ZIMBABWE COULD FORUMLATE US$-DRIVEN ECONOMIC POLICIES FOR SUCCESSFUL GROWTH Notes from a talk to business leaders at a Deloitte get-together evening on 21 April 2016, Harare, Zimbabwe
Summary: Since Zimbabwe predominantly uses the US$, it could take full advantage of the currency by a better alignment of its macro-economic policies with hard currency economies (the way EU insists on common macro-economic performance indicators; or even the way members of the South African Customs Union, SACU, generally harmonise their macro-economic policies with the Rand monetary policy to avoid serious economic distortions). By not aligning its macro-economic policies with those of hard currency zone countries, Zimbabwe has generated unnecessary distortions in the economy and delayed the prospects for quick economic recovery. Furthermore, since Zimbabwe is the only economy using the US$ in SADC, is geographically-located at the heart of the region, and has a large base of skilled human resource, the country could carry out comprehensive structural economic reforms aligned with hard currency zones, achieve greater global integration, and lay the foundation for the country to become the centre of a regional economic revival and expansion this Century. In these discussion notes, policy ideas have been presented in a series of “what if” questions after a short outline of the global and regional contexts as well as a summary of a few key current national economic indicators.
The world economy in 2014 had a total GDP (nominal) of $78 trillion, with the two largest economic players (USA and China) accounting for 37% of the GDP – 23% by USA and 14% by China. With an economy of $18 trillion, the USA was also the “holder of the global currency”; while China with the smaller economy of $11 trillion held the title of “manufacturer for the world”
The USA has in the last decade emerged as the leader in technological innovation, with steady economic growth driven by low interest rates, growth of a green economy, and perception of a safe currency by investors in an environment of concerns over growing global insecurity. The US has used its status as holder of global currency to engage in quantitative easing (money printing) to help the world stabilize financial markets after the 2008 global food and financial crisis.
China on the other is in the middle of major changes in its economic development, particularly with its monetary policy of moving towards global convertibility of its currency once the Yuan becomes part of the IMF Special Drawing Rights (SDR) currency reserve. Contrary to popular perceptions, China’s economy is not declining, but it is changing; moving away from manufacturing to services: and some might say to a more balanced economy in the long-term. As a result of these changes at the global level;
· Commodity prices have steadily declined (oil, platinum, gold, and others) as demand for raw materials has fallen. New orders for finished products and consumption of energy to carry out manufacturing have also declined.
· New relations are emerging that will shape the division of labour between nations in the global economy.
· Many currencies have depreciated against the US$, the global trading currency, at a time when Europe is pinned down by a major crisis in migration that is turning into a political and economic crisis; and Japan and a few other hard currency zones have remained in deflation.
· There is expectation that significant consumption of nickel, copper, zinc, tin, steel, aluminium, and others will recover somewhat once stockpiles from the period of over-supply are used up. Equally, China still has plans to implement big infrastructure programs, e.g. the “One Road, One Belt” initiative of a $46 billion infrastructure corridor through Pakistan to the sea.
This policy shift in China gained momentum in 2012 and it is expected that by 2022, the Chinese economy will have shifted away from manufacturing to :
· Consumption and service industries.
· Financial services,
· Entertainment, and
· Tourism and more;
although the shift will not be fast enough to offset the massive size of the manufacturing sector. China has also relaxed rules for foreigners to purchase mainland property, and strong commodity imports will remain steady.
South Africa is the dominant economy in the SADC region, with a GDP (nominal) of over US$0.3 trillion. Zimbabwe’s nominal GDP per capita of US$1,054 compares with its PPP GDP of $2,133; but this is less than 20% of South Africa numbers(nominal GDP of $5,859 and PPP GDP of $13,321). With its membership of 14 countries, SADC has a population of 280 million, with a land mass slightly bigger than that of the US or China. While India is only one-third the geographical size of SADC, it has five times the population; but India and SADC have the same economy as measured by nominal GDP of US$ 2 trillion each. With its “mineral belt” comprising of Mozambique, Zimbabwe, Zambia, DRC, Angola, and Tanzania (South Africa and Namibia are part of the same belt, but with significant depletion from past exploitation); the SADC region has great potential to become a centre of economic growth in the world.
Like every other nation, economic performance is the product of national policies and how well they take into account domestic, regional and global political-economic trends. It is for this reason that the above summary of both global and regional context provides the backdrop to discussing the Zimbabwe economy in 2016 and beyond.
After the 2010-2012 high growth rates of just over 10%, the post-2013 economy has growth rates of around 3% per annum. Government revenue collections are near stagnant after 2012; with a growing share of government revenue going towards employment costs for civil service (which one estimate shows the wages as having increased faster than economic growth by a factor of 5). The economy is also facing a severe drought requiring high food imports, has a severe shortage of cash given low economic production combined with high imports), and is showing growing indebtedness (around US$10 billion).
During the first Quarter of 2016, Zimbabwe exports were worth $0.63 billion against imports of $1.32 billion (more than double the exports as has been the pattern over the years since dollarization in 2009). This pattern has led the RBZ Deputy Governor, Dr Kuphukile Mlambo, to observe that “Every year we are exporting cash up to $3 billion through the importation of goods from other countries. If we are exporting $3 billion every year that is the reason we don’t have cash in the economy” and lamented that these imports largely meet consumption needs and for some products that are manufactured locally (with such items as apples accounting for US$1 million; while, chewing gum, and mineral water account for another US$1 million of imports during the quarter).
Government revenue already accounts for close to 30% of GDP, making it difficult for taxes to be raised to meet growing spending needs, and especially so for a highly informal economy. Options for higher government revenue to finance service provision would have to come from higher production, but this is made difficult by high production costs (especially in the mining secor where depressed commodity prices undermine viability, and help for these mines might be needed to help them survive this period while waiting for global commodity prices to recover).
Zimbabwe is ranked 125th out of 140 countries in the 2015/2016 Global Competitiveness Index (GCI) report compiled by the World Economic Forum; with the main obstacles to competitiveness being poor access to finance, policy instability, restrictive labour regulations, and overvalued exchange. It is also difficult for Zimbabwe to compete with its neigbours when its price for fuel (petrol and diesel) are the highest and at least 20% above the regional average.
What if Zimbabweans could…
1. learn lessons in economic reform from the Look East Policy?
A major lesson from China is that “if you are going to reform, be bold, be decisive, be deliberate”. China has since 1948 used ten-year policy shifts to transform its economy and society:-
◦ 1949: Peoples Republic of China established
◦ 1958: Great Leap Forward launched
◦ 1966: Cultural Revulition started
◦ 1978: Den Xiaoping economic reforms started a transition from Planned to Mixed Economy
◦ 1990s: China pulled 150 million peasants out of poverty
◦ 1912: Large-scale economic reforms commenced
There is recognition that reforms are difficult, but that useful lessons also exist from around the world if the policy makers seek out these lessons.
2. realize the great promise of Lima debt and arrears clearance?
To clear its debts (inclusive of arrears), Zimbabwe will need to formulate and commence implementation of a Transformative Economic Policy Agenda that includes:-
◦ Government “living within its means” as being formulated by Government
◦ Reforms around areas impacting on “Improved Business Environment” as led by OPC/NECF
Implementation of such an agenda should trigger debt clearance processes for:-
◦ IBRD ($1 billion) using a soft loan from a third party
◦ IDA ($200 million) from internal WB provisions
◦ AfDB ($600 million) from internal AfDB provisions
◦ IMF ($120 million) from Escrow Account held by IMF
◦ Paris Club after suitable negotiations
3. formulate structural economic policy reforms after Lima?
Government has made a number of policy commitments as part of realizing the promise of Lima on debt and arrears clearance; and especially to:-
Progressively stagger the reduction of wage bill to 52 percent from 82 percent of expenditure by 2019
Remove Indigenization and Economic Empowerment (IEE) from the list of issues hindering the improvement of Business and Investment Climate in Zimbabwe. In this regard,
(a) The Ministry of IEE will co-ordinate implementation of legislation by line ministers and agencies like RBZ;
(b) Empowerment will mainly be by “ensuring that the local content retained in Zimbabwe by businesses is not less than 75% of gross value of exploited resources - in the form of wages, salaries, taxation, community share ownership schemes and other activities such as procurement and linkage programmes”; and
(c) Government is “prepared to amend the law “forthwith” to reflect a refined policy thrust”; and hopefully align Regulations with any such ammended Act (extracted from latest clarification by the President of Zimbabwe, R.G. Mugabe).
4. make Special Economic Zones (SEZs) work?
China’s Shenzhen SEZ was established in May 1980, paved the way for seven more SEZs, and made China the global manufacturing centre. These lessons are relevant for Zimbabwe and SADC.
Since Zimbabwe is the only dollarized economy in SADC, could the declaration of Zimbabwe as an SEZ drive both national and regional economic take-off?
Can SEZs become magnets for global private sector investments in infrastructure, mining, agriculture, and services to drive the region towards greater growth and prosperity?
How can we work so that the new SEZ policy use more predictable than IIE (Act and Regulations)?
Government is commited to formulating an SEZ Bill that will become law by mid-2016 (to be followed with aligned Regulations) after lessons from global experiences to attract Foreign Direct Investments and increase economic production are taken into account.
Proposed provisions in the SEZ bill are that licenced investorswill be able to seek approval to not have the Labour Act (Chapter 28:01) and the IEE Act (Chapter 14:33”).
5. reach a Compact on Reforms between Business and Government leadership?
Can Business show Government that 75% of earnings from mines and other businesses are retained in Zimbabwe (i.e. a 25% ROI?)?
In return, can Business ask Government to:-
◦ Honour the above commitment on Indigenisation and Economic Empowerment; and amend the law and attendant regulations?
◦ Conclude the Fast Track Land Reform Program, as 16 years after it started is quite a long revolution (most revolutions are of a shorter duration)?
Could Business commit to ensuring that at least 40% of future imports will be on capital goods (which should be attractive given that Chinese and South African currencies have depreciated and capital goods are cheaper in US$)? This could pave the way for a compact over higher duties on a few luxury items for a fixed period while the Zimbabwe economy recovers its productive capacity in areas where the country is competitive in areas the country has a comparative advantage.
6. make a commitment to pick ourselves up?
To paraphrase Obama on America: “we must pick ourselves up, dust ourselves off, and begin again the work of remaking [Africa, or Zimbabwe]” – Obama Inauguration Speech, 20 January 2009
What if the business leadership and population committed to:-
◦ Saving at least 10% of current incomes?
◦ Buying from Mbare and satellite community markets for local produce as long as they can at least demonstrate SA price equivalence?
◦ Finding new and innovative ways to invest in the Youth as the creators of tomorrow’s enterprises?
7. agree to join hands?
And say that we are
◦ Tired of complaining
◦ Tired of seeing the glass half-full
◦ Tired of Afro-pessimism
◦ Tired of hearing “This is Africa – TIA”
◦ Tired of not seeing the rainbow
◦ Tired of behaving as though we are just here in transit
◦ Tired of not believing in the future
And take our US$ to the Region and become the Foreign Direct Investors wherever favourable structural economic policy policies are in place?
And place national economic development goals above personal political interests?