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Is it possible to change Zim’s economic inertia?

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SIR Isaac Newton’s law of motion holds that an object will continue moving in the same direction, and with the same velocity, unless it is affected by an external force. Unfortunately, this is clearly true of Zimbabwe’s economy as we enter 2022.

Zimbabwe’s inertia on its present path is strong. Its recent economic cycles have become so tightly spaced that a sustained rebound before the next relapse occurs is almost uncertain. It is clear that the country faces a certain crisis after each and every five years.

The latest sequence could be described as a currency crisis that started when the government first introduced the local currency and pegged it at par to the US dollar.

The local unit has been on a clear downward trajectory ever since and the authorities are fully aware.

 A conservative prognosis would suggest that, unless we see disruptive policies to change this inertia, then for the foreseeable future the country will continue to exhibit lagging exports, minimal investment, defensive ad hoc interventions, high year-on[1]year inflation currently at about 58% and climbing, persistent exchange rate pressure, slightly negative per capita growth, following a modest rebound from the pandemic, new or higher taxes to make up for a diminishing tax base, and a renewed flight of capital and people. 

 In the 2022 budget, the Finance minister projects economic growth of 7.8% and 5.5% in 2021 and 2022, respectively. Al[1]though the growth is modest, it is rather too low to inspire change in real per capita incomes as the country is coming from a consecutive two-year economic recession. Given the very low base the economy is coming from, double-digit growth would have been more ideal.

Inflation is expected to average 32% next year, which is still very high.  In sum, more of the same is expected in the short to medium term. The challenge then is to consider Newton’s second law: Are there external forces big enough to substantially alter the inertia, and begin a new (better) course? Zimbabwe is an over-diagnosed and under-executed country.

There is actually consid[1]erable consensus right now about what is needed to put the economy back on a sustainable growth path. But it would be misleading to place too much emphasis on technicalities. Since the beginning, Zimbabwe’s crisis has been political.

The way out, if it exists, must be political as well. Apart from toxic politics, Zimbabwe is grappling with two major macro-economic handicaps: insufficient exports and a feeble currency, which it looks likely to abandon.

 Let us just add that, with no Zimbabwean dollar savings, the government funds its chronic fiscal imbalances with a mix of inflation and financial repression (exchange rate controls and negative real rates), punishing the very Zimdollar holders and investors that it so badly needs.

These two handicaps feed off each other, fuelling sovereign risk, inflation, dollarisation and financial crises and, more repeatedly, the flight of companies and high-skilled jobs. In addition, due to rapid change from a socialist econo[1]my (Mugabe-era) to the current more capitalist, Zimbabwe has swiftly moved towards a path of “inclusive poverty”: The proportion of people living in abject poverty has increased even in urban areas.

Inequality gaps have widened with the rich becoming richer while the middle class has totally disappeared. Government policies, including Treasury bud[1]gets, have focused more on protecting businesses whilst neglecting the welfare of the masses.

 By the end of 2020, independent estimates suggests that only 15% of the working-age population was employed in the private sector, a ratio that will further deteriorate given the uninspiring economic growth projections, the Covid-19 pandemic and continued seclusion from the global community. 

A third ingredient is more recent and, possibly, more critical: Policy temporariness. Notably, it is not economic, but political. Several statutory instruments have been announced, creating so much uncertainty. If policy is transient and reversible, it loses its guiding effect, which is its main impact. “Wait and see” is the natural reaction to the temporary policy game.

Indeed, this policy temporariness can work in perverse ways, inverting its intended impact. What is clear for Zimbabwe is that knowing what to do is not enough. It is a mistake to think that Zimbabwe’s economic problems are economic in nature.

International financial institutions and multilateral treaties may help sustain a long-term commitment, but none of these pending assignments seems viable if they are not processed politically. Zimbabwe’s tribal polarisation has a paralysing effect when combined with the policy temporariness mentioned above.

To undo the trap, a country needs, at least, a commitment to immunise core policies from the political cycle. Political polarisation makes this minimal arrangement even less plausible and convincing. In summary, the government’s Vision 2030 economic blueprint cannot be achieved without a strong external force.

The economic growth rates have been erratic, and the worst part is that even at the peak, Zimbabwe has never matched economic growth with job creation. For the upper middle-in[1]come status to be achieved, Zimbabwe needs to sustainably record growth at more than 10% per annum. Current growth and projected rates are way too low to meet the 2030 targets.

Furthermore, current investment levels as a percentage of Gross Domestic Product stand at between 7% to 9%,  which has been the trend for the last five years. To achieve the 2030 targets, Zimbabwe needs to ramp up this figure to 25%.

 Inflation is also making the country less competitive. In Zambia, the annual inflation rate for October 2021 was 21.1%; in Botswana annual inflation rate for October 2021 was 8.8%; in South Africa annual inflation rate for October 2021 was 5%; in Malawi the annual inflation rate for October 2021 was 9%; in Namibia the annual inflation rate for October 2021 was 3.6%; and in Mozambique the annual inflation rate for October 2021 was 6.24%.

 Comparing those figures to Zimbabwe makes the economy an unattractive investment destination.  However, the pieces for an understanding are on the table.

If an agreement for political reforms is not reached, even reformists will find it hard to implement credible reforms. Without these reforms, in 10 years’ time Zimbabwe will be in worse shape than at the end of 2019, as in 2019 it was in worse shape than in the previous 10 years. Without disruptions, there is no basis for the country’s inertia to change. That is the stark reality.

*About the writer: Tinashe Kaduwo is a researcher and economist. He writes in his personal capacity. Contact [email protected] whatsapp +263773376128

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