Recession depends on Govt discipline

Zimbabwe has had a turbulent fight against inflation, but seems like they are back to winning the war ever since the change in policy where they have introduced tight monetary measures that have brought stability for two successive months.

The situation has brought relief to consumers and given businesses an opportunity to plan ahead with a close to a stable currency.

However, on the downside, the country is experiencing tight liquidity in the market and this liquidity squeeze could weigh on aggregate demand, levels of production and asset values.

As a result, operators may fail to fund their businesses as well as capital needs and if not watched closely, it will have unintended dire consequences.

The hiking of the bank policy rate to 150 percent to curb speculative borrowing has made the cost of money expensive in the economy. This leads to subdued lending thereby affecting liquidity in the market.

Some segments of the economy believe the country might slide into a recession if we go for another three months under such circumstances.

In economics, a recession is a business cycle contraction that occurs when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble or a large-scale anthropogenic or natural disaster > (e.g. a pandemic), according to Wikipedia.

Economist, Dr Prosper Chitambara, believes it is a very tricky situation as we have seen the tightening of the liquidity situation which has constrained aggregate demand in the economy.

“That is of course the tightening of the liquidity situation has had a favourable impact in terms of the appreciation of the local currency that we have seen and a reduction in both the monthly and the annual inflation figures and we are hoping that should also result in the interest rate actually coming down in line with the inflationary developments,” he said.

He added that as long as we are able to deal with the high levels of inflation, it should also obviously result in a reduction in the cost of borrowing in our interest rates.

“So the challenge would be sustaining stability over the foreseeable future in the medium to long term, I am not sure the tight liquidity situation can be sustained, especially given the pressures on government to make payments. But if we are able to make those payments without necessarily seeking re-cost monetary financing, I think that should be sustainable, that should not be a problem,” he added.

The government needs to rely more and more on its own internally generated resources to be able to finance the public spending especially in critical sectors of our economy, so that we are able to ensure monetary discipline.

Dr. Chitambara said monetary discipline, fiscal discipline and of course also institutional strengthening or institutional capacity, especially parastatals would be critical to maintaining this stance without causing a recession.

He believes that whether or not we end up in a recession obviously depends on the prudency of the authorities.

“Like we are saying, we are already seeing aggregate demand has actually slowed down but there is need obviously to ensure there is a balance but that balance can only be sustained through sustainable inflation reduction programme which should have a positive impact on interest rates but it is a very difficult situation, it is a tricky situation which must be handled in a very strategic and very sustained manner,” he concluded.

However, an analyst, Tafara Mtutu, says the possibility of recession in Zimbabwe this year is unlikely because if we consider the things that drive the economy mining and agriculture sectors, they have been doing very well.

“You also have international remittances that support demand of goods in the country. So from that perspective it is unlikely that we could go through a recession,” Mtutu said.

POSB is on record saying the high interest rates are leaving them with clients who are unwilling to borrow because the cost of borrowing is a huge burden.

Mtutu said he really could not comment on what banks are saying because we do not know the actual inflation rate that is in the economy and this is key in understanding where interest rates should be because blended inflation is not a true measure of inflation.

“So I would not say banks are amiss when they say interest rated are too high but that said whether it is affecting uptake of loans the banking sector addresses the constraints or talks to the formal sector, which in my opinion is not as big as the informal sector,” he added.

Mtutu agrees that it is true there is no traffic in the major retail shops but argues that it is not because there is no liquidity.

“When you look at shops especially OK and TM, they do not have traffic because they are forced to price at higher price point and this forces the customer who is very price sensitive because income is limited, to go search for a cheaper price for the same goods that these stores sell,” he said.

“So you find that the informal market has become very competitive because they charge at a price that allows you to really sweat your US dollar compared to formal channels for example you have eggs being sold for US$7,20 in OK Stores and those same eggs being sold for about US$6 in TM Pick n Pay Stores but that same crate costs US$3,50 to US$4,50 in the informal market so it is very hard for these shops to compete.”

Liquidity in Zimbabwe Dollar is low because government is holding on to it and its resulting in people and businesses withdrawing liquidity from the ZSE to take care of their day to day businesses, Mtutu added that, “but if and when they finally disburse money due to contractors the country would be singing a different story”.

The consensus is that the country is well oiled and the need to stay on track by monetary authorities will help drive the economy far away from recession fears.-ebusinessweekly