adminDr Bongani Ngwenya
THE “twin deficit” of fiscal or Government budget and trade balance have set the country in a quagmire of development trap running for a very long time now. This phenomenon, unless reversed, renders the achievement of the vision 2030 a pipe dream.
The country needs to rise from this quagmire before it starts moving in the direction of achieving the vision of becoming a middle-income economy by 2030.
Whereas trade balance or current account would naturally lead to declining foreign currency reserves and inflationary pressures, it can pose serious risks to macro-economic stability as well. External and fiscal deficits are sometimes interrelated, but the causal relationship can go both ways.
For example, this twin deficit that the country has experienced for a very long time now has been caused by a persistent decline in export revenue earnings, which has led to lower Government revenues, while imports have continued to increase and Government expenditure maintained at the current levels, or even increased resulting in both external and fiscal positions deteriorating with time, to date.
In addition, the twin deficit has also originated from the Government budget with an increase in public spending, that is, recurrent expenditure that has not been accompanied by or matched with higher public revenues in the form of taxes or private net savings that could have generated domestic investment, causing both fiscal and external positions to deteriorate to precarious levels.
A combination of lower export earnings and higher public expenditure has led to this twin deficit experienced in the economy.
The Government, in the 1980s to 1990s widely used financial budgetary support from the International Monetary Fund, World Bank and other international financial lenders.
The over reliance on external borrowings to finance the national budget and its deficits led to the accumulation of huge debt obligation that is still a burden today.
Lack of consistence and ability to meet repayment obligations affected the country’s credit worthiness as it continued defaulting in loan repayments. This led to the withdrawal of financial assistance by these international financial institutions.
The Government then resorted to domestic borrowing, resulting in domestic debt stock progressively increasing as well over the years. Lack of macro-economic policy implementation credibility, inconsistent policy formulation and high inflation levels, culminated over the period leading to 2008 hyperinflation, and saw the maturity structure of domestic debt becoming and concentrated towards the shorter end of the market.
The reversal of these unsustainable twin deficits requires not only prudent fiscal policies, but also competitive real exchange rates, notwithstanding the fact that Zimbabwe is in a no exchange rate phenomenon, that is in the absence of a domestic currency, and further improvement in conditions for domestic firms or industry revival and foreign direct investment inflows.
Both fiscal and external deficits would then eventually decline to sustainable levels that ensure economic growth and development towards achieving the vision 2030.
If for example, the trade or current account deficits were to a large extent financed through FDI, they would be sustainable, as this type of financing does not increase external debt and also helps control and contain domestic Government borrowing.
However, as I indicated in last Sunday’s instalment, the proposed National Budget for 2019 in particular, would see the Government making a commitment of fiscal soundness, targeting a reduction in the rate of growth of net current expenditure to levels below five percent in real terms or four percent of the GDP. This is meant to reduce the budget deficit and allow sustainable fiscal policy management. It is hoped that this planned trajectory will not be short lived, leading the country to persistent development traps.
What are development traps? Zimbabwe has in the circumstances highlighted above, been caught in the following development traps: poverty trap and middle-income trap, and thus ranked among the low-income countries of this world.
The structural challenges highlighted above have hindered Zimbabwe to explore the factors that ultimately determine the possibilities of a developing economy, such as Zimbabwe to surpass its dual character and enter a path of successful catching up with the advancing economies in Africa in general and thus achieving its vision 2030. The country needs to come out of these development traps.
There are two distinguishing characteristics or features that may set any country in a development trap. The first feature is the presence of an extended traditional or informal sector that has balloons over the years (that is a large portion of the country’s labour force working in extremely low productive activities that use obsolete technologies and mainly produces for their own subsistence).
The second feature is the existence of an important degree of technological backwardness in the non-traditional sectors (that is a significant technological gap in the modern activities as compared to the advancing economies in the region, such as South Africa for example).
These features are glaring in the Zimbabwean economy and have been exacerbated by the country’s fiscal policy thrust dating as far back as 1980s. That is, the country’s budget has always been expansionary in the wrong direction, that is, recurrent expenditure at the expense of infrastructural and technological development, until now.
We have always seen very little budget vote towards infrastructural development for example, setting the country in a serious development trap. This phenomenon will need to be reversed if we are serious about becoming a middle-income economy, and the recently announced economic policies point in the right direction.
The focus of the development trap trajectory that I am pointing out here is premised on the failure of the dynamical interaction between the two features I have mentioned above, in the process of Zimbabwe’s economic growth and development.
From this perspective, successful development would have entailed a joint improvement in these two dimensions up to the point at which modern activities not only become dominant but also manage to catch up with the general world frontier.
That is, Zimbabwe managing to close the technological gap while absorbing most of the workers or labour from the traditional sector (informal sector) into the modern developed sector (modern industrialisation).
In conclusion, the main focus here is economic reform as a process of structural transformation that I wrote about in last Sunday’s article.
In particular, this article emphasises two key transformations that need to be achieved in order to catch up with the rest of the advancing countries in Africa and become a middle income economy: on one hand, the absorption of an increasing share of the labour force in the modern part of the economy (structural change); on the other hand, the technological upgrading of these modern sectors (technological catch up). Failure to achieve either of these transformations will confine the country to persistent poverty-trap.
Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at [email protected]
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