IN the three weeks since the 2020 national budget both the economy and Finance Minister Mthuli Ncube’s recovery strategy have drifted closer to the rocks. In their stubborn refusal to heed developments in the real economy, including socio-political pressures, the authorities have retreated into default mode — denialism, misrepresentation, implausibility and wishful thinking.
By Anthony Hawkins
While pleading for more time for its “reforms” to work, Ncube’s reform programme is being shredded by himself and others. His announced abolition of grain subsidies was summarily reversed, to be compounded by President Emmerson Mnangagwa’s promise of subsidies for another seven products. All of this unbudgeted for in a document presented to Parliament just weeks ago.
The new Finance deputy minister said currency controls will be tightened as inflation surged to a post-dollarisation peak of 440%, the Reserve Bank of Zimbabwe (RBZ)’s Monetary Policy Committee (MPC) recommended halving the policy interest rate. The MPC believes that the link between real interest rates, money supply and inflation is a Friedmanite, neo-liberal myth. Negative real interest rates of minus 200% are what Zimbabwe needs to foster savings, investment and price and currency stability. This is ground-breaking economic thinking worthy of the Nobel prize.
Ncube is in denial. On the very day that the RBZ was forced to admit that its latest $300 million Treasury Bill (TB) tender had flopped, State media quoted him pronouncing the system a “huge success”.
Success for who? Not for savers, investors, banks, pension funds, insurance companies and the like, whose participation in tenders at negative real interest rates is outright negation of their fiduciary responsibilities.
Ncube should publish details of how much of his own money or pension pot is “invested” in TBs.
A fund that bought TBs in the August auctions had, within two months, lost 40% of both its capital value and negative interest rate income stream. What better way could there be to encourage savings and investment? Last week, we were told by the RBZ that Zimbabwe’s problem is not a shortage of forex, but its misallocation. In support of this claim, which has been heard for decades, the central bank insists that Zimbabwe is better placed in terms of export earnings than other unnamed, African economies. That does not accord with the latest International Monetary Fund (IMF) data showing that 10 Sub-Saharan economies have higher 2019 export-to-gross domestic product (GDP) ratios than Zimbabwe, while in every one of the last 10 years, Zimbabwe’s export-GDP ratio has been below the Sub-Saharan average.
Competitiveness indicators — Zimbabwe is ranked 127 out of 141 countries by the World Economic Forum — and dismal country risk ratings, let alone net inflows of foreign direct investment and investment-to-GDP ratios, tell us that the problem is far deeper and more structural than the misallocation of foreign currency.
In a country with the world’s highest inflation rate and its third or fourth-worst growth rate, this fixation with foreign currency usage, parallel market operations and, of course, speculation and sanctions, reflects a deep malaise in the world of policymakers. They really don’t get it. The current default stance is, wait for our reforms to work. To that end, the same tired excuses and promises are trotted out. The interbank and parallel market rates will converge; GDP having fallen some 10% or so in 2019, will recover miraculously in 2020; monthly inflation will fall to (precisely) 2.3% by next December; investment, jobs and exports will recover in the promised return to prosperity. Productivity will rise on the back of forex shortages, 18-hour daily load-shedding, and thousands of manhours lost in fuel queues.
In this scenario, realism has no place. Risks facing the economy are overwhelmingly to the downside, yet policymakers seem unfazed by the burgeoning crisis in the labour market, the steepening downturn in the economy, receding prospects of an agriculture-led recovery, and the accelerating build-up of socio-political pressures, fuelled by falling real incomes and rising unemployment.
Particularly ominous is the dramatic deterioration in real wages and living standards which points to intense wage pressure in 2020 and beyond. On the basis of the budget’s inflation projections average wages must rise by at least three-quarters just to catch up to the October 2019 monthly Total Consumption Poverty Line (TCPL) for a family of five people of $3 161. In 2020, wages must increase a further 150% to match a December 2020 TCPL of around $100 000 a year. Notwithstanding this inevitable wage explosion, the RBZ continues to insist that the inflation outlook is “positive” as it strives to justify its bizarre interest rate decision. Recently, the European Central Bank warned that even marginally negative real rates are a threat to financial sector stability, but this is rejected by the RBZ and MPC which see no problem with banks lending depositors’ money at a huge loss and long-suffering institutional investors required to hold TBs on terms that guarantee the decimation of pensions and savings, while fuelling inflation and currency weakness.
For the foreseeable future, inflation will remain in triple digits, reflecting catch-up effects, most marked in the case of real wages. Government’s budget figures acknowledge as much, projecting that its real wage bill in 2020 will be 50% below the 2018 level. This is far from the end of austerity as claimed by Ncube.
It’s a sure bet that public sector wages will be increased not once, but several times next year to counter public sector pay disputes. Education fees, especially in State schools, up just 45% in the last year, while the consumer price index has risen 440%, are also set for major increases. The same applies to State health fees and to a swathe of services across the economy, including property rents.
When the price index is rebased early next year, essentials — especially food, but also transport, electricity and gas — will be given increased weightings because they are absorbing much more of the monthly consumer and business spend. This will push inflation up, not down, as Ncube and the RBZ believe. Because no-one believes the preposterous claims of ministers and officials that Zimbabweans prefer the “new” dollar to the US dollar or rand and that the Zimdollar should really be trading at seven to the US instead of 16.4, the exchange rate will continue to depreciate. The local currency trades in the parallel market at a premium of 42% (20% in early July), while the Old Mutual Implied Rate has trebled since midyear. Ncube’s regressive tax policies — VAT, fuel duty and the transactions tax — account for three-quarters of tax revenue — rely on inflation to fund government spending.
But spending is also driven up by inflation, confirmed by Ncube’s admission that his budget will fund only half the bids submitted by ministries.
It is already obvious that 2020 spending will be way above budget; quasi-fiscal spending will continue, while subsidies to Command Agriculture and the like will be camouflaged as capital expenditure funded by issuing government paper at derisory interest rates, assuming that weakened institutions continue to put subservience to government ahead of the interests of their members.
Punitive consumption taxes, cuts in the volume and quality of public services and off-budget spending failed to achieve the much-heralded budget surplus, with the Treasury’s accounts showing a deficit of Z$5,2 billion.
Mr Ncube’s austerity strategy is long past its sell-by date, illustrated by deteriorating service delivery in health, education and most recently, Air Traffic Control. He has nothing to replace it. Nowhere to go.
Next year, corporate earnings will be squeezed by cost escalations and lower inflation-adjusted revenue streams.
Wage pressures will intensify, and unemployment increase, while as the brain drain accelerates, skills will become scarcer and more costly. Consequently, productivity will flat-line or fall.
Just what the visiting IMF team will make of this remains to be seen. The Staff-Monitored Programme agreed in April has left the Fund with egg all over its face, not for the first time in its dealings with Zanu PF. It is difficult to find a single estimate or projection in the SMP that was even remotely accurate. Some – inflation, nominal and real GDP, reserve money, government revenue and spending, employment costs — are not even in the same ballpark as the April forecast.
The IMF will not explain how and why it got it so badly wrong. None of the possible explanations is flattering – technical incompetence (obviously), misled by government promises (definitely), but most disturbingly, a programmed willingness to believe what any objective observer would dismiss out of hand, long a systemic problem for both the IMF and the World Bank.
Perhaps it will extend the current programme, or conjure up a new one, hopefully with more a realistic and honest appraisal and reasonably intelligent forecasts, but don’t hold your breath.
A stronger global economic performance with firmer metal prices than currently forecast might help stabilise the economy, as would a breakthrough in re-engagement talks with the international community. Neither looks likely.
The game changer could be eventual, grudging acceptance of the inevitability of re-dollarisation. The markets certainly see it that way — witness the growth in dollar and rand transactions across many industries, including for fuel, and mineral exporters for electricity.
The gulf separating wishful thinking from reality has seldom been wider. Without radical change soon at both the political and economic levels, the country is headed for a messy endgame. Minister Ncube and indeed the entire New Dispensation project will pay the price for over-promising and under-delivering while clinging to a narrative devoid of credibility.