‘Economy needs home-grown solutions’

single digit levels. However, the economy has failed to meaningfully move from stabilisation to a remarkable growth.
Our Senior Business Reporter Martin Kadzere (MK) had an interview with a top economist, Mr Gift Mugano (GM), who shared his thoughts on the state and the prospects of the economy.
MK: In summary, what is the state of affairs of the Zimbabwean economy?
GM: I must say that the economy is currently caught in a web of weak economic fundamentals which are characterised by low household incomes which averages around US$500, an ever increasing negative current account balance, an unsustainable national debt, insignificant foreign direct investment, poor performance of the agricultural and manufacturing sectors and dilapidating infrastructure which needs close to US$14 billion to revamp. Because of this, the economy is in stagnation such that most economic agents and businesses are finding the going difficult.
MK: In your view, what needs to be done to get the economy back on track?
GM: In every economy, Government normally directs the economy through three policies, that is, Fiscal Policy, which is the National Budget, the Monetary Policy and Structural Policies. All these policies are complimentary.
The fiscal policy must set the tone to the economy through allocation of resources. Normally, the National Budget is made up of recurrent expenditure and capital expenditure. The Government needs to strike a balance on the allocation of funds for recurrent expenditure (consumptive expenditure) and capital expenditure for infrastructure development.
There is no clear cut policy as to how much should be allocated for capital expenditure visa-a-vis recurrent expenditure as it depends with the state of development of the economy. However, some schools of thought propose that capital expenditure should get at least 30 percent.
In Zimbabwe, we have seen salaries of civil servants alone taking a chunk of around 70 percent of the national budget and obviously if all other consumptive expenditures are accounted for, it is obvious that the national budget is not stimulating production.
It would have been better if the civil servants are getting reasonable salaries since this would stimulate demand as they will have purchasing power. Now it is even worse that they are receiving a tail of a mouse which our Finance Minister (Tendai Biti) is killing.
Then structural policies are critical policies that are aimed at addressing structural rigidities (supply side constraints). Among these policies are the trade policy, industrial policy and agricultural policy. Government did well in formulating trade policies over the years and we must take our hats off to the Ministry of Industry and Commerce for coming up with sound trade policies.
And I must humbly salute Professor Welshman Ncube for spearheading the formulation of the first National Trade Policy. Other structural policies like Industrial Policies and agricultural policies did not make an impact because of poor funding. The Monetary Policy is inactive. Under the dollarised economy the major monetary policy instruments like open market operation, exchange rates, interest rates and reserve requirement ratio are limited. So it is clear that fiscal policy as a major policy drive of the economy and obviously without other complimentary policies, we are not achieving our potential as an economy.
MK: In other words, you are saying lack of structural policies are contributing to poor trade performance?
GM: Yes! Capacity utilisation in Zimbabwe across all sectors is hovering around 50 percent with some industries failing dismally. All what industry needs as has been always the song is long term finance at concessionary rates. Professor Ncube mooted the establishment of an industrial bank which was then going to be tasked with the responsibility of supporting industrial growth. So in short, we don’t have capacity to export!
MK: Everything seems to be centred on the Ministry of Finance to address economic challenges. But the Minister of Finance has reiterated that “we eat what we kill” and in the previous comments you indicated that he must abandon his motto. Can you elaborate again?
GM: Let us face it. The times we are in require aggressive approach rather than waiting for tax revenue as a major source of funds. The state of the economy as we have all seen it cannot bring meaningful revenue. It is as good as milking a sick cow.
On a lighter note, we all understand that the Minister of Finance has a daunting task of under the circumstances of economic sanctions and poor publicity by volatile media but does that make us agree that there are no other options available? Under the circumstances where the major international partners are not interested to support us, we must borrow money from like minded countries and use minerals as collateral and also look inward.
MK: Can you elaborate?
GM: Governments borrow from friendly countries to meet their fiscal requirements. If you look at South Africa, for example, Africa’s biggest economy, they still go out and borrow from as far as Japan. Recently, South Africa issued Samurai Treasury Bills to mobilise funds for infrastructure development. As a result, South Africa is earmarking R3,2 trillion (which is three times its current budget) for infrastructure development in the next three years! There is no reason for us not to do the same.
Zimbabwe must also use home grown solutions to address its economic challenges. Ian Douglas Smith did exactly that when Zimbabwe then Rhodesia was hit by sanctions.
Smith’s policies were biased towards import substitution. Zimbabwe actually industrialised under sanctions. We have seen Youth Development, Indigenisation and Empowerment Minister Saviour Kasukuwere spearheading a Zimbabwe made new inward looking policies under the auspices of indigenisation and empowerment rule.
Indigenisation and Economic Empowerment is a bible on its own but if you look at the community share ownership trusts they have become a financial instrument that is already addressing infrastructural challenges and rural development.
Obviously this fills in the gap left by fiscal authorities since they are killing a mouse whenever they go hunting. It is sad that Treasury is not supporting these policies.
MK: You seem to like mice very much.
GM: Believe me, one day I will catch a mouse for the Treasury chief for his supper. I want to see how he will struggle to finish a plate of Sadza let alone to bring his family to share with him. I can assure you one of the kids will end up eating a tail with the mother even failing to get a piece of the meat!
At the end of the day, we are one nation and I believe that all of us we have a collective responsibility to address the challenges facing our economy as it affect all of us without exception. I believe in brutal frankness. Let us face the truth. “We eat what we kill” motto is not working. Rather we should say we eat from our minerals.
In this case we need the support of the Minister of Finance to support the establishment of sovereign wealth fund. Minister of Finance should take these views on his upcoming budget.
MK: You have mentioned that foreign direct investments are low in Zimbabwe. Some have said this is because foreigners are hesitant to invest in Zimbabwe due to empowerment laws. To what extent has indigenisation contributed to this?
GM: To say indigenisation has contributed to low FDIs in Zimbabwe is just hogwash. If you look at all the developed countries they are almost 100 percent owned by the locals yet they receive significant FDIs. Emerging markets such as South Korea are indigenised to the level of 90 percent. If you look at Africa as a whole, its FDIs as a proportion of world FDIs in the 1970s was 4 percent but fell to around 2 percent in 2007. Can we say the FDIs inflows fell as a result of indigenisation?
If we come closer to home, South Africa is ranked in the top 30 in the world in terms of providing a conducive business environment supported by good infrastructure. But they have failed to realise their potential FDI inflows. What is interesting is that of these little FDIs coming to all African countries over 90 percent is directed to extractive industries particularly the mining sector. Whether indigenisation or no indigenisation I don’t see FDIs inflows changing.
If investors want platinum they will still come here because there is nowhere they can get platinum except here in Zimbabwe and South Africa. So this fallacy of saying local laws are causing capital flight is just bookish.
Decline in FDI to Zimbabwe has been a result of a number of factors which include economic meltdown caused by sanctions imposed on the country and the general economic slowdown in the global economy.
MK: You have mentioned sanctions. There are still some quotas who say the sanctions have no effect on the economy. What is your take on this?
GM: If the Western countries in their wisdom know that sanctions have no impact on the economy why are they keeping them on?
MK: What is the economic outlook going forward?
GM: Zimbabwe is going forward! There is no doubt about this. But it will continue to grow below its potential. You see with Zimbabwe, it is an unpredictable economy. If there is an injection of substantial amounts of money into the economy we will immediately see a drastic change of economic outlook. The efforts by Minister Kasukuwere in spearheading empowerment of communities will see all the communities awash with money. This will create a multiplier effect across the country. So it’s a matter of time. So everything rests on the shoulders of our policymakers. This is why I am encouraging them to stop killing a mouse.