The hard lessons learned in 2019

20 Dec, 2019 - 00:12 0 Views

eBusiness Weekly

As 2019 draws to its close, many in the business world will be feeling that this year they really earned their pay as they coped with what was in many ways the most turbulent on record economically speaking.

A year ago Zimbabwe was an import led economy propped up by extensive Government borrowing, a make-believe exchange rate, and foreign currency allocations made almost exclusively by the Reserve Bank of Zimbabwe.

And perhaps we should first look at the achievements of the past year. For the first time in decades the Government ran a positive budget surplus, meaning it paid all its monthly bills out of taxes and only borrowed for part of its capital programmes.

By the end of the year exports had risen to exceed the value of imports. This was largely a result of doing away with the huge import subsidies that arose from a fake exchange rate and allowing Zimbabwean industry to rebuild at least into its own home markets with growing penetration of export markets. Almost from the start of the multicurrency regime, there had been an assumption that the dollars in Zimbabwean bank accounts were real US dollars, an assumption that was dubious from the beginning and which became more and more dubious as time went on. That assumption came close to destroying Zimbabwean industry as it made imports cheaper than they actually were in reality, if we assume purchasing power parities, and made it basically impossible for any manufacturer to export.

As the mismatch between the money supply and exports continued to grow the Reserve Bank of Zimbabwe once again moved into the centre of the economic stage as a participant, instead of keeping to its proper role as regulator and currency manager. The RBZ was deciding who would be allocated foreign currency from the ever more limited pool, limited in the sense of demand exceeding supply, and who would have to wait. While the central bank did not do an appalling job, it is weird that a bunch of banking economists should have been running Zimbabwe’s trade.

We have now been through two periods of RBZ economic participation. Most would agree that Governor Dr John Mangudya’s efforts were a lot more positive than the near destruction of the economy under Gideon Gono, but it is still not the function of a central bank to run an economy, especially in a country where a strong and vibrant private sector is supposed to be the engine for growth.

The switch from the make believe and fiat economy to a real economy in a real world was a lot more difficult than anticipated, hence the tumult that the business world has been through.

The timing of each stage, and even the order of stages, often seemed to be a result of the fiscal and monetary authorities flying by the seat of their pants. There are still some who in retrospect wish there had been a single “big bang”, of all reforms in full on one day. That might have worked or it might have led to the economic collapse we saw in eastern Europe at the end of the communist experiment.

The biggest problem was that so many involved in the economy, including most owners and managers of businesses, did not see that the high-borrowing and US dollar denominated economy was in fact a house of cards held upright by a collective willingness to assume the laws of economics had been suspended for the benefit of Zimbabwe.

Again on the positive front we have seen a stable exchange rate for the past three months, with the small changes actually below what many think is the probable inflation in that period.

This degree of stability has been vital, although many businesses have now developed costing and pricing models that can cope with a far more turbulent financial environment. That nimbleness is probably why the economy is now recovering, despite the many pressures and problems that remain.

The biggest single factor slowing growth right now is the locking up of so much of Zimbabwe’s foreign exchange earnings in tin trunks, both literal ones in wardrobes and the virtual ones of nostro bank accounts. Foreign currency is seen primarily by too many as holder of value rather than a medium of exchange for foreign trade. This, as a result of 2019, is understandable but is also slowing economic recovery. It would be far more rational in the long term if the wealth we create was reinvested into production and real assets, rather than kept under a mattress. The investment option would grow the wealth. The mattress option sees slow decline at the rate of inflation pertaining in the USA.

But with the switch to market-related rates, with this “hoarding” factor thrown in, we have swung from a grossly overvalued local currency to a moderately undervalued Zimbabwe dollar. Neither outcome is desirable. And the continued manipulations by a small number of people at the apex of the black market creates its own distortions.

Classical economics assumes that all in a market have full and equal knowledge and that all will behave totally rationally. Really? Regrettably it will take some time for adequate confidence to build up in the business environment to allow more rational decisions, and perhaps rationality can never be expected in the realm of the private individuals who have grown up in an irrational economic world.

This is why the Government and the RBZ have to continue their hard-line approaches to maintaining the fundamentals, even when the result is not seen or believed by the larger population. Sooner or later the required levels of trust in basic fiscal management will permeate the population and establish the required levels of confidence that Zimbabwe is now a “normal” country.

The fourth factor that has been tackled this year has been the corruption and the crony capitalism. Regrettably the attack on these menaces has taken time to build up and is far from the level required. Enough has now possibly been done, though, to bring the levels of new offences right down but it may take years to clean up the past and, most importantly, claw back some of the ill-gotten wealth.

The sensible sentencing policies of the Zimbawbean courts, offering mitigation in arrears to those who pay back after conviction what they stole, will help. But it might well take  lot of interminable civil cases to get into much of what is missing.

For the business world, it simply requires everyone to soldier on. The worst is now probably over, although no one can ever predict a burst of total irrationality. The fiscal and monetary environments are now far more real than a year ago. The infrastructure decay, especially in power and water supplies, is worse than we ever realised but is being tackled. Unfortunately, it takes years to build a power station or a new treatment plant and the shortage of investment capital does not help.

But as problems ease, business managers can at least take comfort that they have survived worse than what they are now likely to face, have become far more economically and financially literate and have learned lessons in innovation, quick emergency reactions and planning for almost any eventuality. Those lessons will be valuable as they break into new products and new markets. The turmoil of the past 12 months will then be an asset. But if everyone wants a changeless world, then much of the value created by developing managers, workers and systems in the past year to deal with rapid and sometimes confusing change will be wasted.

 

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