Prof Mugano doubts Govt interventions to stabilise economy

With the year 2022 coming to an end, our reporter Martin Kadzere (MK), spoke to economic professor, Gift Mugano (GM), on the major economic highlights and prospects for 2023.

MK: In brief, please provide major highlights of the year 2022.

GM: The year 2022 was a very difficult one characterised by chronic inflation and an exchange rate spiral, which when combined, resulted in the erosion of both capital and wages — pushing people into extreme poverty. You will recall that annual inflation reached a peak of 285 percent in August 2022 up from around 57 percent in December 2021 while the official exchange rate rose from $85 against US$1 in November 2021 to $650 against US$1, that is, eight times jump.

MK: What were the main drivers of exchange rate and inflation?

GM: Both inflation and exchange rate spiral were driven by exogenous and endogenous shocks. Specific external shocks which derailed our economic progress are drought and Russia – Ukraine crisis. Because of the drought agricultural outputs in all crops declined by about 50 percent. This, coupled with the contagion effect of the Russia – Ukraine war which was transmitted through 3Fs, that is, food, fuel and fertilisers, exposed the country to imported inflation. The prices of food in global markets shot up by more than 50 percent in USD terms, while the prices of fertilisers and fuel surged by over 100 percent. I must say that in Zimbabwe our fuel prices didn’t increase by 100 percent thanks to the Government of Zimbabwe’s intervention measures which inter alia include removal of some tax heads on fuel.

On endogenous or internal factors, in the course of the year 2022, we made a number of policy missteps which inter alia including suspension of lending, excessive budget, exchange rate control and unfavourable exchange controls. The suspension of lending, although it was short lived, it was catastrophic as it was synonymous of cutting oxygen from a living creature. As far as I am concerned, this has remained a permanent shock because a number regional creditors in particular have revised terms of existing credit conditions. On exchange rate control, the auction rate was controlled for the greater part of the first half of the year. This resulted in widening disparities between the formal and black market exchange rates which were in excess of 100 percent. Resultantly, the economy suffered from massive arbitrage opportunities as economic agents used the foreign currency realised from the auction system to buy ZWL and go back on the auction to secure USD and go back again to the black market – a casino economy.

The budget outlay, in particular, poured significant liquidity into the market through funding construction work and procurement of government consumables. This, coupled with the failure of government departments to enforce value for money principles, we noted that exchange rates which were used in the pricing ranged from $1800 – $2000 against US$1 when the black market rates were hovering around ZWL$800 against US$1. With these abnormal rates, service providers had enough muscle to push the exchange rates upwards.

MK: During the course of the year we saw government instituting value-for-money measures as well as interest rate hikes. To what extent has this helped to slow down inflation and exchange rate spiral?

GM: These measures as I call them are synonymous to undertaking national fasting. The impact of such a fasting thereof will be associated with a false impression that you are saving food at the expense of serious weight loss and even death!

MK: When you say false impression of saving food, are you implying that the current stability is not sustainable?

GM: Exactly my point. We can’t sustain the current stability by refusing to pay contractors and other service providers and then think that we can hold on for a long time. Likewise, we cannot sustain stability on the back of a 200 percent interest rate. The 200 percent interest rate is killing business. There is no business which can run a business sustainably with the 200 percent interest rate. It can only be a thief which can pay back the loan four fold! This is why you see that businesses are now switching their ZWL into USD loans. This is unprecedented. It defies logic for a debtor to run away from a soft currency which naturally is eroded by inflation to the advantage of the debtor at the expense of the creditor.

MK: But conventional wisdom says that interest rate hikes are a necessary measure to mitigate inflation?

GM: Correct. But you must know that Zimbabwe is a complicated economy. The interest rate hikes, yes, slow down credit creation and contain money supply in the process. However, you must remember that money supply is also driven by the national and export retentions. For example, the current national budget shows that 42,3 percent of the budget is earmarked towards civil servants salaries and the remainder, that is, 57,7 percent is split between capital and the recurrent expenditure (which excludes salaries). So, if we consider the current of $1,9 trillion, it means that $1,1trillion will be disbursed to government service providers who will are insulated from interest rates. Likewise, in the 2023 budget $2,2 trillion was allocated towards capital and recurrent expenditures while $2,2 trillion was allocated towards salaries. Combined, it follows that $4,4 trillion budget will drive up money supply in 2023. With respect to export retentions, the RBZ doesn’t have reserves of Zimbabwe dollars nor budget set aside for the liquidation of the 40 percent and 20 percent export and domestic export retentions, respectively. This means that at every point when RBZ liquidate foreign currency, in line with the defined thresholds, it prints money.

This explains why broad money increased by $402 billion and $308 billion on -month-on-month in August and September 2022 topping broad money supply to $1,9 trillion in September 2022. Based on this observation, although the 200 percent interest has restrained money supply, that is, caused by credit creation, its effectiveness is still watered/weakened by the resurgence of money supply from the budget and liquidation of export retentions. Going forward, in view of the fact that the RBZ has announced that it will review the 200 percent interest rate and export retentions in March 2023, it follows that money supply will continue to increase mainly through the channels of higher export retentions and budget spending.

MK: As we enter into 2023, what is the outlook?

GM: The economic outlook remains gloomy and dire characterised by high inflation and runaway exchange rate. In view, by mid-year, inflation will top 400 percent while black market exchange rate will be hovering around $1500 against US$1. Of course, the circulation of local currency will be very thin.

MK: But the Minister of Finance and Economic Development’s budget assumptions are based on stable macroeconomic environment?

GM: Far from it. The facts and statistics provided in the 2023 budget reveals a formal exchange rate of about $1000 against US$1, that is, more than 50 percent jump from the current rate. This doesn’t show stability. Likewise, the fact that the budget outturn is expected to be $4,5 trillion and national output is expected to increase by 130 percent to $23 trillion (from ZWL$10 trillion) when the economic growth is expected to be 3.8 percent gives a clear explanation that these increases are as a result on inflation.

MK: In your view, what is lacking in our policies and what policy measures should be implemented by government in 2023?

GM: Overall, the current policies are not focusing on the root cause of economic challenges, that is, production challenges in agriculture, energy, manufacturing, transport, etc); corruption and politics hence the reason why the country failed to escape economic turmoil for the last 25 years. In addition, these policies have entrenched command economics which provide opportunities for rent seeking behaviour, wastage of resources and a casino economy. This is the view I will use to inform the economic outlook in subsequent section.

So going forward, we must disband command economics in favour of a well regulated market economy. In addition, we need to urgently scrap the 20 percent domestic export retention and reduce 40 percent export retention to 10 percent with a view to reduce money supply and promote banking of foreign currency. Likewise, the 200 percent interest rate must be reduced to 80 percent to spur production.

On electricity, we need to have proper pricing so that ZESA can quickly build cashflows required to import power and service their plants. It defies logic for ZESA to be asked to price its power at US3c/KwH when the very same companies pays more than US30c KwH through the use of generators. To be specific, I am advocating for a tariff of US15c kwhr, that is, above the traditional rate of 12KwH and this must be paid exclusively in US dollars. Let us bit the bullet. Finally, from political perspective, in line with President Mnangagwa’s for tolerance in politics and economic debates, in 2023, we must rise above the rest as a country so that we run violence free elections. This is a key requirement for both economic development and international engagement. There is no need for us to fight. We are all Zimbabweans. The President has spoken we must follow the directive.-ebusinessweekly