News Column

Drastic Shift in Economic Policies Needed

June 19, 2014

Economic performance to date is painting a gloomy picture and there is a gross sense of worry in the market.

The country has pegged its Growth Domestic Product growth forecast for 2014 at 6,1 percent, a figure that was received with high skepticism by the market at announcement. Currently, there seems to be some justification to this skepticism as most economic performance indicators have tumbled or are expected to do so this year.

International monetary organisations such as the International Monetary Fund and the World Bank, had also expressed their reservations over the growth rate forecast by the Ministry of Finance. The World Bank has gone further to revise downward those same GDP growth numbers falling short of predicting that the economy will most likely turn negative in 2017.

Companies have been releasing depressing trading updates as even larger companies like Delta, OK Zimbabwe, Dairibord and Econet are failing to hold fort due to the harsh economic environment.

Being the largest counter on the stock market by market capitalisation, for many, Delta is subconsciously a default performance benchmark.

Its product range is supposedly inelastic and hence a fall in sales is reflection of total mayhem in the economy and it is likely to shake the market. In their report, Delta attributed the low performance to a rapidly declining consumer disposable incomes.

The problem of lower incomes have been mentioned often since beginning of the year and various reports of companies downsizing or closing shop is evidence of just how income levels in the economy have shrunk.

In fact consumers are turning to the low value products, such as Chibuku and Maheu in the case of Delta, as a means of adjusting to their contracting income levels.

Inflation figures from late last year have reflected just how aggregate demand has been backsliding. To date, the country is just holding on to the rails fearing that we may be slowly moving towards persistent deflation.

Government is going to feel brunt of economic challenges as revenue targets are likely not going to be met. In its 2014 first quarter report, ZIMRA reported that revenue for the first quarter was 2 percent above target of US$818million.

Considering the state of the economy, this is only but a miracle. But one cannot expect a country's economy to sail through the year in the hope of a miracle. Fundamentally, if variously industries continue to suffer as is the current case, then it is highly probable that revenue targets will be missed again, as was the case in 2013.

Lower profits result in lower taxes while losses and shutdowns theoretically result in no taxes at all. Other revenue streams like VAT will dwindle on reduced spending.

As things stand, the economy is tied from all corners. If anything, Delta's contracting revenue should be an eye opener to relevant authorities that the country is in need of a drastic shift in economic policies.

Policymakers may need to urgently consider realistic options as a way of curing the economy. A number of solutions have been put on the table chief among them being policy clarity and consistency, securitisation of assets, reducing external debt whereas others have called on the issuance of international bonds such as Eurobonds.

What remains pertinent at the moment is for policymakers' to move away from mere talk to action. Action from this perspective relates to facing to the harsh realities that there is need for proper policy formulation.

This remains key and appears to be one of the methods in which capital inflows can be attracted into the country. Capital inflows are obligatory as a way of easing the current liquidity crunch which has led to company closures, rising retrenchments and softening of aggregate demand.

Up until policymakers move from their comfort zone towards crafting investor friendly policies, subdued growths rates and deflationary pressures will remain the new norm hurting the general populace.

In addition, most investors both locally and abroad have been calling for security of investments. Such a requirement is inevitable if ever sustainable growth can be attained through unlocking capital flows.

Recently, the European Union was reported as citing the need for security in investments particularly in bilateral trades.

They cited investment protection and promotion as pre-requisites for unlocking capital.

Zimbabwe has failed on this end and explains the reason why most Bilateral Investment Promotion and Protection Agreements have failed to be consummated and ultimately the realisation of the intended benefits. As a nation, redressing this area will go a long way as trust just in normal day-to-day business is a prerequisite.

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Source: AllAfrica

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