Kudzanai Sharara and Golden Sibanda
Government should prioritise economic stability and proceed with extreme caution, ready to stop if evidence on the ground suggests that its $18 billion stimulus package may cause macroeconomic instability, according to Confederation of Zimbabwe Industry (CZI).
The private sector says even before the outbreak of Covid-19 and subsequent lockdowns, the economy was already “walking a macroeconomic tightrope” and finding a solution to the already established challenges should not be overlooked in favour of dealing with impact of the pandemic. As such, the CZI called for careful calibration of the multi-billion dollar stimulus package and reorientation of existing policies to reboot the economy and avoid potentially devastating implosion.
In a position paper titled “CZI Policy Response Paper 1”, submitted to Treasury this week, the influential industrial grouping suggested a highly calculated approach to deployment of resources under the $18 billion stimulus package.
Treasury sources have indicated that the Covid-19 package will be financed from at least US$300 million regional loan facility, nearly $2,5 billion from the Reserve Bank of Zimbabwe’s productive sector facility, $1 billion from statutory reserves to be returned to banks for on-lending, $4,5 billion from State guarantees to companies and individuals and around $2,5 billion national budget supplement.
Secretary for Finance and Economic Development George Guvamatanga, allayed any fears that Government would destabilise the economy by funding the package through running the printing press as has happened in the past.
But CZI has warned of potentially devastating economic implosion through rapid money supply, exchange rate volatility, inflation and total currency collapse due to any policy missteps resulting from efforts to revitalise an economy negatively impacted by the Covid-19 pandemic.
“The country is on a downward spiral of increasing inflation and declining confidence in the local currency. This has been accompanied by a growing rejection of the local currency,” CZI noted.
Zimbabwe’s annual inflation has raced from 5,39 percent in September 2018 to 676,39 percent in March this year while the official exchange rate had climbed to $25 against the US dollar before a fixed rate was adopted in April to minimise potential Covid-19 induced price instability.
“On top of this, the emergence of the Covid-19 pandemic has necessitated putting the country into lockdown making our economic situation even worse.
“The country is walking a macroeconomic tightrope. Any missteps will likely result in a dramatic upsurge in inflation and the total collapse of the currency,” CZI said.
Zimbabwe’s economy, the manufacturing representative body pointed out, was already suffering from a coterie of economic ills like price distortions, unfunded subsidies and quasi fiscal operations.
Further, falling confidence, rapid money supply growth, declining exchange rate and rising inflation were among the myriad of factors forming an albatross on the wobbly economy.
CZI contends that not only do these economic factors present unimaginable major risks to Government’s vision of middle-income status by 2030, but threaten Treasury’s already weak finances.
As such, CZI cautioned, that while the Government had recently announced an $18 billion stimulus package for the economy, to limit the impact of Covid-19 and rekindle production, this could be the “medicine the economy needs or turn out to be the poison that kills the patient”.
The industrial lobby group called for careful calibration and targeting of the proposed stimulus package to minimise negative impact of the Covid-19 response stimulus on domestic macroeconomic stability.
It also proposed the creation of a two-tier exchange rate management system with a crawling peg
combined with a market tier system to guarantee formal access to foreign exchange for all businesses.
Further, CZI recommended maintenance of iron clad fiscal and monetary discipline to ensure the stabilisation of the currency, strengthening of institutional arrangements and stimulation of production and productivity.
There was need, CZI said, for an overarching guiding principle of earning the money first then spend it and while the bulk of the $18 billion funding were State guarantees, the guarantees should carry a fee equal to expected rate of default.
CZI has therefore recommended very careful monitoring of the macroeconomic environment, with Government standing ready to scale down the stimulus package at any time if adverse effects arose.
“We have a history of financing packages including the Millennium Economic Recovery Programme (MERP), Productive Sector Facility (PSF), Parastatals and Local Authorities Restructuring Programme (PLARP) and Command Agriculture just to name a few.
“They all have one thing in common, they were financed by high levels of money creation and resulted in devastating macroeconomic instability.
“There is very little doubt that the economy would have been far better off without these attempts. This is not to say that stimulus packages are never justified.
“There are cases when they are justified. And indeed this Covid-19 pandemic is one of those cases. We therefore recommend proceeding with extreme caution ready to stop if evidence of macro instability surfaces,” CZI said.
The objectives of the stimulus include mobilising resources to fight the Covid-19 pandemic, sustain vulnerable groups, resuscitate economic sectors badly affected by Covid-19 such as tourism and hospitality and rebuild production in other sectors such as manufacturing and mining.
As such, CZI proposed that the package should not be perceived as some form of handouts, but should be drip fed over time, take the form of guarantees rather than actual disbursements while the guarantee security should expedite the loan approval process.
The industrial body wants the package to prioritise sectors that have high potential but have been decimated by the pandemic such as tourism and hospitality and sectors that have potential to quickly grow exports and have high capacity for imports substitution.
“Disbursements (should) prioritise borrowers with a track record of repaying previous loans,” CZI said.