It is extremely curious why Zimbabwe should be experiencing an unwarranted degree of economic turmoil ever since Minister of Finance and Economic Development Professor Mthuli Ncube announced the Government’s Transitional Stabilising Programme and the Reserve Bank of Zimbabwe started implementing complementary and prudent changes to its monetary policy.
With President Mnangagwa making it clear that this cultural change had the full backing of the Government, along with a zero tolerance of corruption and influence peddling, the policy changes should have been calming markets, not creating turmoil and seeing herds of people rushing around hither and thither as each unsourced rumour went viral on some social media platform.
The fiscal policy changes by the Minister were exactly what just about every economist, and indeed every person who was functionally economically literate, had been pressing for and the only revolutionary part of the policy was that for the first time since independence Zimbabwe was aiming for a balanced budget, at least as far as recurrent expenditure was concerned. This is hardly innovative economics; it is the basic requirement for a stable economy capable of long-term growth.
Prof Ncube was extremely realistic and practical in his programme. Yes, Government spending had to be reined in and brought under control, but there were limits; so tax revenue had to be increased and here he took advantage of the fact that Zimbabwe is the first country in the world to have a near cashless economy to extend what used to be called stamp duty to a percentage tax on all transactions, but because it was just about all transactions over $10 he was able to keep the tax very low.
So his new tax passed the tests of desirability: it was low, it spread the net very wide, it was very cheap and easy to collect, it was impossible to evade and since it is collected automatically by just 19 banks and three mobile money platforms, Zimra gets the full sums very quickly.
While he must have expected an outcry over the tax, since no one likes paying taxes, he must also have expected a growing degree of economic calm and confidence as he tackled what was easily the greatest economic danger facing the country and the biggest brake on a full-throttle growth in production. Instead he got turmoil.
At the same time the RBZ started tackling the other two problems: the surge in liquidity caused by the very fiscal deficit the Minister was tackling and eliminating and the resultant pressure for consumption of imported goods and so on foreign exchange. Governor Dr John Mangudya formalised the informal arrangement made near the beginning of the year that exporters could use their earnings to import at least some of their raw materials instead of relying totally on the RBZ. Already many industries are looking for export markets for some of their production, so they can continue supplying the growing home market. He then reintroduced the reserve requirement for banks, albeit at the low level of 5 percent, to start mopping up some of the excess liquidity. This policy only made sense once the Minister announced he was turning off the liquidity taps. Again these monetary policies, backing the fiscal policy, should have calmed everyone down. And all the RBZ found was that vast numbers of people went berserk.
The Minister must be exasperated that his fairly clear and straightforward statements were not taken at face value but were interpreted in the light of at least one conspiracy theory, and often in the flickering light of several and mutually contradictory such theories. So he had the sensible idea of getting advice on how best to get his message across so that everyone could understand what he was doing and why. And as a secondary objective try to get everyone as excited as he was applying the laws of economics to sort out the problems he was facing.
The only trouble was what appeared to be a credible choice of an advisor did not give advice but suddenly started grabbing headlines as he flew off at a tangent in public statements. So it is almost back to the drawing board.
But the basic idea is still worth pursuing. The Minister’s policies will work in any case, but they will work faster and better if he can get through to all Zimbabweans, just as he is getting through to most economists and people like World Bank officials, exactly what is going on. This is not impossible, largely because his programme is in most respects very conventional and perhaps even boring if you are not an economist: balance the budget, pay your debts, clean up what is still a manageable mess, and get Zimbabwe’s economy growing steadily at a reasonable clip to meet the Governments goal, as stated by President Mnangagwa, of bringing Zimbabwe into the ranks of the middle-income countries by 2030.
Zimbabweans are still scared by the hyperinflation of the 2000s. That colours their economic view even though Minister Ncube is doing the exact opposite of what was done then. He is refusing to spend or print his way into very short-term gains and medium-term disaster. He is returning to economic fundamentals instead for a little short-term pain, nothing more than a small dip in consumer demand of less than 5 percent and Government spending kept on a tight leash, and good medium-term gains and long-term wealth as he ensures that the conditions exist for others to push ahead on production rather than consumption.
For the Finance Minister’s job, while critical, is only one facet of an economic programme. The bigger programme is the one the President has been hammering ever since he came into office: get production and exports up to the levels that are required to meet consumption demands. The Finance Minister’s job is to ensure that there is a base to support that bigger programme, run by the President and the rest of the economic team in Cabinet, and then lock in the gains.