them with lightning speed. It’s on record that the financial sector is literally the foundation of economic growth and development in any economy.
Untamed government expenditure
The new dispensation has shown commitment to putting a check and reduce this challenge. This is noted in the Transitional Stabilisation Programme
For the period stretching and around 2008, the Reserve Bank of Zimbabwe has been involved in quasi-fiscal activities that virtually crowded out other financial intermediaries that the central bank was supposed to be monitoring and supervising.
The empirical performance of non-core duties resulted in the destabilisation of the financial markets. This challenge is not attributable to the period stretching to and around 2018 though.
Serious deficiencies in the democratic credentials of the Robert Mugabe regime successfully blocked foreign direct investment (FDI) in all magnitude and sectors. The regime ran down the confidence of both international and local investors with the precision of a cheetah, resulting in a perpetual soaring of the balance of payments deficit as we had more imports relative to exports.
The lack of a robust industrialisation plan has seen Zimbabwe relying strongly on imports to an extent that we are currently importing even toothpicks, dog biscuits, matches, candles, mineral water, goat milk and sliced potato.
The period before and around 2008 was characterised by unsustainable printing of money. The policy position of the Reserve Bank of Zimbabwe (RBZ) during the period stretching to and around 2018, which brought into circulation bond notes and coins had a negative net benefit to the economy of Zimbabwe.
Gresham’s law is an economic principle which stipulates that “bad money drives away good money”. The explanation is simple, if we have two forms of commodity money in circulation which are accepted by law as having a similar face value, the more valuable money will gradually disappear from circulation.
This is a law made public in 1860, but in 2017, economies such as Zimbabwe fell short of it. The introduction of bond money led to the disappearance of the United States dollar from circulation.
The 2% electronic tax on intermediated money transfers (IMT) has its own share in terms of contribution to the current crisis. The general public and business communities considered the tax regime as being too high, given that they are already heavily taxed.
The fact that Finance minister Mthuli Ncube wants to collect revenue from those outside the tax radar is a good thing, but the art of following others without a proper analysis of the current realities is very dangerous, and the move was considered quite punitive.
When the economy is weak and fragile, government should thus try by all means to boost consumer and business demand by cutting taxes – not to increase taxes with such a margin.
Tax cuts encourage business to invest and open up the country to the much-needed foreign direct investments. Only when the economy is near capacity, can taxes be increased.
It would be prudent, and recommended to ensure the following key fundamentals are given the priority they deserve to bankroll the economy;
- Remove the bond notes and coins through the process of demonetisation. There is need to urgently respond to the loud call to engage the rand community for possible incorporation to be able to get rid of this so called surrogate currency.
- Robust industrialisation strategy that defines the best path to follow taking advantage of studied comparative advantages of specific investment silos
- Enhance production and productivity under various sectors prioritising agriculture, mining and manufacturing. Zimbabwe’s mining sector is bleeding because of leakages and this is basically costing us as a country. We are the second largest platinum producer in the world and we are second poorest country in the world and what an embarrassment.
- It is critical to flag-out the need to revive the agricultural sector and enhance production, productivity to feed into the strategic movement towards reviving the manufacturing sector.
- Adoption and implementation of prudent fiscal and complimentary policies. Limiting the fiscal deficit to sustainable levels is very critical, when it comes to guaranteeing return of investor confidence lost over the past years. The Transitional Stabilisation Programme stands the test of time on this aspect. What is critical is to emphasise its implementation and ensuring strategic funding options are availed.
Government expenditure over the years has been hitting unsustainable levels in some circumstances leading to issuance of Treasury Bills. The TSP is not the complete medicine for full recovery, but it’s a better solution for kick-starting the economy
- Restoring the banking system and attracting foreign direct investments. Political games should literally be parked and shelved for history lessons either at secondary or primary schools. There is no doubt, peace and stability is a pre-requisite for engagements and effective luring of investors. Restoring confidence and getting rid of financial malpractices being currently identified with the current banking regime should be a priority.
- Government requires to extensively deal with the current financial market distortions, where we are unsustainably assuming and operating as if the exchange rate is 1:1. Strategic efforts should be put in place to formalise the informal trading of the United States dollar that is happening on the black market.
Freeman Gutsa is an economist and writes in his own capacity. He can be contacted on firstname.lastname@example.org 0774455458