- Treasury offered little economic stimulus against COVID-19 in 2020
- Limited fiscal coffers to blame
- New incentives to increase forex earnings, employment, and national output
When coronavirus (COVID-19) struck the world heavily in early 2020 forcing nations to implement hard lockdown measures and curfews, governments and central banks engaged in various stimulus initiatives to avert a catastrophic humanitarian and economic crisis in a century. The pandemic has exposed developing nations the most while widening income inequality gaps between and within countries.
Advanced (developed) countries spent staggering amounts fighting the pandemic relative to developing nations. For instance, to date, the United States of America (USA) alone has spent over US$7 trillion since Covid-19 struck the country in February 2020. This amount is nearly fourfold the amount spent by 54 African countries combined. Hundreds of billions were spent on direct paychecks and unemployment benefits for all eligible Americans to survive the pandemic. Companies, large and small alike accessed forgivable loans to remain afloat as production plunged. The US Federal Reserve lowered its policy (interest) rate to near-zero -levels last seen during the Global Financial Crisis. The Fed also engaged in trillions of dollars of bond buying to support the credit market. This has been the trend in other major economies like the Eurozone and the group of Seven (G7) countries.
Domestically, no tangible actions were undertaken by authorities. Zim Treasury announced that it offered a ZW$18 billion stimulus package to help all stretched businesses as well as providing direct cash transfers to vulnerable groups of the population. However, this announcement ended up being a pie in the sky as most top business executives revealed that they did not receive any state-funded loans. If this is true, then the only recipients of that stimulus package were winter wheat farmers who, according to Zim Treasury records, received roughly ZW$6 billion.
One can pose a question: Why did the Finance Ministry offer too little support too late despite unprecedented economic decline? Most expected to see bold policy moves such as tax incentives -lowering taxes or postponing tax filing at the very least.
However, we have to recall that the country was reeling from a deep recession realized in 2019. A popular local research firm, Equity Axis, estimates that gross domestic product (GDP) plunged 10 percent. The decline flowed from inter-alia weak consumer spending emanating from low disposable incomes, volatile exchange rate and subsequent price instability, acute forex & energy shortages, drought, and Cyclone Idai. This severely shrank the fiscal space -room in a government’s budget that allows it to provide resources for the desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. Consequently, (high) taxes were to be maintained to avoid a fiscal blow-out.
Also, the government over relies on the domestic economy (mainly corporate tax and individual tax) to raise revenue to support most of its spending programs. Other developing nations including our regional peers received assistance from international financial institutions (IFIs) like World Bank and the IMF. Zimbabwe could not benefit from this IFI window because of its pending financial obligations. The country defaulted on its debt in the early 2000s and to date, over 70 percent of Zimbabwe’s public and publicly guaranteed debt is made up of arrears. The IFIs maintain that for Zimbabwe to access fresh loans, it should first clear all its arrears, a nearly impossible feat given the status quo. All this made it harder for Zim Treasury to respond forcefully to COVID-19 as witnessed elsewhere. Tax incentives would jeopardize the fiscal side.
Money printing through the central bank was also inadvisable given that the country was facing falling output and the world’s highest inflation rate after Venezuela. Monetarists posit that it is the quantity of money that greatly affects prices. If money stock is increasing disproportionately to output growth in the real sector, we end up with too much money chasing too few goods and through the operation of market forces, it exerts upward price pressures. Also, the Bank could not reduce its policy rate to improve liquidity in the financial markets. A lower policy rate in an environment with a volatile exchange rate and increasing inflation exacerbates the situation as it encourages economic agents to engage in speculative and arbitraging strategies. So, the Bank had no option but to elect a contractionary monetary policy to stabilize prices and exchange rate despite the Covid pandemic requiring expansionary solutions.
Now that vaccines for the virus have been successfully developed, the global economy is expected to recover sharply from a synchronized slowdown experienced last year. However, in this recovery, some countries are likely to be left out. The countries to recover sharply are those with strong fiscal and monetary tools to stimulate their economies.
Given that Zimbabwe’s economic atmosphere is stabilizing though still in a fragile state, it is high time now for authorities to craft a non-inflationary policy mix to aid significant recovery. In my view, vast measures announced by the finance minister, Prof. Mthuli Ncube, on May 10, 2021, are steps in the right direction to support this year’s economic recovery and stability.
The government is putting in place export and investment incentives to promote GDP growth by driving export value growth, diversification, and competitiveness. The economic intuition behind targeting export growth is that higher exports earn forex, lowers the current account balance, create employment for factors of production and accelerate GDP growth. The juicy part of the proposed Incremental Export Incentive Scheme (IEIS) is that it gives the corporate world room to accumulate foreign currency balances in their books thereby minimizing exchange rate losses. The local currency, though starting to show signs of stability against the US dollar, is already down 3.5% since the beginning of the year and ZW$ depreciation pressures continue lingering.
According to IEIS, all exporters who exceed their historical monthly average exports will retain 80% of forex earned from those incremental exports while exporters licensed under Special Economic Zones (SEZ) as well as those listed on the Victoria Falls Stock Exchange (VFEX) are now entitled to retain 100 percent of their incremental earnings. RBZ was taking 40% of all export earnings irrespective of the exporting company’s performance. This policy in its initial form was seriously disadvantaging those in the exporting business as they ended up subsidizing non-exporters at the auction.
So, now powered by the motive of reducing exchange rate losses associated with a weak local currency, it is highly certain in my view that exporters will up their output to take advantage of the new IEIS further contributing to GDP. If participation in the VFEX improves in the coming months, it is a plus as this market is a key source of foreign currency capital for domestic firms.
In Zimbabwe, gold is one of the key commodities that if harnessed properly can transform the entire economy. Using 2020 statistics, it was the second top export generator after the platinum group of metals (PGMs) which includes palladium, rhodium, and iridium. National gold output plunged 17.4 percent to settle at 19tons in 2020 despite global gold prices being up more than 20 percent. The decline is attributable to rampant side marketing activities due to large discrepancies in prices offered domestically relative to international offerings. This gave rise to corruption, arbitrage, and illicit financial flows within the sector.
Cognizant of the above, to minimize smuggling and encourage gold production and delivery to Fidelity Printers and Refiners (FPR), producers who deliver quantities above their monthly average deliveries are now entitled to retain 80% of their incremental portion. Also, large-scale gold producers meeting the 80% retention threshold are now allowed to export their incremental portion directly to take advantage of global prices. This will be a game-changer for the gold sector in particular and the economy in general.
Furthermore, there are fiscal incentives put in place including inter alia tax holiday, duty-free importation scheme, and export market development expenditure. Under duty-free importation, manufacturers of goods for the export market are entitled to duty-free importation of raw materials. Also, exporters are now allowed to claim expenditures incurred in developing export markets while their taxable income will be taxed at a rate of 15 percent if they export at least 51 percent of their output. All these are sweeteners for the productive sector to increase productivity, and diversify their market to remain competitive.
Targeting of export businesses has other positive spill-over effects like strengthening of the local currency and subsequent stability of general prices. As the flow of forex to companies improves, their demand for the greenback on the interbank will plummet. The best way for Zimbabwe to re-build its depleted forex reserves is through targeting exports just as China did 4 decades ago. Reserves are essential as they act as a buffer when faced with uncertainties like natural disasters.
For a government facing a limited fiscal space, these export and investment incentives in an environment already heading towards exchange rate and price stability will go a long way in stimulating domestic production and economic recovery. After all, doing something economically sensible is better than doing nothing!