‘Austerity for Prosperity’ fiscal measures: Zimbabwe tussling for economic transformation (Part 2)
By Paddington Masamha
Professor Joseph Stiglitz once said, “The austerity programmes bear a striking resemblance to the ruinous structural adjustment policies imposed on Latin America, South-East Asia, and sub-Saharan African in the 1980s and 1990s. These policies were a failure: a medicine that sought to cure the disease by killing the patient. They cannot be allowed to happen again.”
There is strong evidence which demonstrate that austerity measures of increasing taxes and government spending cuts are a painful form of economic management. In the long-run austerity can be self-defeating. Country experiences have largely demonstrated that austerity further widens the gap between the rich and the poor. In practice, significant inequalities are observable as opposed to the intention of having ‘an equal share of economic prosperity.’
At the very core, a country’s international relations, country indebtedness, economic developments and political willingness to implement the painful policy prescriptions (particularly government spending cuts) harmoniously determine the end results of fiscal austerity. Zimbabwean austerity measures have had some short-run benefits as discoursed in the previous article. The TSP was theoretically framed to ‘prosper’ the masses, however a significant number of barricades, imperfections and deficiencies have been openly visible.
The Transitional Stabilisation Programme (TSP) is primarily guided by four major objectives which are; (i) stabilising the macro-economy, and the financial sector (ii) introducing necessary policy, and institutional reforms, to transform to a private sector led economy (iii) addressing infrastructure gaps and (iv) launching quick-wins to stimulate growth. The TSP objectives’ overall intention was to incubate a short-term economic recovery. Given the miniature success stories, the fiscal authorities and the highest office in the land has largely appealed to the masses to ‘endure the pain, be patient and austere.’
Austerity Short-run Costs
Zimbabwean austerity was ill timed. When the current President’s administration took the reins of control, strong signals were pointing towards an economic recession. An economy which had previously displayed solid signs of recovery through the years of the Government of National Unity (GNU) later plunged to the old-time trend of fiscal mismanagement and the ultimate economic slowdown. The economic woes of depressed aggregate demand, unemployment, poor economic growth rates and a burgeoning parallel market forced the people to march against former President Mugabe’s regime having the blessings of the military.
The new President having been symbolized as the biblical typology of Moses, by taking away Zimbabweans from the Egyptian land (Mugabe era) to the land of Canaan (Mnangagwa era or so called New Dispensation); had promised the masses milk and honey (national prosperity). The fiscal lieutenant (Prof Mthuli Ncube) instead chose to ignore the Egyptian struggles and established the excruciating austerity measures.
As a basic tenet, the economy was direly in need of an economic stimulant. It is public knowledge that Zimbabwe has constrained industrial capacity utilisation hence the economy is largely import reliant. A stimulus package to resuscitate the moribund industry was an expected package. Without a doubt, government portfolios deserved a bitter injection to curtail their unwarranted spending.
The masses having endured all the agony of political maladministration and poor governance, aggregate demand boosting measures could have helped resuscitate the economy. Instead the MOF had an opposite strategy of squeezing the masses and pretending to be punishing the heavy spenders (central government portfolios).
Whenever an economy is receding, austerity is an inaccurate economic dosage. Currently, companies are plagued with a business slowdown. Given the poor aggregate demand (constrained spending) few companies are hiring, whilst others are downsizing and the worst scenarios being retrenchments. The combination of a tight fiscal and monetary policy has largely dampened economic activity. The failure to find a monetary solution to our currency crisis has further crippled the economic recovery locomotive.
In the long-run; given the slowdown in economic activity reduction in tax revenues will soon be visible. Concomitantly, the capacity to generate enough revenues to pay back debts significantly diminishes. The TSP austerity is instead incubating mechanisms where inequalities are rife, poverty rising, increases in civil and labour unrest (e.g. strikes, riots, stay away, demonstrations etc.). Specific negative ills and public contestations against the austerity measures thus include; the Zimbabwe junior doctors’ strike, the January fuel price protests and the teachers’ strikes.
For that reason, Zimbabwean austerity measures have in the interim period clearly failed to navigate the economic challenges besetting the economy. Tangibly, there has been gross misalignment between problem diagnosis and the concomitant policy prescriptions.
Having accurately diagnosed the central government portfolios as the epicentre of the country’s economic tribulations, the austerity solution fell short by disproportionately targeting the meagre incomes of the poor inhabitants. The 2% IMTT did not only reduce the economy’s aggregate demand but it also triggered an inflationary spiral.
In 2018, the Zimbabwean economy was plagued with a currency crisis. The fiscal authorities’ failure to pave way for the demonetization of the bond note acted as the main barricade for the austerity measures. In the midst of a liquidity crisis and having a false belief that parallel market activity can be crippled through the IMTT tax, the prices ran amok.
Between October 2018 and February 2019, the year on year official inflation rate was measured at 59.39%. The inflation upsurge has been mainly triggered from three fronts; (i) foreign currency black markets (which is also triggered by the currency crisis), (ii) the IMT tax incidence effect and (iii) the 12 January 2019 fuel price increases by the President.
Given that businesses did not have the much needed foreign currency and were not benefiting from the RBZ’s foreign currency allocation schemes; the black market was the obvious source of foreign currency supply. Driven by the rational desire to maintain profitability, any increase in the black market rates was easily filtered into the businesses selling prices.
Those who failed to increase prices, merely scaled down operations, streamlined product lines and some even closed shop. The observable goods market shortages gave rise to rationing techniques and the inflationary spiral were inescapable.
When the TSP austerity measures levied the IMT tax, businesses simply utilized the well-known tax incidence effect. In simple terms, a tax is a cost. Whenever a business is faced with a cost, the simple thing to do is to add it to the product or service cost structure. Depending on the demand elasticity and competition within the industry, businesses simply push on the increase in tax through an increase in prices.
The government’s view of such strategies was the usual claim that businesses are sabotaging government recovery efforts. The poor masses faced with these unfathomable economic conundrums, they were forced to demonstrate, strike and showcase unruly behavior. The usual blame game economy then manifested. However, the author wishes to stress a paramount point that the government seems not to acknowledge.
Before the TSP austerity policy prescriptions; Zimbabweans had abundant problems (e.g. liquidity crisis, unemployment, black markets, poor income distribution, massive poverty and abundant inequalities). On a larger scale, the new government was faced with the debt distress but having made enormous election promises that Zimbabweans were on a political and economic exodus from the land of Egypt to Canaan.
The ‘new dispensation’ and ‘Zimbabwe is Open for Business’ melody persuaded the masses into believing that an economic revolution was beckoning. Unfortunately, in the midst of such great economic and political melodies; the sudden implementation of austerity prescriptions on people who had grossly suffered from various economic dilemmas was a ‘wrong turn’.
The increase in tax was heavily felt with the poor masses. To worsen matters, the proposed expenditure reducing measures are not being implemented, hence the public outcry that it is only the masses who have to ‘austere’ whilst the ‘prosperity is reserved to the leaders’.
However, those leading the country through the national exodus from poverty to prosperity are appealing for patience. The fact that in October the market bubbled, then in December the masses had a bleak Christmas Holiday and the January deadly protests is but part and parcel of the wilderness experience.
The bottom line is, Zimbabwean austerity measures should have been in the short-run be more accommodative instead of the sudden slamming of the meagre incomes of the largely poor economy. Empirically, Zimbabwe is a testament of the claim that austerity tends to have an adverse impact on the poorest segments of the population.
Austerity has been blamed for being a futile exercise and anti-development (since it sacrifices current economic growth). Across the globe, the usual public concern is a scenario where the poor are forced to pay the debts of their oppressors.
By right, before establishing the repayment modalities; Zimbabwe needs a debt audit. The obvious questions of how the debt was accumulated and who were the direct beneficiaries of the debt will be answered by the debt audit. Forcing people to austere (but merely forgetting the past and focusing only on the future) is not only unfair but a disproportionate fiscal stance.
In the interim period, austerity as a result has not conveyed any of the anticipated economic and social ‘prosperity.’ The much desired long-run potential ‘prosperity’ of having safer and sounder public finances, stable or decreasing public debt-to-GDP ratios and revived economic activity as stimulated by booming investments in the public and private sector risk an economic miscarriage. In the absence of economic stimulants, the Zimbabwean road to economic prosperity looks bleak.
Austerity economic outlook
Zimbabwe is highly indebted, faced with a volatile currency crisis and plagued with massive political polarization. Consequently, without radically changing the previous authoritarianism in political and economic governance systems, attaining at least a stable macro-economic environment and finding a lasting solution to Zimbabwe’s debt distress; the expected quantum change from economic sluggishness to prosperity might prove to be an ambitious objective. For Zimbabwean fiscal measures to pay-off as intended, they should have been originally structured to be expansionary ab initio.
The timing of austerity measures is key. Generally speaking, it is not good to implement austerity measures when a country is going through a recession or is deep in an economic depression. Empirical evidence shows that such wrong timing can worsen a country’s problems through the massive buildup of more debt and the unavoidable massive social unrest. Instead, it was advisable for Zimbabwe to introduce a fiscal stimulus as opposed to an outright contractionary austerity bitter pill.
Finding a solution to the debt distress and currency crisis will give the government enough room to maneuver. Zimbabweans having endured the strenuous economic setbacks which started manifesting as early as the year 2000, should have been rewarded for their perseverance with a more accommodative expansionary economic policy.
On the other hand, the government portfolios whose insatiable appetite for infinite borrowings contributed to the economic abyss should have received a fiscal consolidation disciplinary dosage which significantly and radically reduces its over-spending.
Having a bolstered aggregate demand (achieved through an accommodative fiscal public policy stance) and fiscal retrenchments specifically targeting central government expenditures was poised to bring stability in the interim period.
The ruling government has always had a trend of over borrowing towards election dates. As such, the purported desire to achieve fiscal discipline is just an economic wish which is yet to pass the litmus test of general elections’ usual trend of ballooning expenditures.
The ‘austerity for prosperity’ reform agenda is currently a disproportionate attempt to further weaken the livelihoods and standards of living of the largely poor economic inhabitants. The program sustainability is also questionable given the massive protests and potential civil unrest which beckoned as the year begun. Zimbabwe needs to gradually move from the punitive fiscal stance being enforced on the poor masses in an endeavor to bolster aggregate demand.
Meagre efforts have been placed on radically revitalize the supply side economics. There is no deliberate attempts to establish and implement an industrial policy which re-tools industrial firms, buttresses productivity and improve capacity utilization. The verbal commitment of being open for business, is not matching fundamentals on the ground.
For industrial production to be bolstered, there is need for a deliberate attempt to finance local entrepreneurial initiatives, new product and service developments, funding industrial research and technological innovation.
Instead of spending considerable amounts of money travelling around the globe looking for friends and donors, Zimbabwe can in the interim finance its own locals. Once local entrepreneurship starts budding, the flood gates of foreign direct investment and foreign aid becomes inevitable
Going forward, the country’s desire to recover from the economic morass of our predecessor leader should largely be underpinned on resolving the political, economic and social impasse. In my view, even the best economic blueprint will be suffocated by the politically unhygienic elements within our nation. Thus, Zimbabwean economic prosperity is a by-product of having established a political and economic balanced diet.
The desire for national prosperity is noble. However, the objective will under no circumstances materialize if the means (austerity) to attain the end (prosperity) is creating perpetual economic distortions, inefficiencies, worsening poverty and income inequality. The economy is direly starved of economic stimulants as opposed to the status quo of fiscal, monetary and political barricades.
Paddington Masamha is an independent Financial and Economic Analyst. He can be reached on email [email protected] and Twitter @PMasamha