17 April 2014

Zimbabwe: Need for Speed to Liberate Zim Economy

Photo: Antony Kaminju/IRIN
A woman sells vegetables at a food market in Harare.

The International Monetary Fund (IMF) and World Bank Group held the annual Spring meetings in the United States last week.

Thousands of guests, mainly finance officials, central bankers and other top officials gathered at the three-day meeting. Focus of the meeting related to the global economic outlook, the expected downside risks as well as key reforms to these multilateral institutions.

The IMF chief, Christine Lagarde, noted that the world economic growth momentum was gradually improving despite being uneven across the globe.

Zimbabwe was also represented at the global event and there were key areas discussed that policymakers may need to adjust to and adopt to minimise the impact of the forecast downside risks for sustainable economic growth.

To put things into perspective, the IMF expects the global economy to grow by 3.6% in 2014 compared with the 3% registered in 2013. Supportive monetary policy in advanced economies, reduced fiscal drag, (except in Japan) and easing crisis legacies were the major factors which supported 2013 growth.

Growth in the current year will be driven mainly by the continued recovery in the US economy.

The IMF and World Bank argue that global headwinds from the great recession are receding, allowing monetary policy--both conventional and unconventional--to normalise. Recovery in Europe, particularly Germany and United Kingdom, as well as emerging market economies, would also spur global growth.

Whilst the global economy is expected to grow compared to prior year, the rate of growth is lower than the 3.7% initial forecasts by the IMF at the beginning of the year.

Rising geo-political tension, particularly the Russian-Ukraine conflict, poses a new threat according to the multilateral lenders and hence the downgrade.

In emerging markets (EM) in particular, optimism about growth and convergence has been tempered by weakening performance and more adverse external conditions such as capital outflows and falling export demand due to lower Chinese growth.

Five countries have been particularly affected by this sudden reversal of EM capital flows, given their large current-account deficits: Brazil, India, Indonesia, South Africa and Turkey.

This group, now called the Fragile Five, has seen the largest weakening of their currencies and the biggest impact on economic activity.

Their growth appeal has declined which recently led to their downgrade by the IMF and World Bank. Another downside risk relates to the deflation risk for Europe due to the persistently low inflation in the area now termed "lowflation." Japan is another nation also facing the same risk.

In light of these risks, the IMF chief proposed that central bankers in the euro area take bold measures to address the low inflation levels. Maintaining accommodative monetary policy was the major tool that the IMF proposed and preservation of low interest rates.

In addressing the EM economies' weakness, one of the measures preferred was the US avoiding an abrupt end to the quantitative easing program as well as ways to prop up activity in China. Lower China growth and the turn in the commodity cycle is a drag on export prospects of many countries, particularly commodity-exporting emerging markets.

The IMF also proposed ways to alleviate the geopolitical tensions mainly the Ukraine-Russia conflict. In addition, the IMF chief made recommendations on measures to adopt to improve job creation across the globe and the reduction of public debt by governments.

Key to note from this global event is that turning the corner for any economy should not be an impossible thing requiring "out of the world" measures.

This is because the measures that are being proposed by the IMF are standard and straight forward.

Policy-makers in Zimbabwe may need to consider such a stance and take the necessary bold moves.

For instance, a major constraint locally has been the liquidity squeeze. Policymakers need to consider ways to attract foreign capital to ease this animal.

This is achieved by formulating and implementing investor friendly policies.

Key to this area is the need to attract more foreign direct investment (FDI) inflows relative to portfolio investments. This is because most of the EM countries that have been adversely affected by the QE taper are those that have been attracting bigger portfolio flows than FDI flows.

Zimbabwe may need to address this area as it is the "only" game-changer for pulling the country out of the care-and-maintenance mode it currently is stuck in.

Another important area on which policymakers need to focus, just like the emphasis by the multilateral lenders, is that of inflation.

Zimbabwe's low inflation levels simply reflect the trends in the economy where aggregate demand has weakened considerably.

Thus searching for ways to prop up economic activity will go a long way to address this monster.

The critical ingredients for such revolve around improving disposable incomes. An increase in investments especially for retooling and embracing technological developments for the private sector will also make a difference in reducing the output gap locally.

Overall the government will need to address the misfortunes haunting the domestic economy as all indicators are pointing to a sinking ship.

Disposable incomes are declining for households, revenue and earnings are following the same trend for corporates whilst government coffers too have been shrinking.

Attracting capital, sovereign debt reduction, investments and infrastructure development must be adopted sooner rather than later if sustainable economic gains are to be achieved.

Rather than policymakers going abroad with begging bowls, they could better concentrate on the need to create the correct atmosphere for attracting investment capital.

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