The Herculean task of rescuing Zimbabwe's economy

By Lance Mambondiani

THE signing of a power sharing agreement between the main political parties on Monday the 5th of September has raised hopes for a laboured revival of the world’s fastest shrinking economy.

The appointment of Morgan Tsvangirai as the Prime Minister and a possible appointment of an MDC Finance Minister is expected to provide fresh impetus towards renewed efforts to resuscitate Zimbabwe’s comatose economy.

The unity government will have to immediately take clear steps to resolve the economic crisis as a priority before expectations of a quick fix turn into despair.

Years of economic ruin and failed policies have given us an international test case on ‘how not to manage an economy’ -- condemning many Zimbabweans into poverty.

Much focus has been placed on what the international community can do to help the recovery process. This article looks briefly at some possible approaches for the new government to consider in the setting up of a framework for economic recovery.

The country's new economic managers are, in fact, confronted with a Herculean task. The collapse of Zimbabwe’s economy is well documented. The country’s inflation rate of 11 million percent is the highest in the world. At least eight in 10 people are unemployed.

The economic crisis has also seriously affected the country’s income levels. The intensity of the economic crisis has set the country back by more than half a century. In 1953, the average income of an average person living in the then Rhodesia was $760 per year. In 2005, the average Zimbabwean had fallen back to that of the 1950s -- wiping out income gains over 56 years.

Estimates suggest that at least 85 percent of the population is living in poverty. Since 1994, the average life expectancy in Zimbabwe has fallen from 57 years to 34 years for women and from 54 years to 37 years for men. Most economic indicators have worsened so badly, it is almost difficult to find a comparable economic case in recent times.

The first task of the new Finance Minister will undoubtedly be to manage the drafting of a consultative and carefully considered economic recovery plan before entertaining or accepting any economic recovery package from the international community.

Reports suggest that the IMF, which suspended financial and technical aid to the country in 2006, is ready for talks with the new government about stabilising the economy.

However, before begging for alms, a country specific recovery plan which contextualises the multi-dimensional causes of the current economic crisis is important before a prescription is administered.

The economic success of the new administration would ultimately depend on the extent of cooperation it is able to secure from trade and industry, the farmers and the trade unions. It has also to persuade the people to accept a long, preferably five-year, period of austerity so that the country, at present having one of the lowest savings rates in the world, is able to save more, invest more and employ more.

The new administration should also be cautioned against impetuous destabilisation of current economic structures by replacing key finance personnel for political gain.

One such mistake would be the suggested immediate removal of the current central bank chief. If he is to be removed, it should be because the new government is seeking a different direction based on formulated policy than for his alleged misdemeanours or to settle political scores.

More crucially, the new government will be judged on the quality of its recovery proposals and what it does within the first 90 days of assuming office. The finance minister will have to strategically deflate people’s expectations by honestly declaring that the MDC has no magic wand for a quick turnaround and that any austerity measures may result in a period of painful adjustments.

According to Professor Anthony Hawkins at the University of Zimbabwe, it could take us another 10 years to get back to where we were in the 1990s and 15 years to get back to where the country was in the 1980s.

Economist John Robertson suggests that before Africa’s worst basket case economy can be revived, it is going to get worse before it can get better. To immediately cushion the public against further suffering, the new administration can consider launching efforts aimed at poverty alleviation which can be funded by international organisations without the conditionalities often associated with adjustment projects.

Although it will eventually be accepted that economic recovery will be a process not an event, measures can be put in place to stop the vicious cycle of economic decline -- an environment where people are able to concentrate on consumption and investment with confidence.

The Prime Minister’s speech to bring back goods to the supermarket shelves and medicines to hospitals can be achieved in the short term by abandoning the ruinous price control policies adopted by the previous government which resulted in price disequilibrium and commodity shortages.

One of the major problems with the previous government was lack of clarity and consistency in policy direction. Whilst famously rebuffing ‘bookish economics’, the country’s economic model has often been a confused blend of social equity and market economics.

The fragility of the Zimbabwean economy requires an economic approach which is a judicious mix between the free markets approach and an entrepreneurial paternalist state to guide development. Implementing these structural reforms should aim toward a competitive society that thrives on global trends, and putting the bubble economy completely behind us.

Restoring investors' confidence should also be a major objective of the new government. Before we can attract foreign investment, the interest rate policy will have to be reassessed to attract sizable domestic investment.

Years of political bickering have left behind a polarised business environment criminalised by overregulation. The Zimbabwean business community will have to be engaged into a social contract discussed by the author at length in previous articles.

Almost every recovery of mismanaged economies or economies afflicted by hyperinflation such as Germany, Israel, Brazil and Bolivia have adopted social contracts as part of their turnaround plans. Stakeholders in those countries collaborated with real intent to reverse the economic problems.

A viable social contract must be grounded in a clear and widely shared set of values and expectations. It must build an economy that is strong and durable based on trust and respect for each other.

For a social contract to work, politicians have to be willing to subordinate political survival to the overriding need to genuinely address the causes of the economic malaise, achieve economic recovery and redress the suffering of the majority of the people. To restore investors’ confidence, law and order must also be improved radically and the run-down infra-structure strengthened quickly.

When the country is indebted to the extent of 100 per cent of the GDP, and 90 per cent of the tax revenues going towards debt servicing, the current fiscal policy measures will have to be restructured.

To achieve that, we need to increase the tax base, increase domestic savings, carry out pragmatic tax reforms, turn-around the state enterprises towards profitability, boost agricultural productivity, revive industry and promote austerity measures. Pervasive corruption within the civil sector should be an important focus in arresting state leakages and improving investor confidence.

These various measures should provide a framework on which a substantive economic recovery plan can be constructed.

The implementation of the economic recovery plan will not be without its challenges. Some sectors of the international community have already raised concern that the architects of the economic implosion are still in their positions. As a result, neither generosity nor austerity will be delivered as enthusiastically as might have been a fresh start.

The EU and the USA have also decided to adopt a wait and see attitude preferring to watch the unity agreement’s implementation before a decision to withdraw sanctions is made.

Internally, the compromise parallel governments which have resulted from the agreement may result in policy paralysis, where much is said but little is done. If the unity agreement between the major political parties were to hold, the new government presents a golden opportunity to revive the country’s economy from its state of collapse. This perhaps is the best opportunity for a NEW ZIMBABWE.

Lance Mambondiani is an Investment Executive at Coronation Financial Plc, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com. Please contact us should you wish to subscribe to our mailing list. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.

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