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Editorial Comment: Let’s create real wealth from productivity

15 Oct, 2020 - 00:10 0 Views
Editorial Comment: Let’s create real wealth from productivity

The Herald

The stabilisation of prices as a result of the foreign currency auction system that previously stabilised the exchange rate was confirmed this week when ZimStat put out its latest figures, those for September.

Between mid-August and mid-September the cost of living rose 3,83 percent, having fallen sharply to 8,44 percent in the previous month from the appalling 35,53 percent in July, the worst this year, although June’s 31,66 percent ran it close.

In fact, except for the weird and anomalous January figure, this is the lowest monthly inflation since early last year, just before the black market exchange rates started taking off into orbit and the Reserve Bank of Zimbabwe started the reforms by introducing the now defunct interbank market, but a reform that began the process of finally taking into account the massive printing of fake US dollars during the last decade of the First Republic.

Everyone agrees that the price stability is a direct result of the foreign exchange stability that we started to see at the end of June when the auction system started and has become entrenched since around mid-August, from when weekly movements have been minute.

The market-related process of price discovery did in the first few weeks of the auction system start matching the amount of Zimbabwe dollars in importers’ bank accounts with the requirements of those importers. The openness and transparency of this process meant that the RBZ was unable to interfere in how importers saw the value of both the local currency and the US dollar.

The fact that the last seven auctions have seen the Zimbabwe dollar firming slightly, culminating in a firming of just one three hundredth of a percent on Tuesday, strengthens the belief that stability has been obtained. The minuscule weekly firming is simply a sign that the vast majority of importers are pitching their bids into an ever tighter range. The larger fluctuations in the top bid and, to a lesser extent in the bottom bid, have had almost zero effect on the exchange rate, implying that a growing majority of bidders are now in a very tight range.

We can now expect minute weekly shifts, and even if some see the rate go up slightly, while some see it fall slightly, the actual movements will remain small.

Changes in the cost of living now need to be explained by other factors and will arise from actual changes in costs.

Since stability there has been a little catching up. The biggest one is in electricity prices, when Zesa managed to get a 50 percent tariff rise recently, although the modest cross-subsidisation of the first small block of energy for homes means that a basic electricity supply for a small house remains quite low, and if everyone is watching their meters with great care every day that is all to the good.

Zupco’s movement away from an almost pure subsidy finance system to fares that start matching actual costs still produces significantly lower fares than those charged by the pirate kombis and mushikashika, and the advantage of large buses in controlling costs per passenger carried becomes ever more obvious.

The end of the subsidy on roller meal and using the budget for that subsidy to upgrade the social payments to the poor will have little practical effect on the actual cost of living. Most people were unable to buy subsidised roller meal, and all the subsidy was doing was enriching those in the black market, who were well-connected.

That corruption problem is one effect of subsidies, as we have seen many times. The other problem of subsidies is their inefficiency. The roller meal subsidy, for example, subsidised the rich and the poor.

Now the money for the subsidy goes to the poor alone. The Zesa cross subsidy does help the rich, but only very modestly. Two hundred units is way below what someone with even two bathrooms requires, let alone the owner of a decent Borrowdale mansion. In any case you cannot sell cheaper electricity on the black market, so abuse is automatically impossible.

The advantages of keeping the poorer households healthier and out of the firewood and charcoal markets has such huge environmental benefits that the modest distortion in the Zesa tariff schedule is far outweighed by the advantages.

Of course, the dreadful inflation seen over 15 months as exchange rate systems were totally reformed and the rates themselves finally stabilised still has its effects. A lot of people are poorer. The Government’s focus on social transfers, rather than messing with economic fundamentals or funding inefficient subsidies, is the best-practice solution to absolute poverty. As producers start getting re-organised, and this includes the Government-backed upgrade of agriculture productivity, real incomes can start rising, based on real rises in production.

The Zimbabwe Congress of Trade Unions, an organisation that obviously wants to see rises in real incomes for the ordinary worker, has also rather suddenly moved into the real and practical world. In pre-Budget consultations, the ZCTU came up with the suggestion that income tax should not be charged on incomes below the poverty datum line, a suggestion that the Government should think about seriously. The switch to indirect taxation in the form of VAT and the transfer taxes means that these households will still contribute to the national revenue.

Another suggestion is reforming the band system. The next band up from the zero band is 20 percent. That is a large jump. Why not look at a 10 percent band instead? There are limits to tax reform as the Government itself, with its determination to live off taxes rather than printing presses and its needs to pay its own workers and fund development, cannot afford a severe drop in revenue.

But it can adjust the system better to ensure that everyone chips in, if only through indirect taxes, but that the lowest paid are not hammered. Figuring out how to get the last squeeze of VAT or its equivalent from the informal sector would also help level playing fields as well as push more people into registering as taxpayers to gain the benefits of zero brackets. Dairy farmers can tell the Minister of Finance and Economic Development that you get more milk when you milk healthy cows.

The cost of living and exchange rate statistics now imply we have absorbed the consequences of the high levels of fiscal and monetary indiscipline of the First Republic, and can start winning from the discipline of the Second Republic and its stress on creating real wealth from production, not fairy tales.

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