The Sunday Mail
Economic observers could only watch as mainstream business reporting over-played the liquidity crisis. The time period was mid-2012 to late 2014.
The reporting itself wasn’t to blame.
When interviewing Zimbabwean corporate executives, their immediate — if not only — frame of reference is the balance sheet: working capital, cash on hand, short-term debt, and current ratios.
As has become Zimbabwean business culture, reporters can barely engage corporate executives into conversing about economic matters beyond that respective executive’s mandate.
Of the many vessels we have in our economic ocean, each sailor cares only to man for the survival of his own crew and ship! As such, it is credible suspicion that even when our more approachable policy-makers try to engage with corporate executives, dialogue, too, is interpreted off the balance sheet as this is far as executives are willing to converse.
Understanding such an ecosystem, perhaps it becomes clear why mainstream economic discourse often lacks clarity on occurrences taking place in the macro-economy.
For instance, by mid-2012 it should have been clear to all that Zimbabwe was experiencing a vicious slump in consumer welfare.
However, economic discourse concentrated on liquidity concerns off balance sheet narratives.
The slump in consumer wealth was never recognised until it became undeniable by the end of 2014; but damage to the consumer had already been.
It was only then when managerial statements on financial reports shifted from the micro-focused “due to tight liquidity” to the more precise “due to poor consumer demand”.
Economic comprehension had finally superseded the balance sheet, but all too late.
Of course, this is not to say that Zimbabwe does not have an ongoing liquidity problem since mid-2012.
Instead, it is to say that we became more submerged into this liquidity crisis because micro-executives failed to raise early concern about slumping consumer wealth which has continuously worsened!
Tight liquidity can be eased by the amount of credit in an economy. Credit formation is a result of changing levels of consumer wealth, represented by claims to owned assets.
The more assets owned in an economy, the more credit in an economy. This is why a country like Sweden is almost an entirely cashless economy; it has assets to back consumers. Conversely, when there are fewer assets in an economy,creditworthiness declines and thus liquidity shortfalls exacerbate.
A lot of entities that are affected by lack of liquidity in Zimbabwe simply do not have claim to adequate assets which give counter party confidence to enable participation in formal business transactions.
This is especially true where risk tolerance is extremely low.
Hence, overall economic activity is falling.
So, whilst micro-executives cared only to peruse through their balance sheets and saw low working capital, enunciated as a liquidity crisis,much more harmful was that overall wealth in Zimbabwe had been declining all along.
Therefore, it is my argument that in any optimistic case, potent remedy to liquidity shortfalls will not necessarily be recapitalising balance sheets and availing finance.
This should be persuasive a seven after heavy financial inflows post-dollarisation and money seemed easy to come by — what Reserve Bank of Zimbabwe governor Dr John Mangudya labelled as the “euphoria stage” in his last monetary policy statement — growth proved to be unsustainable.
Finance itself did not guarantee sustained prosperity.
What we truly need are structural adjustments for wealth distribution to enable confidence for whatever finance we may have to support more widespread formal business transactions.
We need structural adjustments such as equitable corporate wage structures, financial inclusion, empowering welfare programs and other adjustments which help enable credit formation for as many citizens as possible.
Since mid-2012, not a single corporate executive raised this wealth emphasis in such a specific manner!
However, it seems that we have potentially reached a moment of clarity.
On November 26, Finance Minister Patrick Chinamasa will reveal whether or not we fully comprehend the situation at hand.
The most important part of his National Budget will be where he talks about prices; more specifically, his interpretation of price trends.
Already, there is the contentious issue of how we are interpreting trends in general prices in the economy.
In released excerpts of the Pre-Budget Strategy Paper (BSP) to The Sunday Mail, I quote the following: “Annual average inflation remains on a downward trend reflecting the dampening of inflationary pressures on the back of weakening domestic demand and other external factors…
“Major price declines were most pronounced in food and non-alcoholic beverages; clothing and footwear; housing, water, electricity, gas and other fuels; communication; recreation and culture; restaurants and hotels; and miscellaneous goods and services… For the rest of 2015, average inflation is projected at about -2,2 percent.”
Granted that it is not in his strategy paper or the above quotation, ZimStat has made recurring announcements of what it calls “disinflation” throughout the year.
As Minister Chinamasa has stressed a multi-stakeholder effort in creating the budget, I will couple the above BSP quoted remarks with those of ZimStat. What we have then is a worrying case of inconsistency in our understanding of economic occurrences.
We need clarity on whether the economy is going through disinflation or deflation?
While it may seem nuance, how we distinguish the two poses significant implications on the fiscal policies to be pursued moving ahead. Disinflation is a decrease in the rate of inflation; a slowdown in the rate of increase of the general price levels in an economy.
Under disinflation, the inflation rate is positive because prices are still going up though only at a slower rate. Deflation is the decrease in the general price levels in an economy.
Deflation is negative inflation because prices are not increasing at all.
So, Honourable Minister, which one is it? What are we experiencing?
The BSP is self-contradicting when it says inflation is on a downward trend, only to then say this is due to major price declines. Definitively, those are mutually exclusive scenarios.
More disconcerting is that the BSP looks to create “a stable macro-economic environment, with low inflation averaging -1,2 percent”.
Negative inflation can never be termed as a stable environment!
Obviously, something is definitively amiss in our understanding of what is going on with general price levels.
It will be imperative for Minister Chinamasa to provide clarity on this matter. What astute observers expect to hear is an acknowledgement that the economy is actually in deflation and fiscal policy should be expansionary!
If Minister Chinamasa alternatively proffers that we are in disinflation, it will almost guarantee a negative outlook because under proper definition of disinflation the budget would inherently pursue contractionary fiscal policies — which would be wrong!
The deflation in our economy is caused by the aforementioned reduction in consumer wealth.
It is, therefore, incumbent on Minister Chinamasa to pursue expansionary fiscal policy which is in coherence with structural adjustments that enable wealth distribution and credit formation.
As the creation of the National Budget is meant to be inclusive of stakeholders, it is high time our corporate executives raised concern beyond their own balance sheets and become active protagonists for wealth distribution.
The economy no longer has capacity to accommodate micro-executives. There is a business breakfast to be hosted by The Herald after Minister Chinamasa presents his budget.
Hopefully, we shall start to hear corporate leadership advancing the concerns for consumer welfare.
After all, nobody has since mid-2012.
