THE Transitional Stabilisation Programme (TSP) is nearing its end and the verdict amongst state actors and policymakers is that the reform programme has been a success because it has been able to induce macro-economic stability, but with negative economic growth rates.
Prior to the programme’s introduction in October 2018, Zimbabwe had endured relatively stable inflation rates since 2009, but had failed to sustain the high levels of growth experienced between 2009 and 2012.
This calls for a robust assessment of the reforms in the TSP and whether they meet the objective of economic growth or are they an end in and of themselves.
Stuti Khemani, in a working paper for the World Bank titled Political Economy of Reform, defined reforms as changes in government policies or institutional rules because of existing policies whose dysfunction leads to stunted economic growth. Therefore, reforms are not the objective, but the means towards equitable and sustainable economic growth.
In that same manner, Godfrey Kanyenze et al, in their book Beyond the Enclave, note that the common mistake in any reform programme is for policymakers to mistake macro-economic stabilisation, liberalisation and state enterprise privatisation as an end and not as a means to an end.
The Ministry of Finance attributes its efforts in balancing the fiscal budget and obtaining fiscal surpluses to the TSP. Moreover, the programme has also been lauded for reducing the civil service wage bill as a percentage of the budget and thus freeing up funds to channel towards capital expenditure. However, the reduced percentage of the civil service wage bill is due to the high rate of month-on-month inflation, which was 761,02% in August 2020.
The failure by the government to increase expenditure to cushion civil servants from the inflationary pressures has resulted in real wage compression. A result has been the reduction of the government’s wage bill from 70% to 30% of total expenditure, which has been touted as a major achievement by the government. The International Monetary Fund (IMF), in its 2020 Staff-Monitored Programme, observed that since January 2018, inflation had eroded public sector wages by at least 80%, from about US$5 000 per year in 2016 to less than US$1 000 in 2019.
The wage compression has seen the average civil servant earning an average basic salary of ZW$3 000 (US$36,71) against a poverty datum line of ZW$15 573 (US$190,61) for a family of five as of July 2020. Therefore, it is disingenuous for the government to celebrate a fall in civil servants wages as a percentage of expenditure as part of the reform initiative.
In its Consolidated Financial Statement in June 2020, the Ministry of Finance reported that it had a budget surplus of ZW$4,820 billion (US$59 million) and surpassed its revenue targets in the six-month period starting in January 2020.
However, the authorities have failed to reveal that this increased inflow of tax revenue was driven by inflation and not improved economic performance. Moreover, part of this surplus can be attributed to the 2% tax which, despite having its threshold increased to ZW$100 (US$1,22) in 2020, still overburdens the poor and the civil servant whose average salary is ZW$3 000.
In an article titled Retailers reel under diminished demand, published in the Zimbabwe Independent of September 4, the Zimbabwe National Chamber of Commerce and Confederation of Zimbabwe Retailers presidents were quoted to have expressed concern over the dwindling levels of disposable income and its impact on aggregate demand, which has affected the performance of major retailers in the country. As an indicator of fiscal management, public sector wage compression may appear as a success, however, the danger of this approach by government will likely lead the economy into a perpetual low-income cycle and thereby reduce the standards of living and economic growth.
The TSP has failed to stimulate economic growth and in 2019, against a growth target of 9%, the economy contracted by -6,5% due to climatic shocks and, according to Equity Axis, in 2020 the economy is expected to contract by as much as -12% against a growth target of 9,7%. This is in the context of the Covid-19 pandemic that has caused strain on global growth figures in 2020. The economic contractions in these two years have been blamed on exogenous factors, but the magnitude of their impact brings to question the degree of preparedness and capacity of the government to absorb economic shocks.
It is important to recognise that the surge in inflation over the last two years is due to what the IMF referred to as “policy missteps” by the monetary authorities, which included liberalising the foreign exchange market in line with the TSP and increasing money supply. Thus, the success in month-on-month inflation rate reduction, from 837,53% to 761,02% in August 2020 comes because of the corrective measures introduced by the government in trying to correct its initial mistakes. It is important for the authorities to admit to their mistakes if they are to regain public trust and maintain the social cohesion required for the success of a reform programme.
Having noted that reforms are a means to economic growth and prosperity, it becomes pertinent to ask why the reported successful macro-economic stabilisation efforts have not yielded any improvements in the standard of living for the average Zimbabwean. The answer lies in the observations made by Khemani that the idea of reforms has evolved from issues to do with macro-economic stabilisation and market liberalisation and inclined more towards issues to do with reforming public institutions to address rent-seeking amongst public officials.
This follows the realisation of failures of free markets and therefore the growing need for strong public institutions and enterprises in addressing market failure.
The Auditor-General, through her reports, has pointed out non-compliance and lack of accountability and transparency in state-owned enterprises as the major constraint to public enterprise performance. The Public Accounts Committee on Compliance Issues for the Finance ministry has buttressed the Auditor-General’s reports at a macro level and observed that there is rampant misuse of public funds in violation of various Acts of Parliament and the constitution.
It becomes evident that despite the reported successes on the fiscal front, the binding constraints to economic growth in Zimbabwe are its institutions of governance. Kanyenze et al advise on the important need for the government to “… focus on the binding constraints on economic growth rather than take a laundry list approach”.
It is evident that the failure by the TSP to address the binding constraints to economic growth has sowed the seeds for its failure. Macro-economic stability and fiscal reforms are not an end, but a means towards economic growth. It is upon economic growth that the state creates a wealth base and can redistribute wealth and improve the overall standards of living.
Given the events of the past two years and the discourse created due to the policy missteps by the authorities, it becomes imperative that the government revises its growth projections, as the current status quo will not permit the realisation of Vision 2030.
Pasipanodya is an economist. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society. — email@example.com or mobile: +263 772 382 852. This article was first published here by the Zimbabwe Independent