Slow pace of reforms derailed TSP

The Zimbabwean government recently announced the conclusion of the 2 year Transitional Stabilization Programme (TSP) which will be replaced by the first five year National Development Plan (NDP). TSP was launched on the 5th of October 2018 with a major thrust on kick-starting the transformation of Zimbabwe into an upper middle income economy by 2030. This entails achieving a nominal GDP of US$65 billion by 2030, a Gross National Income (GNI) per capita of US$4,046 and sustaining economic growth rates of +7% per annum from 2018 to 2030. Some of the standout policy objectives included creating over 2.2 million jobs thereby alleviating poverty, infrastructure rehabilitation and investment of at least US$1 billion annually. An upper middle-income economy is a nation with a GNI per capita ranging from $4,036 to $12,535 according to the World Bank 2020 classification. Factors such as economic growth, inflation, exchange rates and population growth influence GNI per capita rankings.

TSP aimed at fiscal consolidation, job creation, economic growth and stability. Further, it targeted the implementation of complementary monetary and fiscal policies and creating a pro-business investment climate. To achieve the above targets, extensive reforms were necessary. These included austerity reforms in government especially on foreign travel and missions, governance and institutional reforms, civil service restructuring, mergers of government departments, privatization of state entities, corporate governance reforms in state entities and parastatals (SEPs), tax reforms and free market policies to achieve a private sector led economy. Below are selected outcomes from the TSP era:

Economic Performance
After registering a 3.5% growth rate in 2018, the Zimbabwean economy slumped to a 7.5% decline in 2019 in TSP's first full year against a target of 9%. The World Bank expects the economy to decline by at least 10% in 2020 against a target of 9.7% growth rate. Economic instability characterized by power cuts, foreign currency shortages and high levels of inflation sank the economy to its worst ever performance since 2008. The period witnessed a sustained slump in consumer demand, corporate incomes and production stoppages in the mining and manufacturing sectors.  Production in mining is still being hampered by lack of transparency, high levels of corruption and smuggling, and delays in the signing of the new Mines and Minerals Act. Despite notable progress on the ease of doing business due to amendments of the Indigenization and Empowerment Act and improvements in turnaround times for business licensing, Foreign Direct Investment (FDI) inflows slumped from US$745 million in 2018 to US$259 million in 2019. This year, inflows are expected to close the year below US$150 million. This shows that TSP did not bring any favorable changes to the local business climate, which continues to deteriorate even further. International investors still find it difficult to repatriate their dividends and capital from the country. Economic output slumped under TSP and so did incomes for households and businesses. Manufacturing capacity utilization in the industry slumped from 48% in 2018 to 37% in 2019 and about 30% currently.  

Monetary Reforms
TSP managed to register decent progress on reducing consumption subsidies that were being financed via the central bank money printing. These included electricity, wheat, fuel and cooking oil subsidies, and Gold incentives for gold producers. However, the untimely introduction of the Zimbabwean Dollar and subsequent money supply growth from June 2019 dented any hopes of an economic recovery. Year on year inflation spiked from 5.39% in September 2018 (before TSP launch) to 521% in December 2019 and 761% as of August 2020 (Against targets of less than 10%). The spike in inflation was a direct result of growth in money supply with reserve money growing from ZW$2.9 billion in September 2018 to ZW$15 billion in September 2020. The growth in money supply in a declining economy created huge demand for foreign currency and depreciated the reintroduced Zimbabwean Dollar. After months of manipulating the exchange rate and fixing it, the government scored a plus in introducing the Dutch foreign exchange auction system. The auction market coincided with a reduction in money supply growth which has managed to stabilize market prices in the last 3 months. The stability however came too late as the market is rapidly redollarizing and minimizing the use of the local currency. In a nutshell, the monetary and foreign exchange policies under TSP did not achieve the inflation and money supply targets set to stabilize the economy or sustain the re-introduced Zimbabwean Dollar. There was no alignment between monetary and fiscal policy under TSP.

Debt and Austerity reforms
To achieve fiscal consolidation and reduce money supply growth, TSP targeted austerity reforms in government. Austerity measures were aimed at implementing cost-cutting measures to reduce the public sector wage bill, which consumed close to 80% of budget allocations between 2008 and 2018. Austerity measures saw the introduction of the 2% Intermediated Money Transfer (IMT) Tax. The tax has been very pivotal in government's revenue mobilization exercise, contributing ZW$2,663 billion in 2019, thanks to high levels of inflation which pushed the value of electronic transactions to record levels. Despite claims of a budget surplus of over ZW$1.2 billion in 2019 and ZW$800 million in the first half of 2020, the government continued to issue Treasury Bills and borrow from the domestic market. Similarly foreign travel expenditure only receded because of COVID-19 travel restrictions. Furthermore, there has been not been any realignment or restructuring in the civil service. Austerity reforms have only managed to compress wages for the civil service with detriment to public service delivery in health care and education impacted. Industrial action has become the order of the day while most civil servants earn below the poverty datum line.

Behind the facade of the austerity measures and budget surpluses, the July 2020 Reserve Bank of Zimbabwe (RBZ) report shows that central bank debt has ballooned from ZW$23 billion (US$2.3 billion) in July 2019 to over ZW$366 billion (US$4.8 billion) in July 2020. This can only point to the government using the central bank to plug its budget deficit or finance various subsidies in the economy in quasi fiscal operations. The much touted austerity reforms only delivered on adding IMT Tax on the already burdened taxpayers with no real expenditure cuts in government or reduction in government borrowing as public debt has grown exponentially in the past 3 years. The US$4.8 billion central bank foreign debt adds to the Publicly Guaranteed (PPG) external debt of US$8.094 billion as of December 2019. Domestic debt stood at ZW$12.89 billion as of May 2020. The up-to date public debt figures still remain a mystery.

Privatization of State Entities
The promise to privatize various state entities has not yielded positive results with high consultancy fees being cited as the major drawback. However the economic instability, high levels of state entities debt, political interference and bureaucracy, policy inconsistency and tight restrictions on repatriation of dividends have wiped off genuine investor interest in most of the assets on the shelf. The only success story came in the consolidation of Zimbabwe Investment Authority (ZIA), Special Economic Zones Authority and The Joint Venture unit into the now operational Zimbabwe Investment and Development Agency (ZIDA). Similarly the separation of Grain Marketing Board (GMB) and Silo Foods has been completed. It can thus be said that SEPs will continue to bleed the fiscus in the short to medium term despite their contribution to economic production falling below 2% of GDP. The First National Development Plan should therefore prioritize the flaws of the TSP especially on paying living wages for the civil service, improving public service delivery, investment in infrastructure, tax reforms, and respect for property rights, money supply discipline, market deregulation and transparency reforms in mining. Poverty levels have also multiplied under TSP in both urban and rural households due to inflation.  

Since independence in 1980, the Zimbabwean government has come up with not less than 15 economic blueprints aimed at economic recovery and development. From Growth with Equity in 1980-1981 to the now defunct Transitional Stabilization Programme (TSP). There is no shortage of economic development strategies or ideas in Zimbabwe and fancy names to label the economic blueprints. However most of the policies suffer from an implementation paralysis where reforms that underpin economic growth are partially implemented or avoided in favour of political mileage. The local economy is saddled with structural challenges that require free market policies to stimulate a private sector led economy; Governance reforms to ensure transparency in government, equitable resource allocation and prudent economic management; and above all institutional reforms to ensure checks and balances to the executive arm of government. It remains to be seen whether the first NDP will not suffer the same fate as its 15 plus predecessors where there is a change of blueprints with limited political will on reforms that usher good governance and sustained economic stability.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.