eBusiness Weekly
Clifford Shambare
This is the second instalment of this series.
In the last part of the first instalment of this article I promised to continue our discourse starting with the Government’s “policy shift” on monetary and fiscal policies. As far as monetary policy goes, the Zimbabwe Government is grappling with a situation where it is finding very little room in which to manoeuvre. The origin of this challenge is the economic meltdown of 2008 when the Zimbabwe dollar virtually evaporated into nothingness.
After that, a decision was made to introduce a multi-currency regime into the economy. To me, this is the time when a lot happened (in the economy) whose cause and basis many Zimbabweans did not, and still do not seem to comprehend. I shall proceed to give my reasons for arguing this way.
First of all, the real cause of our challenge was the capital flight that took place after the land reform programme. Because of this phenomenon, the economy lost the capacity to manufacture goods — a process that was logically followed by inflation that in turn, killed the country’s currency, the Zimbabwe dollar. The ordinary man in the street, seemed to have not been able to decipher the cause and effect mechanism at play in this process. The interesting but tragic part of that event, were the people’s attitudes and perceptions of what had actually happened. To most people, it appeared as if the supermarket shelves just ended up ‘empty overnight’ To them, the Government had committed a serious crime that had annoyed the business fraternity whom they knew in their heart of hearts, to be the white community in the country. However, they seemed to be somehow uneasy about owning up to this fact in public discussions on the matter.
As a result, some expressed this fear (or anger) in a number of ways in which the race element was either obliquely referred to, or (was) mentioned in hushed tones. Naturally, most people began a process of attribution — at the same time trying to decipher the reasons for such a phenomenon, which they had never experienced before in their lives. Most of them attributed it to the “reckless actions by the Mugabe Administration”.
So why did they think the way they did; and was their thinking rational? I shall start by answering the second question. Yes, it definitely was rational. However, the answer to the first question is not that straightforward, but it is interesting in a number of ways. You see, many ordinary people expect their (political) leaders to make major decisions on issues that affect their lives, on their behalf; this is why they elect them into office in the first place. It is the same the world over.
However, in our case, people demonstrated their “failure to connect the dots”, so said Steve Jobs. They also exhibited short memories in that they seemed to have forgotten that during the colonial period two decades or so before, black people were not even allowed to walk in First Street for example — let alone go into a supermarket! In this case, they also failed to appreciate the very likely possibility that their adversary, the colonist, would retaliate on the government’s action (of acquiring land), one way or the other.
That said, ironically, during that period — a period under which blacks lived under an enforced form of austerity — goods were always available in the shops in the townships where they lived. The other irony embedded in this matter was that people did not always have the money to buy what they wanted since in the townships, there were always people from the Reserves (communal areas), surreptitiously accommodated there, looking for jobs. But interestingly, nobody seemed to complain about their plight then. And talking of unemployment — that dreaded phenomenon — how many Zimbabweans even think of what the unemployment rate was during those days? And this was a phenomenon that only affected the Africans then, and still does today!
So here lies the challenge, come 2008 and the people could not connect the fact that it was the same guy who owned the said supermarket, who closed it because he had been annoyed by the action the government had taken — that of seizing his land. And if you remember, this is the time when most whites did their own private exchanges in those goods that were unavailable in the shops. At the same time, most of them just quietly went to do their shopping for manufactured goods in South Africa. This is also the period that some of them quietly left the country for greener pastures or to wait until things got better.
On the other hand, among the people were the youths who had never experienced such tough conditions, being “born frees” as they say. This latter situation further complicated matters. I think to some extent, these are the same feelings that have now been extended to the bitterness of the youths against the current government. And sadly, many people could connect these challenges to the land reform programme, let alone to the liberation war.
So back to monetary policy where we find ourselves with a multi-currency regime with its many contradictions. At that time things seemed to have started to improve somewhat since the US dollar somehow stabilised the prices of most goods. People felt better then than before, since the introduction of this currency into the economy enabled some companies to import ‘raw materials’ and to access working capital as well as to import a limited amount of machinery and spares. Household product prices also remained relatively low and so one could fill their shopping basket for as little as twenty dollars!
And interestingly, this currency was well received by Zimbabweans who saw it as a panacea for all their monetary challenges. This perception on its own, can be a source of interesting debate since it also carries a psychological element within it — an element in which the mere use of a US currency, the currency of a superpower and a hard currency for that matter — may have had its own effect on them. (This effect still lingers on among us!).
The latter was a phenomenon that was not necessarily monetary in nature. But whatever the reason, this attitude seems to have blinded the people to the negative effect of the introduction of the US dollar into the economy — that of constraining real economic growth.
Be that as it may, this is the period during which the government, through the RBZ, lost considerable control of the monetary system due to the dominance of the US dollar in the economy. At the same time the RBZ lost moral suasion to influence interest rates, the control of money supply as well as the movement of money in and out of the system. This is the genesis of the challenges that dog the government today, vis-a-vis monetary policy.
That said, we have to recognise another important fact here. As I have said in my other instalments in this paper, the manufacturing industry should boost the economy by producing tangible goods so that the Central Bank becomes more confident and flexible in its money supply activities. No monetary administrator will print money to put into a non-productive economy since this action automatically leads to inflation.
At this juncture, let us move on to Zimbabwe government’s fiscal policy. This government has so far got a lot of flak from the private sector, which accuses it of ‘profligacy and overspending resulting in budget virementation activities and finally budget deficits’. In this case we need to look at the matter holistically. To begin with, government cannot deny these allegations with a straight face. However, it is trying to contain the situation as evidenced by the current budget surplus although it cannot ignore the need to continue to work hard to improve the situation since it is the long term that is critical here.
That said, what I said about the relationship between the private sector and the government’s monetary policy and consequent action, still applies here. First of all it is critical to appreciate that corporate taxes, both direct and indirect — are any government’s biggest source of revenue.
At this juncture, let us critically look into the relationship between the government and the corporate sector in Zimbabwe. This is a relationship that has a unique history in that the two had been intimate right from the birth of this economy in the early 1900s until the period after independence in the early 1980s. Apparently, as a result of this intimacy, the corporate sector seems to have tolerated very high tax rates. Interestingly though, these taxes have fallen over the years from the initial 45 percent to 30 percent by 2010 to the current 25 percent — a rate that is still much higher than that for most African countries.
This rather odd situation can only be explained by the fact that since the major companies in the country meant to stay they may have tacitly agreed to a high tax regime for purposes of using those taxes for permanent infrastructural development, working with the government in doing so. However, over the years these companies have undergone some subtle changes that have made them virtually hostile to the current government. The way I see the matter, this is the source of a good part of the challenges the economy is facing today. (But because of the fairly complex nature of this phenomenon, I shall leave it for consideration in latter articles.)
Be that as it may, when considered holistically (in general terms) the relationship between the state and the private sector can be viewed and /or regarded as a two sided equation whose two sides comprise revenue and expenditure. On one side of the equation is the government, whose sources of income are taxes, state enterprises, internal and external debt, as well as other minor sources such as general services and donor funds. On the other side of the equation is the private sector, which contributes to government revenue mainly through the said taxes.
This situation implies that if economic activity is low and government expenditure grows or even remains constant, the latter will appear to be overspending. This situation creates a chicken and egg conundrum since a vibrant economy springs from a healthy (enabling) environment with the necessary infrastructure and an efficient public service. It also depends on functional institutions, another area that on its own, makes up an important aspect of governance, which is necessary for a healthy economy. So by looking at the situation this way, we can see that the government and the private sector have to work together to achieve economic success. This is the case in all successful economies, whether developed or emerging ones; and this was the case also in Rhodesia up to 1980.
Be that as it may, the way the government manages its budget remains critical here since it is controlled by the level of its revenue(s). If the latter is unthrifty, it will continually incur budget overruns, a situation that does not bode well for its efficiency and effectiveness, and consequently, its relationship with its creditors. In this respect, it is not an exaggeration to assert that so far, the Zimbabwe government has displayed profligate tendencies.
This characteristic — one that has been the government’s bane up to this day—seems to have reared its ugly head soon after the death of Douglas Colville Smith, the former RF member and financial expert — a man well respected by the black government of the day for the way he managed the fiscus during his time. This is a case that seems to lend credence to the perception that blacks cannot manage their finances well, this is why they are poor! Personally, I well remember Ian Smith — cheesed off by the way the new black government ran its finances — quipping sarcastically; “This government spends money like water from a tap!”
Notwithstanding this situation, there is another feature of government expenditure that we cannot ignore here. In a way, the government’s budget is controlled by externalities that limit its flexibility regarding its expenditure demands. For example, education and health make their demand on the fiscus — a demand that is controlled by population growth, not by the government’s whims. In the same vein, infrastructural development makes the same demands on the fiscus, even though sometimes government ignores it at the nation’s peril. (To be continued)
◆ Clifford Shambare is an agriculturist-cum-economist and is reachable on 0774960937.
