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Zimbabwe in austerity-induced recession

14 Jun 2019 at 08:22hrs | Views
"OUTPUT in Zimbabwe is expected to contract in 2019 with a sharp rise in inflation reducing real incomes and foreign exchange shortages constraining activity," the World Bank reports in its Global Economic Prospects Report, revising downwards Zimbabwe's GDP growth by -6,8 basis points to 3,2%.

The World Bank joins the International Monetary Fund (IMF) and many other analysts who are projecting a deep economic recession this year. The World Bank notes that the removal of subsidies and foreign-currency shortages have led to double-digit inflation rates, which has curtailed real income and private consumption. Out of the 44 Sub-Saharan African countries, Zimbabwe and conflict-torn countries Sudan and Equatorial Guinea are the only economies to experience negative growth with Zimbabwe regressing the most. The growth is the worst in the region and puts the country further away from its regional peers. Although the country implemented austerity measures as the authorities pushed to balance the fiscal position, on balance the increased taxes have been offset by increased subsidies and disaster unpreparedness. The government has also hiked producer prices for grains to RTGS$1 400/tonne, up from the recently revised RTGS$726/tonne.

Austerity policies under normal circumstances should drive demand downwards as government cuts down on spending or consumers feel the pain of increased taxes. However, this is not the case in Zimbabwe as supply is shrinking faster than the pace at which demand is falling resulting in the current recession and increasing inflation. The consistently debilitating currency, the RTGS dollar is also increasing the cost of businesses as suppliers and producers need to constantly adjust prices to keep in pace with the elusive US dollar. Austerity measures through high taxes, high fuel prices and falling real incomes have seen citizens on average hemmed in a coral like cows with nowhere to run, "El Corralito".

Now that we are in a recession, stimulus policies which are actually an opposite of austerity are the right cocktail of interventions to return the economy to a positive growth path. Now one wonders how much austerity has contributed to downward projections of economic growth; not to mention the dampening effect it has already had on the government's own declared objectives of increasing employment levels in the country and lowering poverty. It is high time indeed that the government looks to proper fiscal policy measures and governance reforms, not to mention coming up with policy to reduce inflationary pressures from market failures in the real markets. Zimbabwe's problems are structural and structural problems do not require monetary interventions. Monetary interventions under a structurally defunct economy do not work, but they rather discourage investment and economic growth prospects.

Now in the 18th month, the performance of government is nothing more than paltry.

The government and its advisor, the RBZ, should come up with better and more diversified planning in dealing with the big challenge of inflation and weak growth. Monetary reforms, including the interbank were expected to have a positive impact on pricing, but this is not the case as the economy has structurally weak institutions and markets.

The situation will not be any different if the authorities push on with the proposed currency rebranding exercise, that is introducing a currency to replace the RTGS dollar, which is a currency in its own right. Since, the exchange rate normally takes time to come down at the back of primarily improvement in institutional quality to enhance productivity, the other main source of keeping inflation under check was reducing the burden of taxation that businesses and retailers carries.

The government should, therefore, seriously look to lower these taxes to the minimum, and rather shift to enhancing direct taxes to fill this tax loss and in enhancing the overall tax revenue. So far, austerity has just proven an unnecessary pain without gain as there is nothing tangible to celebrate from the austere driven budget surpluses, given the current economic recession.

Tinashe Kaduwo is a researcher and economist. - kaduwot@gmail.com

Source - the independent
All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24's community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.

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