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The myth of economic recovery
Eric Bloc
August 23, 2012

http://www.theindependent.co.zw/2012/08/23/eric-bloch-columnthe-myth-of-economic-recovery/

There is continued despondency over Zimbabwe-s economy notwithstanding government and Finance minister Tendai Biti-s claims that economic recovery is progressing, albeit slowly. Many contest the view that there has been economic improvement, or that it is occurring, believing claims of recovery are fictitious and/or made only with political objectives in mind. This perception of the population at large poses the question: Are Zimbabweans economically whipped for many years, oblivious to change, or are politicians who claim economic change is occurring hallucinating or merely pursuing political agendas?

The reality is that three years ago there was one positive development in Zimbabwe; and that is the cessation of the highest hyperinflation ever. In 2008, Zimbabwe experienced inflation at a rate of several trillions percent. So rapidly were prices rising that most retailers stopped displaying prices of their goods. Instead, shopkeepers resorted to adjusting prices on their computerised cash registers or by cashiers adjusting prices upwards by percentages prescribed by traders during each day.

In early 2009 the newly-formed Government of National Unity effectively stemmed that hyperinflation by adopting the multi-currency system comprising the United States dollar, South African rand, Botswana pula, British pound and the euro. By so doing, to a significant extent Zimbabwe-s inflation was aligned to the inflation rates of the countries from which those currencies came from. Of even greater import was that, by virtue of Zimbabwe no longer having its own national currency, the Reserve Bank of Zimbabwe and government could no longer resort to endless printing of money, unsupported by any meaningful national reserves.

Consequently, inflation almost immediately fell to minimum levels approximating 4% per annum, consistent with inflation rates of many of the neighbouring countries, and lower than those prevailing in much of Africa. The impact of that development cannot be credibly denied. However, although hyperinflation ceased, it was not reversed. Most prices of goods and services remained at their January 2009 levels, with periodic marginal increases in alignment to the admittedly low inflation that persisted thereafter. There is increasing doubt as to whether inflation data is materially correct; many are convinced actual inflation is higher than official data suggests.

There is substance to that conviction, especially insofar as low income earners are concerned; for the weightings of the respective components of the Consumer Price Index (CPI) on which inflation rates are calculated today were determined many years ago. In subsequent years, the spending patterns of low-income earners have markedly changed. Their limited resources necessitate that their spending is predominantly on basic foodstuffs, accommodation, utilities, education, transport, healthcare, and minimally on such items as clothing and footwear, furniture, restaurants and hotels.

Inflation on the latter categories has been significantly less than that on the former categories, which deflates the computed inflation rate against the actual rate sustained by most. Hence, whilst there is some substance to claims of economic recovery based on the overall decline in inflation, the fact that prices have not gone back to pre-hyperinflation levels and that there have been unavoidable changes in spending patterns, diminish the real extent of the alleged recovery.

As a result Zimbabwe remains confronted by several other negative economic circumstances. A combination of the limited spending power of most Zimbabweans and an ever-increasing influx of imported goods has impacted upon the productivity and output of most manufacturing enterprises.

Moreover, as an after-effect of the hyperinflationary era and of the demonetisation of Zimbabwean currency, almost all of those enterprises are under-capitalised and devoid of capital resources necessary for viability. In addition, their productivity has been negatively affected by inadequate utilities such as electricity and water and by the paucity of rail and air services. The result has been closure of industries, and the downsizing of most others. This has impacted adversely on employment, and upon the salaries and wages of those still employed.

In a normal economic environment, under-capitalised businesses seek to redress their capital inadequacies by sourcing new investment, or by obtaining loan funding from banks and other financial institutions. But this has proved to be almost impossible in the prevailing environment. Investment funding is extremely limited as potential investors fear for the security of their investments as a result of the unstable political environment, ill-considered and oppressive indigenisation and economic empowerment policies, and pronounced government bureaucracy. Similarly, access to loan funding is marginal.

The public-s lack of confidence in the banking sector after the collapse and failure of many banks has minimised deposits which in turn curb banks- lending. Financial institutions also experience great difficulty (for like reasons) in sourcing international lines of credit to enable comprehensive lending to commerce and industry. Because of their limited lending ability, such loan funding as the banks can provide is of limited tenure, and subject to exceptionally high rates of interest and allied charges, coupled with demands for considerable collateral security.

One of the platforms used by politicians to justify claims of economic recovery is the progressive upturn in the agricultural sector (save for the 2011/12 season when poor rains severely reduced production). It must be acknowledged that there has been some significant growth in tobacco production, to a large extent because of corporate contract farming, although total production was nevertheless only marginally more than 50% of that achieved in 2001 when draconian land reform policies undermined the sector-s viability. But production of maize, wheat, cotton, sugar, and many other crops is at a low level compared to the 1990s and compared to the country-s economic needs, whilst the national livestock herd is only at 36% of its peak level.

Another major economic ailment is the impoverished state of the national fiscus where there are accumulated debts of many billions of dollars, inability to fund essential infrastructural needs, recurrent below-budget revenue inflows and therefore ongoing fiscal deficits. At the same time, it is certain that there are many in government who continue to resort to costly, corrupt practices.

The problems of manufacturing industries, agriculture, the fiscus and others prove the economy continues to be grossly emaciated and to say Zimbabwe has attained economic recovery, such recovery is of so little real extent that to a substantial degree, the recovery remains a myth.

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