After a couple years of recession, the Zim economy grew in 2021. The World Bank says we grew by 5.1%.
Now, increased economic activity necessitates and causes a growth in money in the economy. With this in mind, it is reasonable to have the 27% growth in reserve money we saw here.
Only problem with this is that the govt wants to “buttress the growth trajectory established in 2021” and might end up shooting us in the foot.
The government will almost double 2021 spending this year. This will be done to drive economic growth as we seek to grow by 5.5% in 2022.
Government spending and inflation
This plan of theirs is fraught with potential problems. Govt spending or so called expansionary fiscal policies often lead to inflation.
The Zim govt says in addition to taxes, they will fund their spending by issuing bonds. All well and good, this won’t lead to an increase in reserve money. Both taxes and bond issues in effect mean the government gets its funding from the market and not necessarily from printing (or issuing itself) money.
Crowding out
However, the govt will likely crowd out the private sector. Like we saw with open market operations, they will be attractive to many in the private sector. So, rather than risk investing in their businesses, they just lend the money to the govt. The much needed private sector growth will be curtailed a little with each bond that is bought.
Govt inefficiency
So, the private sector which employs the majority of Zimbos grows at a lower rate. And our hopes will then be on the govt to efficiently spend it all. Yes, the same people who can misplace US$15 billion will become our efficiency champions. Yeah, right.
High taxes, low growth
Also to consider is how funding from taxes may not result in the adequate demand growth which helps economies grow. Taxes represent a reduction in people’s spending power. The Zim govt taxes like its going out of fashion and so the taxed will not be able to spend as much on the goods for sale in the country. Businesses suffer for this.
However, it has the effect of reducing the chances of inflation. I hope the RBZ is reading, because when people have reduced disposable income thanks to taxes, or anything really, demand drops and so suppliers cannot increase prices willy nilly.
How govt spending hurt us in 2021
We should note that the govt wishes to divert part of its spending to infrastructure in 2022. There were significant infrastructure projects that were funded in 2021 and we are not the better for it.
Many economists and businesspeople becried that beneficiaries of these huge infrastructure project tenders were the same ones flooding the market with Zimdollars. They argue these massive amounts of money were chiefly responsible for the parallel foreign exchange market collapse.
That’s where the main problem lies. The govt spends billions of Zimdollars and yet all the beneficiaries of that money look to convert it into USD at the earliest convenience.
So, in 2022, the promise that the govt will double its spending means double the Zimdollars on the black market. Which will lead to an accelerated Zimdollar collapse. That’s even before the US interest rate hikes come in to complete the job and tank the Zimdollar for good.
More terrible ways to spend our money planned
Thing is, we can complain when, say, a road construction company helps tank the Zimdollar. As we have the right to. However, if the road is built, we can then enjoy the road. On the flip side, what if the spending went to parastatals? What can we point to after all is said and done in that case?
Zimbabwean state-owned companies are not the bastion of stellar performance. Therefore it saddens me that there are significant amounts earmarked for recapitalisation of parastatals. It’s as if all the above wasn’t enough, the govt will be wasting even more time and money on state-owned companies. They promised us they would be selling them off a while back. Guess it was the old govt fib cause they are actually recapitalising.
How many of us are truly excited that the govt, with a straight face, confirmed that AirZimbabwe is ripe for a recapitalisation exercise in 2022? I am not alone in thinking they should just sell off as many of these companies as they can. Instead, they are committed, even to AirZim of all companies.
Two steps back
Let’s be honest, fixing the Zim economy will be no easy task. I do not envy those in decision making positions. There are so many dials and switches to mess about with that it would take a miracle to get the plane off the ground.
However, when we see two contradictory govt positions we can’t help but get mad. All the gains made in tightening the money supply and somehow taming inflation a little are offset by other fiscal policies. In my opinion, govt spending will be the death of us. Just like it was a major factor in our initial hyperinflation run in the noughties.
With the 2023 election cycle, we can be certain (off-book) govt spending will reach ungodly levels. My advice – enjoy the calm before the storm.
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Quote: “Let’s be honest, fixing the Zim economy will be no easy task. I do not envy those in decision making positions. There are so many dials and switches to mess about with that it would take a miracle to get the plane off the ground.”
No serious investor is even going to knock on the door, until the basics are in place! Power supplies are erratic, to put it politely (yes, my UPS is doing its thing as I write this and generators are going at full taps as well), water supplies are equally as bad, investors are dictated to as to who can own how much of the enterprise, and the currency is yet again in free-fall! Top this up with rigged elections, no hope whatsoever of any positive change in the next 3 plus years, and that’s just for starters! If there are any positives lurking in the shadows here, please post them! Would love to see something positive, other than a covid test!
It’s a chicken and egg problem. We need investment to boost productivity and stabilise the economy. Yet we need a stable and productive economy to attract investment.
Without the basics you mentioned we are just not an attractive destination. We need to make some headway before we can expect serious FDI. We do have the natural resources and the climate conducive for agricultural excellence. If we set the conditions right, business could thrive but with an upcoming election, no such thing will happen soon.
In the meantime, ordinary people must buy products Made in Zimbabwe. Every little bit helps.
This economy has gone fully blown informal. All the measures and metrics being published are irrelevant. Common economics requires these however and and of course they can always be provided. The WB, IMF, AfDB, parliament, the RBZ etc require these metrics as a matter of economic principle. But in our economy they are irrelevant.
How can you explain the massive housing projects in Harare, Byo, everywhere. Domboshava, Chitown, Ruwa, Rusape, Nyazura, everywhere. Where is the money coming from? People are building everywhere and the houses are mansions by any world standard. And you talk of shortage of money in Zimbabwe. Doesn’t make sense. The money is there but not accounted for in the metrics.
Same goes for the imports, exports, FDI etc. With the porous borders, weak financial systems and corruption, measurement of these is nigh impossible.
I totally agree with you, a lot of productive activities are not being factored into the calculation of GDP.
We were meant to believe that informal sector is not of any importance in the calculation of the above.
Its unfortunate.
Today China is the biggest economy but because of the way calculations are done, its still second to America.
I totally agree with you 🤝 Remember, “The key to understand modern life is knowing what to measure and how to measure it” – Levitt and Dubner
Agreed, the crowding out analogy is misplaced and does not apply to this economy
Spot on!
Government spending is not always inflationary. When the large budget deficit is supplemented by use of Tbs ( treasury bills). This mopes all the excess liquidity in circulation. However, when money is printed to supplement larger budget deficit there lays the the inflation issue.
Thats a balanced analysis, no politicking.
If we can start seeing things in an apolitical position, then Zimbabwe will go forward.
Munenge manyepa boss Crowding out does not apply to this economy because unemployment is at 90% this is a highly informal economy so if gvt borrows all it does is employ those who are unemployed. Your analysis assumes economy is operating at full employment which is not the case in Zim, the major projects will actually grow GDP. Musanyepere vanhu tsano
Agreed, the crowding out analogy is misplaced and does not apply to this economy when unemployment is at 90%, mfess anenge arikushandisa google economics uyu, probably doesnt fully understand what Crowding Out means and its effects