31 May 2019

Zimbabwe: The Centre Can No Longer Hold

SIGNS of economic collapse mounted this week, with no solutions in sight, amid increasing calls for the authorities to show leadership by containing the turmoil before it spirals out of control. What is happening to the economy seems to confirm the International Monetary Fund's projection that the economy will contract by 5,2% this year.

Aggregate demand is falling, production has been decimated, purchasing power is being eroded and inflation is unrelenting. Shortages of fuel and electricity are buffeting, not only the economy, but also the day-to-day lives of long-suffering citizens. This week, chaos erupted at petrol station forecourts when some fuel retailers suddenly increased prices, catching motorists by surprise. Government reacted predictably, with Energy minister Fortune Chasi condemning the price increase and emphasising that no price adjustment had been authorised. He warned: "Remedial action will be taken."

The tension between government and fuel importers could have been avoided. A climate of mutual suspicion is unhealthy for all the stakeholders. It is bad for the fuel retailers because they cannot thrive in an environment characterised by heightened risk and uncertainty. It is bad for government because it sends a terrible message to investors, who are naturally averse to a commandist approach to economic management. More importantly, it is bad for the already burdened consumers, who must now contend with yet another headache.

What has astonished the neutral observers is that government can impose price controls on fuel, yet players in the petroleum industry are sourcing their forex on the interbank and parallel markets where, as everybody knows, the rates are no laughing matter.

Price controls -- especially in an environment where companies are not allowed the latitude to operate profitably in line with the dynamics of open market forces -- are untenable. They undermine the profit motive: which is the reason why businesses exist in the first place. If importers are sourcing most of their forex on the open market, how on earth can government force them to sell their products at a controlled price? As history has shown, price controls are often a clumsy way of managing an economy via direct intervention.

Prices of basic commodities are also shooting up, obliterating the quality of life of the average Zimbabwean who does not earn a forex-denominated salary. This means disposable incomes are being severely eroded -- and there are virtually no social safety nets to rescue the vulnerable, who now constitute the overwhelming majority.

The rapid rise in prices of foodstuffs and other items that comprise the basic consumer basket is worrying. The end result can only be social unrest, as recent experience has shown. An increase in urban poverty, for instance, is directly linked to a rise in such crimes as muggings, housebreakings and robbery.

The answer to Zimbabwe's economic mayhem is to ramp up production. The authorities can tinker with the symptoms of economic malaise -- as they are currently doing -- but lasting solutions will remain elusive as long as the fundamentals are not addressed. There are no shortcuts; what is needed is a brick-by-brick reconstruction of the moribund economy.

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