Different routes, same consequences This was the scene was a common site in 2008
This was the scene was a common site in 2008

This was the scene was a common site in 2008

Linda Tsarwe Business Correspondent
As much as this country is rich with nostalgic history, 2008 is one year most Zimbabweans do not wish to relive.
Although the problems had started before, 2008 was the year of reckoning as all the economic challenges ballooned out of out control.
The coming in of the multi-currency brought great relief to the anguishes of hyperinflation and a streak of hope for a better future. However, five years down the line, the economy seems to be in the gutter. It is battered with a number of challenges and begs the question of where we are headed to.

The greatest fear among many is whether or not we are heading towards the 2008 scenario, using only a different path.
For some readers, this may come as a surprise. The current environment appears rather different from that of the hyperinflation period. While inflation was skyrocketing and currency was losing value daily in 2008, the environment is currently stable with the US dollar being the main currency in use. Goods are evidently in abundant supply, and the yesteryear queues which symbolised a constrained supply chain are nowhere in sight.

Furthermore, the black market which took advantage of a non-functional formal supply system during hyperinflation, is clearly a phenomenon of the past. Given such a snapshot preview of the state of the economy, why would anyone liken the current to 2008?

A fine dissection of the economy will show that it is myopic to deem the economy as functional on such a micro perspective. Macro-economic challenges in this economy have a great resemblance, if not the same, to those of the hyperinflation era. Firstly, the country is in deflation.

There have been arguments among economists and other market players on whether or not the country is really in deflation or its just price correction. Whatever the conclusion might be, statistics still show that our inflation is negative.

For the month of June, year on year inflation was negative 0,08 pc a gain from a negative 0,19 percent in May. This phenomenon has been blamed on weakening aggregate demand. Common man might confuse this as good because loosely speaking, it can be viewed as the opposite of hyperinflation. However, deflation is just as harmful as excessive inflation. Consumers are cash strapped and their spending is lower. Being the biggest component of aggregate expenditure, a fall in consumer spending can only lead to a contracting economy.

For Zimbabwe this is disastrous considering that the economy is not even at full employment and therefore the deflationary gap will continue to widen. Due to the low demand, among other factors, companies are forced to downsize in line with declining business activity. In extreme cases, some have actually closed shop due to unviability.

Recently we witnessed the closure of one of the oldest stores, Greatermans. Fall of such giants leaves a lot to be desired. One can only imagine what will become of other small players when such market leaders are surrendering their guns.

Of course Greatermans had its fair share of operational challenges but low demand was one major factor. Similarly, in hyperinflation a number of companies closed shop due to unviability.

Unlike now where aggregate demand has desiccated, companies in hyperinflation failed to stay afloat due to failure to fund raw materials or stock.
Revenue was being generated in Zimbabwe dollars, yet raw materials required hard currency to import. Therefore manufacturers, for instance,had an impossible economic situation on their hands and closing shop was the only rational decision for many.

It would probably have been a different story if the country had received a substantial flow of foreign direct investment just after dollarisation.
Possibly our current capacity utilisation in the manufacturing sector would have climbed up much further than the 30 percent it is now. Banks would have been sitting at comfortable liquidity levels, extending long term cheaper credit to the economy.

However, foreign capital inflows since 2009 are quite measly considering what our peers in the continent are receiving. Kenya successfully raised $2 billion in the Eurobond market, in an issue that was actually oversubscribed. These funds were to be channelled towards infrastructure development.

At the moment, Kenya is a force to reckon with as far as development in Africa is concerned. Another case is that of Zambia which managed to raise funds in the past to finance its budget deficit and will be going back in the market to do the same this year. Interestingly, Zimbabwe has not managed to receive anything substantial in budgetary support in a long time. The country is currently operating with a budget deficit and recurrent expenditure continue to dominate the budget due to a huge civil service bill and just like in the days of hyperinflation, capital expenditure is continuously crowded out.

Although the current environment might appear different from that of 2008, it is seemingly the flip side of the same coin. Factors leading to the demise of the economy are somewhat different but the consequences are the same. Aggregate demand is nose-diving and has the same destructive effect of driving companies out of business.

Unemployment is still high and feared to increase if the trend in company closures continue. The economy is facing deflationary pressures, which is just as troublesome as hyperinflation as they both bring more harm than good.

Liquidity challenges are the order of the day and furthermore the tax collector is failing to meet targets on revenue. Recession is possibly looming if nothing is done to stimulate the economy.

Given the severity of the state of our economy, there is need to swiftly act to prevent a brewing of another 2008. Old Mutual established a Youth Fund to provide capital for young entrepreneurs.

Unfortunately, the loans turned out to be non-performing and CABS, the disbursing bank, had to suspend issuing out more. This is quite disappointing as the group had made strides to support the informal sector, only to be let down by delinquent borrowers.

Notwithstanding that, more resources are obviously required to capitalise slumbering industries. This will positively contribute to GDP growth, creating employment and increasing disposable income.

Foreign capital flows are our only bet to getting the economy on its feet again, but this can only trickle in once investor friendly policies are enforced.  More bilateral agreements can be signed and ensure that they are honoured. As long as an investor is guaranteed of safety of investment, the investment opportunities and returns in this country are lucrative enough to attract them.

The country can also become more integrated in the global unions to derive benefits of trade, skill and technical expertise. Otherwise we might be on the verge of witnessing the other side of 2008, though through a different path, but with potentially the same consequences.

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