Zimbabwe is currently facing a financial quagmire. Stocks are falling, taxes have been raised, unemployment is rising and investment is not forthcoming. What then should the country do?
Reserve Bank governor, Leonard Tsumba, gives his views on how investment growth can be achieved. This is excerpted from his keynote address to the Institute of Chartered Accountants in June, a month before the current budget, but it appears his advice was not listened to.
The level of unemployment in Zimbabwe is very high, currently estimated to range between 26-40 percent. To reduce it to acceptable levels, will require investment to rise over 30 percent of GDP.
If such rates are matched, this should improve the general welfare of our population. There is no reason why Zimbabwe cannot achieve this, given its diverse resource endowment and existing technology.
Since 1990, the average rate of annual economic growth has only been 1.8 percent. In comparison, population growth has remained high. This has resulted in falling per capita incomes and low standards of living.
To reverse this decline and release Zimbabwe’s full production potential, it will be necessary to raise and maintain both savings and investment at high levels.
Because of the strong relationship between investment and long-term growth, economic reforms have always emphasised the need to stimulate investment. Our economy, has not been able to fully capitalise on the reforms instituted in 1991, however.
The manufacturing sector, in particular, was expected to underwrite the economic growth promised by these reforms. Failure to achieve the anticipated high growth has partly been due to low investment and failure to forge critical trade linkages with important global markets.
Having said this, however, bold policy measures aimed at raising savings are also essential if meaningful domestic investment, complementary to the investment activities of foreigners, is to take place. Thus far, investible surpluses available to support domestic investment have remained very low.
The savings ratio has been targeted to rise to over 30 percent of GDP, in line with the experiences of rapidly developing economies since 1991. Savings have however, only averaged 14 percent of GDP per year, far lower than necessary to ensure a sustainable rate of investment of over 30 percent of GDP per annum.
Public sector dissavings, reflected by fiscal deficits, currently estimated in excess of 10 percent of GDP, have also contributed to the overall poor savings pattern. Low net savings ratios have meant investment of only under 19 percent of GDP significantly lower than targeted.
Furthermore, overall investment, including investment in infrastructure and essential social services – such as in health and skills training has barely kept pace with the depreciation of existing infrastructure, let alone the growth requirements of the economy.
Gross capital expenditure over the fiscal years 1990/91 to 1996/97 has grown by an average of only 1.6 percent per annum in real terms, against the estimated 2.5 percent per annum depreciation allowance on infrastructure. As a proportion of GDP, capital expenditure fell from 4.5 percent to 3.4 percent over this period.
The experiences of other countries show that high domestic savings are a pre-requisite for high levels of investment and growth. The most successful region over the past thirty years, in this regard, is South East Asia.
Several economies of this region have grown at average rates of about 8 percent of GDP per year, and have maintained high savings ratios upward of 30 percent.
Malaysia and Indonesia, for example, experienced savings rates of 37 percent and 33 percent of GDP, respectively, in 1994, and investment levels of 39 percent and 30 percent.
The savings ratio is even higher in Singapore, at 51 percent of GDP, while in Hong-Kong the savings ratio stands at 33 percent.
In contrast, the savings to GDP ratio fell, from 12 percent in the 1960s to about 6 percent in the 1990s, in sub-Saharan Africa. The implications for real economic growth are obvious.
Annual average real growth rates of only 0.9 percent have been achieved during 1990 – 94. As a measure of worsening social welfare, per capita annual incomes have declined from US$680 to US$460 over the ten year period, to 1994.
Over the six years to 1995, Zimbabwe grew by an annual average of 0.8 percent, well below the 3 percent population growth rate and the sub-Saharan Africa average growth rate.
Reflecting this, total formal sector employment over the same period grew by only 6 percent, such that annual average growth of 1.2 percent was realised, much lower than the rate required to absorb thousands of unemployed Zimbabweans.
These low savings and investment ratios, therefore, translated into low growth rates, as measured by per capita income, and will continue to decline over the years unless bold measures are taken to reverse this trend. At such low growth rates, it would take Zimbabwe a century to double its overall GDP from current levels of over US$8 billion.
Given our high population growth rate, Zimbabwe will continue to be a poor country for a long time, unless measures are taken to stimulate faster growth and/or sustain current rates of real growth.
Economic reforms will, hopefully, lead to a reversal of this trend. A shift in government policies is, therefore, required, such that the budget also begins to contribute to the country’s savings rate by ensuring that government moves boldly to a balanced budget or surplus position, over the next three years.
It need not be emphasised that, in our own country, fiscal instability, persistent high inflation and interest rates, unstable exchange rates and balance of payments dis-equilibria undermine production and make the attainment of sustainable growth at anything above 5 percent almost impossible.
Increased private investment will require, in particular, lower fiscal deficits and inflation to reduce investment risks, high nominal interest rates and the crowding out of the private sector. This will necessitate that we address the high public sector expenditure profile.
The deficit has remained high, over 10 percent of GDP, posing high demand for domestic resources by the public sector, and this has in some measure contributed to higher production costs and to loss of export markets.
It is only with increased private sector production and employment generation that government will see tax revenue expand. It seems to me that all efforts should now be focused in this direction.
Capital investment and expenditure, complementary to the private sector, such as, infrastructure, agricultural research, education etc., however, must rise from current levels of 3.4 percent of GDP per year to at least 5 percent per year in order for current real growth rates to be sustained.
While liberalisation of the investment climate has led to a positive response on the part of portfolio investment, some of which represents short term speculative investments, through the Zimbabwe Stock Exchange, the accent should now be on foreign direct investment because of its long term benefits, in terms of both employment generation, transfer of technology and access to export markets.
In order to attract foreign direct investment, there is, however, need for government to underwrite such investment inflows through the adoption of a transparent, consistent, predictable and formal investment code.
Such arrangements should, among other things, ensure the reduction of bureaucratic procedures, and allow, where appropriate, immigration of expatriate labour to accompany such investment.
The objective should be to establish international standards consistent with foreign investor expectations. This is most crucial because Zimbabwe competes with the rest of the world for scarce foreign direct investment.
Of the US$90.3 billion global foreign direct investment, in 1995, to emerging markets, Sub-Saharan Africa received only US$2.2 billion, while the rapidly industrialising South East Asia and the Pacific received over US$55 billion and Latin America and the Caribbean, US$17.8 billion.
Relative to this, direct foreign investment to Zimbabwe remained very small. In 1995, this amounted to only US$118 million, and further declined to US$86 million in 1996.
It is crucial that the budget now focus on stimulating economic activity, through appropriate tax incentives targeted, for example, at the export sectors. This can be achieved by government offering investors such incentives as relief from income and profits taxation, in the form of investment allowances and grants, tax holidays and the provision of accelerated depreciation allowances which would offer more tax relief than straight line depreciation.
Investors and exporters could be offered tax incentives which are related to incremental investment and employment creation and export generation. In this way, Zimbabwe should be able to guarantee sustainable real growth above population replacement levels.
Other possible incentives could include pioneer status to manufacturing companies that go into totally new areas of production, introduction of new technologies and products, especially for the export market. Such incentives could also include exemption from payment of duty, levy and sales tax on scheduled materials and equipment, specific to such companies.
Lessons from the Asian economies, such as Malaysia and Thailand, underline the importance of Export Guarantee Schemes. Introduction of an Export Credit Guarantee and Insurance Scheme, emphasising beneficiation of primary products, would not only stimulate export growth, but would lead to higher value added exports.
This, in a way, is what the World Bank finance facility and the Afri-Exim Bank are attempting to do. There is need for Zimbabwe to have similar home- grown schemes.
Critical to growth, and essential for the transformation of our economy, is that we recognise the importance of the export sectors. If we emphasise investment for production for domestic consumption alone, we will fail – and fail dismally.
Zimbabwe’s market size is too small to ensure a high but steady real growth. High exports growth is, therefore, crucial in order to enable the country to finance most of its investment and development requirements.
To achieve export-led economic growth, we must upgrade our export promotion efforts, and these efforts must be supported by the transfer of appropriate technology and investment in necessary infrastructure, especially improved telecommunication services, electricity and transport networks.
These have become key factors in assuring competitiveness, efficiency and to guarantee foreign investment inflows, at levels necessary for Zimbabwe to meaningfully move forward.
More investment in marketing training is also needed to get our companies to upgrade product quality, as a way of improving competitiveness in export markets. This should be supported by improved packaging design as well as the adoption of an aggressive export marketing strategy. ZIMTRADE have done well in this regard- but much more needs to be done to meet international standards – across Zimbabwe’s entire production spectrum.
Although financial liberalisation has given fresh impetus to the economic growth potential of Zimbabwe, the challenges experienced in the conduct of monetary policy have brought into sharp focus the need for a careful blend of our monetary and fiscal measures.
This is because, without a significant reduction in money supply growth, inflation cannot be reduced to the desired single digit levels. This requires that monetary policy remains tight.
Alternatively, non-inflationary deficit financing could achieve this objective more effectively. Although causing hardships for the business community and the general population, our experience, in the absence of budget balance, is that the benefits of a tight monetary policy stance outweigh the costs.
Financial liberalisation, which has led to market oriented efficient financial systems, has been an important component of the country’s infrastructure development, without which economic growth would not take place. Dynamic and efficient financial systems, therefore, remain crucial for enhancing economic growth.
Investment promotion efforts often fail to fully acknowledge the economic growth potential of small to medium-scale enterprises. It is my view that small to medium-scale enterprises constitute the best hope for rapid employment generation in Zimbabwe.
Established companies should be encouraged to provide marketing and quality control services to such enterprises. To ensure timely availability of products for marketing, both for the domestic and export markets, the small scale sector would benefit from the provision of warehousing facilities for their products.
Sub-contracting by larger firms would also enable linkages which would allow the larger companies to concentrate on core activities, while leaving it to the more flexible and versatile small-scale enterprises to handle varied jobs which take up time and expense but make little or no contribution to the profitability of the large companies. The employment pay-off from such arrangements is not insubstantial.
Lastly, but not least, re-orientation of the education system towards what is more relevant to the economy is now necessary. While the expansion of the educational system since independence has been impressive, the challenge is now to change the education culture towards matching skills and jobs.
The introduction of a self-employment perspective in school curriculum is, therefore, important and should involve a shift in resource use towards technical and vocational education, general skills training and the development of managerial skills essential for an export-oriented manufacturing economy.