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IMF critique: SMPs fraught with error
09/10/2014 00:00:00
by Bhekinkosi Ngubeni
 
 
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THE finance ministry, desperate to lay claim on concessionary funds, recently carried out a “fiscal pounce” on unsuspecting parties in its attempts to satisfy IMF pre-loan conditions forcing Zimbabwe to subscribe to multiple monitored programmes. I tend not to side with IMF’s monetarist position and view them with permanent suspicion.

To reinforce my suspicions, I recently carried out a cursory study, tracing developments on IMF “programmes” going back at least to 1991. Findings suggest that 60-65% of countries advised to adjust  economic structures  experienced a measure of economic growth. However, 90% of the time, GDP figures reverted within a year. The slight positive short term deviations mask the long term failure or indifference. The constant indication is that cuts are ineffective.
If I could present 4 hypotheses contrary and divergent to that of the IMF:

  1. Wage/job cuts + taxation are not infallible.
  2. Indigenisation conditioning is inflexible short term.
  3. Full rand and adoption & imports repression a more practical & feasible solution.
  4. Inflation tax a healthier revenue stream.

Firstly, reducing the national wage bill through expenditure cuts will free up a portion of the budget to be put towards serving the U$10 billion debt and upgrading obsolete infrastructure. The trade off, however, is adverse and harmful possibly leaving the populace worse off. Government cannot cut expenditure without firing people. Checked against empirical  evidence, a  mere 10% budget cut could result in 28,400 job losses.

Here’s how I arrived at above the figure:
(1) $1.4 billion is the reported Jan-Jun Government pay cheque
(2)  The median wage of civil servant is $7200per/yr including benefits
(3)   Divide (1) by (2)annualise the result, it comes to circa 284 000 jobs serviced by $2.8 billion
(4) Equally weight the figures down -10% the result is an astonishing 28400 job losses.

The manifestation that follows is reduced household spending, reduced propensity to consume leading to chronic demand saturation. Up to 100,000 dependants can lose a source of livelihood.



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Secondly, the belief that tax is a viable “revenue stream” specifically towards levying the informal sector is misplaced. The measures primarily affect low income families such as the case of vendors required to pay one dollar a day. The tax is regressive considering broad sector income has fallen. Such is the sensitivity around the issue that tax collectors violently clashed with vendors. Budget balancing won’t be accomplished by targeting relatively minor sectors.

Thirdly, revising indigenisation is not an option. Just when the “innovative” process is detecting and illuminating sub or wholly overlooked expositions whilst highlighting problematic/beneficiary features within the social development space, you get Bretton Wood stifling progress.

Given there exists no  empirical grasp of indigenisation multipliers, or lack of, Zimbabwe has positioned herself as the poster child of aggressive ownership reform and resource redistribution providing invaluable lessons to countries across to region.

Were this command economy action evaluated solely on efficiency grounds, there could be a valid call for amendment. However, the non-linear complexity of any development paradigm will always pit social returns against business interests. In this case, the later comes second.

Finally, by way of progress, a more expansive and practical revenue stream would require an import repression policy on household goods whilst providing home traders with incentives that stimulate growth in the local consumer market. The nation’s circular flow of income is negatively skewed to an unsustainable degree. The Africa Development Bank wants imports limited; taxation can be deployed as a key trade balancing instrument.

The $US dollar has decreased demand for Zimbabwe’s exports, in the process lowering export earnings. Local companies fail to compete. As a result, businesses fail and individuals are made redundant. South Africa and Zimbabwe operate a free movement of labour system. The next logical step is formalising a seemingly self-suggesting currency union. Biti spoke at length about rand adoption.

Modelling inflation is a less taxing way to raise revenue or erode the real value of Government debt. Moderate price rises could trigger a positive inflation tax. Assume an investor requires 1.5% real interest rate and inflation is expected to be 2.5%. Hence a 4% nominal return will satisfy the investor.

But Chinamasa hikes fuel prices and the actual inflation is 4.5%.  A negative real return 0.5% real value loss is generated. An amount equivalent to 0.5% is gained using a value erosion model in regard devaluing long term liabilities.

I would prefer the above principle of monetization. It’s costless, effective and cushions against political unrest due to its invisible/sneaky nature.

The IMF’s efforts to set Zimbabwe on the right path are duly noted. Nonetheless, the institution should be mindful of the fragile environment and act with temperate awareness. The delicate balance between national interests and global assimilation is one of the key challenges of our time. It requires an open but shrewd engagement otherwise we will be left counting the costs.

Bheki Ngubeni (BA, MSC) can be reached at bheki213@yahoo.co.uk 


 
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