IT is clear that austerity through high interest rates has failed to curtail inflation and bring stability in the monetary sector.
However, it has perpetuated the elites’ grip, thus weakening our society and its democratic processes. Democracy thrives when the masses are empowered, have a strong voice, thus keeping those in power under check.
This environment of high inflation and high interest is only benefitting the elite and has made the masses weaker. To move away from their grip, just reduce the interest rates since that austerity policy has failed.
We need to get out of the trap. Since about mid-2021, around the time the impact of global supply shocks – including the rise in oil prices globally starting in the 2020s also feeding into inflationary pressures – our inflation soared. In response, the Chicago boys-style policymakers, and given Zimbabwe was under an active re-engagement drive with the International Monetary Fund (IMF), with the attendant strong neoliberal and procyclical inclinations.
Overall, it has meant that the policy rate began being raised quite regularly since then, resulting in extortionary interest rates. On the other hand, lack of meaningful tax base enhancement reforms and little progressive taxation, along with few taxation measures taken to tax the very rich, not to mention lack of any meaningful external debt relief/moratorium provided by creditors, while the IMF also provided little special drawing rights (SDRs) allocation, all meant development expenditures were cut quite regularly and deeply.
In addition, lack of governance in terms of checking otherwise highly likely over-profiteering, and on the contrary inflation continued to increase even as interest rates were punitive – not to mention the cost-push channel enhancing impact of interest rates in the first place. Hence, since 2021 policy rate has remained above 150%, while CPI inflation has remained above 200%.
In one year since 2020, even a lot more severe austerity policies – different from current (non-developmental) expenditure efficiency or belt-tightening, which should indeed be adopted – in terms of both fiscal and monetary austerity policies, have resulted in weak economic growth. At the same time, CPI inflation has galloped, with authorities resorting to innovative inflation reporting, just for the numbers to look better, while the policy rate has also seen a significant increase.
Hence, procyclical and austerity policies have driven the country into serious stagflation, that is growth has been stagnating, and inflation has also not come down, in fact, increased. While the government takes pride, and rightly so, in indicating that its policies led to above-3% growth during the last two years, the growth could have been even higher.
And this would have been achieved without causing any extra burden on the current account, if counter-cyclical policies had continued even beyond mid-2021, and if there had been both a better import compression policy, and less reliance placed on using monetary policy to lure otherwise highly volatile foreign portfolio investment (FPI) or hot money.
Absence of any meaningful non-neoliberal economic, institutional market reforms, at the same time, also meant the growth rate could not have been sustained for a longer period, as the situation of twin deficits would have resurfaced, and in unsustainable manifestation.
Having said that, both the current government, and IMF did not learn from this experience of why procyclical austerity policies were not working both nationally, and also overall on the global scale, and even went harder in this direction of these wrong policies, which have spawned a highly unsustainable macro-economic situation, especially in terms of inflation, low foreign exchange reserves, and high debt distress.
There is clearly, therefore, a need for reversal of these policies. The policy rate should be reduced drastically, and quickly, given also that the inbuilt time-taking monetary transmission mechanism will likely keep retarding economic growth for the next one to two years, while a progressive taxation policy is introduced, along with tighter controls/checks placed on current expenditure, and subsidy targeting done more efficiently, to have much greater fiscal space for enhancing development expenditures, and in also providing meaningful energy subsidy, since it has a strong bearing on cost-push inflationary channel of overall inflation.
Economic policies, political parties` manifestos and budgets should reflect this change, while the government should also come up with a meaningful non-neoliberal reform strategy, especially for energy, and state-owned enterprises (SOEs) sectors, at the earliest possible, to stem huge fiscal losses on each account.
Here, for instance, better management of the energy sector could lead to a decrease in energy tariffs, and less circular debt. Lower losses by SOEs could lead to both greater fiscal space, and lessen the impact on inflation. Moreover, greater provision of Special Drawing Rights by the IMF, and more meaningful debt relief/moratorium will indeed go a long way in allowing the government to move away from procyclical, and austerity policies.
About the writer: Kaduwo is a researcher and economist. Contact: [email protected], WhatsApp +263773376128