The recently announced Monetary Policy Statement (MPS) was couched around rebalancing the Zimbabwe economy towards more production, which will be achieved through a reduction in consumption. Production deficiency has been identified as the major challenge weighing down the economy. This is exacerbated by high consumption levels, which has resulted in increased dependence on imports making the country a “supermarket” economy.
To put this into context, Zimbabwe consumes more than 80 percent of its GDP meaning less than 20 percent is available for investment annually. The bulk of investments go towards replacement of obsolete equipment leaving less for new capital formation.
No country faced with this situation can hope to grow. A country that doesn’t invest will also not generate income and employment and may be caught in this vicious cycle for a long time, unless bold steps are taken to rebalance or adjust its economy.
What underpins RBZ’s notion of economic rebalancing is the logic that the adjustment towards increased production and reduced consumption will be complemented by the reduction in imports and increase in exports. As the country starts to produce more than its domestic requirements, it will have to export and earn more revenue. This way a strong economic growth let alone recovery can be achieved. That’s why economic rebalancing is seen as a panacea to the country’s economic woes today.
While the notion of economic rebalancing outlined above makes sound economic sense on paper, my view is that to taut it as the panacea to the country’s economic challenges is overly simplistic. Changing the structure of an economy from a consumptive to a productive one is not an easy task. It requires time and in our case may take a couple of decades to get to where protagonist of this rebalancing would see a desirable balance. A look at China’s problems today bears testimony to this proportion. China’s biggest challenge is to transform its economy from an investment led growth model to a consumer driven one — exactly opposite the direction we want to take our economy. China’s economy is now expected to grow at less than 7 percent from average growth rate of more than 9 percent prior the global financial crises as it struggles to adjust towards increased domestic consumption. That’s why the country is suffering from over investment, which may last for a long period and may even result in a hard landing scenario.
Given the structure of the economy characterised with shrinking private sector and growing share of public services, the journey towards creating a productive economy will require massive trimming of public expenditure notably labour costs. Economic Structural Adjustment Programme (ESAP) tried to rationalise the public service sector and the consequences were dire.
If the Government decides to retrench, it can only do so at the expense of increasing the informal sector, which is itself a drag on economic growth today. This leaves the Government with limited options such as cleaning up ghost workers,freezing wage increases together with new posts, among other measures that could be implemented to rationalise the civil service.
However, these measures are not enough to achieve the desired results suggesting that economic rebalancing, though necessary,may not be achievable in the short run.
Research has shown that to sustain a productive economy there is need to build a strong base of investible resources mainly savings. However, with a poor savings culture in Zimbabwe it will take time to transform the country from a consumer economy to a net saver. The country’s hyperinflation policies prior dollarisation are widely blamed for this poor saving culture.
Savings of all forms from short-term to long-term savings such as insurance and pension funds will remain scarce in the short to medium term despite RBZ’s drive to promote a saving culture through financial inclusion among other measures. Arguably so because financial inclusion may not produce the best results in an economy faced with high and increasing levels of unemployment and the informal sector.
Given the significance of long-term savings in driving the country’s long-term economic growth, there is need to transform institutions charged with responsibility to grow national savings, notably Pension Funds and National Social Security Authority (NSSA), into more efficient, well managed and regulated institutions. The thrust should be towards rebuilding the contract of trust between saving institutions and the investing public, which was broken at the experience of hyperinflation. This transmission may be weighed down by Government’s tendency to “trim,” to compromise, to avoid taking a bold and principled stand required to strengthen its institutions and make them more credible, reliable and efficient in both mobilisation and deployment of national savings.
The need to transform national institutions extend beyond pension funds and NSSA, to the institutions of learning and training. Achieving a productive economy starts with the country’s education system, which points to the need for transformation from academic towards practical and technical bias.
The now famous Science, Technology, Engineering and Mathematics (STEM) project immediately comes to mind as a Government initiative to transform the country’s education system. A production oriented country like German, prioritises vocational training and education over academic education. This structural change will be necessary in Zimbabwe as we try to transform our labour market into a more competitive one supportive of a productive economy. While the STEM programme has generated a lot of excitement among the general Zimbabweans it should be complemented by industry through establishment of more vocational training centres and apprenticeship structures supportive of the transition towards a productive economy.
While the idea of rebalancing the economy towards more production is plausible,the feasibly of how this transition could be achieved remains largely unexplored. RBZ seems to be convinced that a low interest rate regime will support the growth of the productive sector in Zimbabwe. In this connection a maximum all-in interest rate of 15 percent per annum to the productive sector has been set for the banks to comply with whilst penalty rates should not exceed 18 percent per annum.
Whilst the causality between lower interest rates and higher levels of production may be strong, tight liquidity conditions will weigh down credit creation by banks as they go for quality.
Ideally a low interest rate regime would need to be supported with higher levels of liquidity which may not be easily achievable Zimbabwe, with low savings. — To be continued next week.
Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can use my email address [email protected] or WhatsApp on +263 773 030 691.