If we don’t act today, we won’t have an economy….. tomorrow!

On a chilly September 18 2008, deep in the financial crisis, top US lawmakers and financial regulators met for an emergency meeting where they sought to chart a way forward on how to deal with freezing credit markets, bank and company failures and the real estate bubble which was about to burst.

The resolutions adopted in the meeting would have an impact on the global economy which had become entrenched in a recession gravitating towards a depression.

It was a striking warning from the then Chairman of the Federal Reserve System, Ben Bernanke, that changed the atmosphere and intensity of this meeting held on a Thursday. Bernanke and Henry Paulson, the then Secretary of the US Treasury wanted the approval of lawmakers to inject US$70 billion in the US financial system. In a gentle and not so ornate or restrained manner, Bernanke told the top lawmakers present in the meeting, “If we don’t do this tomorrow (Friday) we won’t have an economy on Monday”


                                                            

Ben Bernanke

According to one commentator Bernanke’s statement literally resulted in a “pause in the room, with the little oxygen left.”

The financial crisis of 2008 is long gone but a small nation in Southern Africa finds itself on the verge of a depression just like the United States’ and global economy (in general) in 2008. In magnitude, action and response the economic problems of the US in 2008 and those of Zimbabwe now are not comparable. Of course the United States was quick to act and at least Henry Paulson had the bazooka at his disposal- in the form of a stimulus package. Unfortunately Zimbabwe is slow to act and it’s a pity our own Minister Chinamasa doesn’t have the bazooka.

However, something Zimbabwe could learn and take heed out of the US financial crisis are the simple words of Ben Bernanke- , “If we don’t do this tomorrow, we won’t have an economy an economy on Monday.” 

Zimbabwe is facing a plethora of economic problems most of which are out of reckless unviable economic policies and lack action from the policy makers.

As they do in literature where every Shakespeare phrase is critically analysed it is vital to scrutinise Bernanke’s statement in the context of Zimbabwe. Breaking it into two phrases….

“If we don’t do this……”

The challenges bedevilling Zimbabwe’s economy require systematic action and remedies which ought to be done or implemented. Failure to implement such remedies, the economic situation can degenerate into a severe depression.

What is it that Zimbabwe needs to do?

Most economists have argued that Zimbabwe’s problems stem out of liquidity challenges. This is flagrant oversight and wrong analysis of the economy. The liquidity problems playing out today are also a result of adverse economic movement and shocks. Money is always chasing productivity, and there is no production in Zimbabwe which is the reason why liquidity is a challenge.

A drive through Belmont (Bulawayo), Nyakamete (Mutare) or Willowvale (Harare) confirms the sorry state of industry in Zimbabwe where rust continues to build up.

What is required in Zimbabwe is fresh capital which in turn drives money growth inevitably enhancing the liquidity position of the country.

The reality on the ground is that, within the borders of Zimbabwe, there is no institution or an alter ego of Warren Buffet that can change the landscape of industrial activity.

Zimbabwe is in urgent need of foreign capital to spur economic growth and there is need for the policy makers to create a friendly environment for investment.

In traditional African belief, there are spirits that act as a medium between the people and gods. In the context of the economy the financial system acts as the medium between firms and economic growth. It is the financial system that specializes in the provision of credit, financial advice and even investment.

If the medium cannot execute her duties properly, both ends of the chain suffer. Firms will not be able to boost operations through credit inevitably resulting in subdued economic activity.

Zimbabwe’s financial sector is dogged by non-performing loans, undercapitalisation, chronic bank failures, abuse of depositor funds and overcrowding (especially in the banking and insurance sectors). Robust actions are required to enhance bank supervision and regulation so as to create an effective and reliable financial system.

It is therefore imperative for Zimbabwe to lure real capital and establish a strong financial system to ensure sustainable economic growth and avert a looming economic catastrophe.

These are things Zimbabwe needs to earnestly. If we don’t do this….

“…we might not have an economy on Monday”

Whilst the Americans at the time of the financial crisis were very much aware to the fact that they had to move with speed, the lackadaisical approach coming out of Zimbabwe’s policy makers to the economic crisis at hand is very disheartening.

To illustrate the intensity of how the American markets urgently required a deal to save the economy, Bernanke predicted that if no swift action was undertaken the economy would be in turmoil in a space of three days. Conceptually America would still have an economy but the devastation of the three days (in fact it’s one working day since the two other days fell on a weekend) of no action would have wiped off confidence and exacerbated losses.

Zimbabwe is at crossroads. Like Bernanke we might not be able to predict the day we wouldn’t have any economy to talk about, that is if we have an economy anyway, but the health of the economy requires urgent action.

If we don’t institute good economic policies and reforms which ensure attraction of capital and sustainability of the financial system today, we might not have an economy……..tomorrow!

 

Second Hand products in Africa……………Good or Bad

The influx of second hand vehicles, clothes, electrical appliances and other products to Africa is on an alarming increase from both the developed countries and emerging markets. These goods have been to some extent the saviour to impoverished or marginalised people of Africa as they cannot afford a brand new product due to its costliness. The USA, Britain, Germany, China Japan and others are the biggest importers of second hand goods to Africa. The question to be asked in all this is How developmental or detrimental are these imports to African countries and economies?

Second hand imports have created much of formal but to a greater extent informal employment to a continent that suffers from a high level of unemployment and poverty. Governments in Africa have been failing to map viable policies that will tackle unemployment problems and thus the ordinary but innovative people have taken the opportunity to fend for themselves through second hand imports. Informal sectors have been ignored by most governments but in true aspect they are a bedrock for most struggling African economies and they have contributed to the growth of economies despite them not paying taxes to the government.  Governments might not benefit from any tax remissions from informal traders but they benefit from the import duties that are generated from the second hand products. Some governments are against the second hand imports and thus ban or charge high import duties so as to protect their industries and promote high production in their own economies. The high import charges are much beneficial to governments as they will channel them to local production. City councils are not to be left out as they benefit from letting out space to vendors of second hand goods.

On the contrary the African continent has become so desperate for second hand imports thus stifling its own local production which will affect the overall GDP of the nation. Much is being imported with a less life of use and thus making Africa to keep paying as the goods will only be having a short limited lifespan. Africa has become a dumpsite for the developed countries and to worsen the situation the continent has no expertise or idea on how to deal with the second hand products after their use is done. We do not have any recycling plants for these products especially machines, cars and electrical gadgets if they become obsolete.

The continent is endowed with natural materials and also produces raw materials but we don’t have any processing factories for these raw materials which are then processed in developed countries used there, after productive use they are dumped to Africa. We need to have plants that process the raw materials we produce and resources we have into finished products boost local production, improve the standard of living of the African people, create employment, provide liquidity for our economies thus boosting our own economies.  

Africa has a serious dependence syndrome that needs to be uprooted from our minds for our economies to grow. India banned most second hand imports and now their economy is one of the fastest growing economies in the world. We have to adopt a mind that is self-reliant, independent but closely knit with each African economy. This will create positive ripple effect in all economies within the continent as we will be supporting each other. It’s time for Africa to be proud of its products boost its own production and take advantage of the innovative minds that are within but lacking support and a spring board to launch themselves and the continent to higher levels of competence and economic  efficiency.

Hair Business boom in Africa

The hair business in Africa is on the rise as women seek more ways to beautify themselves and go with the current trend. Africa not long ago was known for simple hairstyles such as the Afro, s-curl, plaiting, braiding among other styles, but now since the world has become one global village hair pieces have taken centre stage. Artificial hair is now popular with women and this has proven to be brisk business in Africa as the trend is growing and showing that it here for quite some time.  Synthetic hair and Human hair have become the talk of town with the bulk of it coming from countries such as India, Brazil, China and they all depend on the quality with some going well above $200.00 just for a piece.

The hair phenomenon has caused much of an increase in hairmarts or hair selling outlets around Africa with popular and the less popular brands opening up shop to sell their products to the public. Different brand names have and are emerging as the sector has become more competitive and profitable for all the players involved. Hair brands now have hair salons in their brand name so as to market their brand properly with their products on sale in those saloons making the shops a one stop shop for their clients bringing in convenience. Hairdressers associated with the brands are usually hired as they will bring in more clientele and help in marketing the brand with others also renting a chair in the branded saloons with some of their contracts stating the use of their hair brand.

Saloons are one of the informal sectors in most African economies but they have created employment for most women with men also venturing into this lucrative trade. Hair dressing schools have also emerged due to the booming business and a profession that is bringing financial stability and growth to most families in Africa.  

The Bubble will Burst!!

After having been dosed with a modest and articulate mid-term Monetary Policy by the Governor of the Reserve Bank of Zimbabwe everyone was very much convinced and hopeful that the mid-term Fiscal Policy which was to be delivered on a later date was to provide the same impetus and steer the economy in the right direction.  The Fiscal policy consists of two tools- government spending and taxation, which have the potential of galvanizing the economic growth or simply warrant a death sentence to the economy. With all due fairness the not so mid-term (it came almost two months past mid-year) delivered last week is the epitome of failure in its highest regard.

Every Zimbabwean is in agreement and can concur to the sorry state of the economy but that has not inspired a solution based Fiscal policy. Most of the measures spelt in the mid-term budget antagonize any efforts to drive economic growth let alone efficiency. Most of the measures are so detrimental to the economy and will rapidly accumulate into a bubble of hot air.  As the prices of real estate started to spiral out control in the United States, one Democrat congressman, Charles Schumer, asked, “…will there be soft landing or will the bubble burst?” This is a question which aptly confronts our economy today in light of contractionary fiscal measures instituted recently.

                                                                         

To begin with, the central government is facing an ever shrinking revenue base which has even prompted the tax collector to go after the informal sector. Instead of looking at the fundamental causes of the shrinking revenue base our policy makers have adopted an ignorant approach where they seek to devise all ways to spur revenue. Central to this approach is the review of duty upwards on certain imports and some services such as communication (airtime to be precise). One then wonders if such actions will pull the country out of the doldrums and the answer to the question is an undisputable “no”.These measures which have been suggested or already put into effect are not only catastrophic but deplorable in the strongest terms. They don’t work in the short term and neither do they succeed in the medium to long term. Income levels in the country are so low to an extent that any shift of policy towards a cautionary contractionary position will hurt incomes furthermore and the repo effect translates into low consumption spending which in turn stifles production or imports if there be. Imagine the impact of duty on petrol and diesel! Transport costs are likely to shoot and the contagion effect is felt in every sector, be it agriculture, industry or mining.

Other measures such as increasing rentals on government properties and duty on mobile handsets are not sustainable at all. No meaningful revenue can be realised from such actions.Whilst some might argue that a contractionary fiscal policy is inevitable in these current times one is also motivated to question government sincerity especially looking at its expenditure levels. Recently the government bought a fleet of top of the range vehicles for ministers and Parliamentarians. Fourteen years since the land reform the issue of inputs and subsidies on agricultural products dominate fiscal debate where much funds are allocated. Is the government not supposed to do away with such expenditure and divert the funds to productive endeavours rather than review duty and tax every time fiscal space is small?   Instead of dealing with the underlying causes to the problem, our policy makers continue to fight a losing battle. It is clear to everyone that the real challenge confronting Zimbabwe’s economy is liquidity. The way to deal with this problem has confused many such that some have thought mortgaging resources for cash is the best way. Some propose that we revert to the Zimbabwean dollar and some think a sovereign nation like China can just bail out Zimbabwe with cash. After all the Chinese are risk averse just like the Americans or the British for that matter.

The reason liquidity is a challenge is derived from a non-productive agricultural, mining, services and industrial sectors.The mid-term fiscal policy should have addressed challenges bedevilling these sectors whilst at the same time instituting catalysts which can drive growth. Most companies in Zimbabwe are operating below capacity and there is no justification for an additional burden in the form of high energy (petrol and diesel) prices driven by a review of duty. Instead there is need for the central planners or government to relax the cost of doing business in the country and attract capital from outside. The indigenisation policy is a hindrance in its entirety to the attraction of meaningful capital which can drive sustainable economic growth and the consequences of such adverse legislation should have been realised, reviewed and corrected by now.

John Mangudya, the Reserve Bank governor, is very correct when he says that the economic problems we are facing as a country are not insurmountable. Our problems are not insurmountable but arise out of mischief and failure to prescribe and diagnose any economic shock we encounter.

If the policy makers persist with measures premised on tax and duty as sources of steady and reliable revenue on the back of weak industry and economic activity it shall come a time when there would be no tax base to milk from. Only that time are we going to realise that there is no soft landing. The bubble will burst! Zimbabwe is fast approaching those times of economic implosion.