STERP: Is blueprint out of step with reality?

But there is something disconcerting about the style, form and content of the Short Term Emergency Recovery Programme (STERP), the roadmap driving the revival process.
Analysts say the policies and strategies contained in the short-term recovery plan depict a simplistic belief in the magic of economic liberalism and aid — two doctrines that have plunged Africa in general and Zimbabwe in particular into a web of failed policies and stagnation.
Invariably, after travelling for just a few miles the pistons of the economic turnaround locomotive have started misfiring.
Implementation of STERP — launched in the capital last month — is already falling behind the timelines set out in the programme’s 100-day action plan.
But where exactly is the problem?
Mistake number one: Aid dependency
For one thing, STERP is predicated on misplaced assumptions and inept theoretical premises, particularly its attempt to base public sector policies/ projects on verbal promises of aid.
Besides the in-herent risk of external interference in policy through Singapore-based bilateral aid agreements, experience has shown that pledges are not binding and do not usually translate into actual disbursements.
(see a brief analysis of Singapore issues below)
It was clear from the beginning that the Southern Afri-can Development Community (SADC), a regional economic community of 15 nations, 13 of which are rated poorer than Zimba-bwe, did not have the financial wherewithal to mobilise the US$2 billion that it pledged in support of the inclusive government’s economic turnaround programme.
If South Africa, whose gross domestic product (GDP) exceeds the GDP of the other 14 members bandied to-gether, only managed to commit US$20 million, it follows therefore that the contribution of the rest of SADC can only be much less.
A similar mistake was made in the early years of independence when the government of the then Prime Minister Robert Mugabe cast its first five-year economic plan on the pledges made during the Zimbabwe Conference on Development (ZIMCOD) of 1980.
According to Joseph Mverecha, the then Reserve Bank of Zimbabwe deputy division chief for economic research, “less than a third of the ZIMCOD pledges were actually received by the bank” over a period of about 10 years.
Mverecha said this in 2004 during a monetary policy review seminar in response to a question whether the country was doing enough to mobilise balance of payments support from cooperating partners.
Mistake number two: Borrowing for consumption
Apart from the questionable efficacy of aid, it is also disturbing to note that a greater proportion of the efforts of the inclusive government to mobilise foreign aid have focused narrowly  on the financing requirements of the public sector to the neglect of the productive sector, which is currently struggling to raise both working capital and investment finance for the rehabilitation of obsolete plants and equipment.
At US$4 billion, the size of Zimbabwe’s external debt is about the same size as its GDP, which clearly marks the gravity of the debt overhang the country already faces.
“We should not continue to borrow for consumption. We should also resist the temptation of borrowing what we can’t pay,” economic analyst Luckson Zembe said.
“Our efforts should focus on securing lines of credit for the productive sector. Without external financing, we may as well forget about achieving a recovery.”
In appealing for aid, Treasury has specified that the money would be spent on civil service salaries and other recurrent expenditure items.
Zembe added that the inclusive government should instead adopt a “trickle down” approach, which involves recapitalising the productive sector to ramp up production, create employment and stimulate investment and consumer demand, a process that will also boost revenue performance for public sector financing. Not the other way round.
Mistake number three: Unrealistic targets
The inclusive government has set a 60 percent capacity utilisation target in the manufacturing sector by December from under 10 percent in January.
Economists have had varied reactions to this target with some describing it as a “tough call,” with others saying it’s a “pipedream” while a few optimists argue it is a “possible feat.”
Within the framework of STERP, an assumption is made that once the productive sector secures lines of credit, companies would automatically recapitalise through a gradual re-skilling, plant rehabilitation and increasing production to close the yawning domestic output gap currently plugged by imports mostly from South Africa.
The assumption is blind to both the level of aggregate domestic and external demand for Zimbabwean products, which determine the level of production in any economy.
Since the global economic crisis set in during the third quarter of last year with a sub-prime crisis in the United States, global export demand has fallen by more than 40 percent and by more than 50 percent for commodities, which constitute the bulk of Zimbabwe’s exports.
The price of gold has crashed below US$1 000 per ounce after the precious metal lost its lustre as a safe haven for cornered investors.
Diamond and platinum orders have also fallen due to a collapse in the global jewellery and car industries.
The world’s leading car markers — the largest consumers of platinum — from Toyota and Honda in Japan, Volkswagen and Daimler in Germany, Peugeot and Renault in France, Jaguar, Landrover and Rolls Royce in Britain to GM Motors in the US, have all failed to respond to state aid.
The slump in global export demand means that local companies will have to seek sanctuary in the liquidity-strapped local market, which may only sustain a modest recovery in a few sectors unless household and corporate incomes rise phenomenally through a government-led economic stimulus plan.
But with local banks walking a tight rope and the government facing its severest public finance shock in three decades that kind of stimulation might be inconceivable at the moment.
“We are trying to recover at the wrong time when both domestic and export demand are at a record low,” said development researcher, Jonathan Mafukidze.
“We seem to assume that once our companies secure lines of credit, they will automatically invest in plants and equipment, increase output and substitute imports. In reality, that is not necessarily the case.
“There are three things to consider here. One, companies will only expand production if they hope to sell and here we are assuming that households and firms have the disposable incomes to spend. Two, domestic output will only increase if the input supply chains are restored.”
At the current level of domestic demand, only a few sectors, namely, retail, tourism, telecommunications and agro-processing industries, particularly fast-moving consumer food manufacturers, have the potential to experience an upturn.
But for the agro-processors to recover, there must be a supply response from the agricultural sector, which is currently hamstrung by a lack of inputs such as fertilizer, seed, power, chemicals and irrigation equipment to sustain a smooth flow of raw agricultural commodities such as maize and wheat.
In addition, at its current capacity, ZESA cannot power the local industry; the National Railways of Zimbabwe cannot move inputs and goods; councils cannot supply adequate treated water to industry, the Hwange Colliery Company cannot provide enough coal to power ZESA’s thermal power stations or to the agricultural and heavy industries; Sable Chemical Industries and Zimphos Limited cannot fertilise the agricultural sector and SeedCo, Pannar and other seed breeders cannot meet the seed needs of the local farming sector.
The assumption held by many people, including policymakers, is that there exist international lines of credit ready with fat loan books to jump-start the local productive sector if an arrangement is made. Economic data from Europe and North America points to the contrary.
The global financial crisis has left many international banks struggling to deal with toxic assets stemming from the sub-prime crisis.
The much-touted international lines of credit, it appears, may just be a phantom formed in the brain of Zimbabwe’s policy-markers.
Suppose the nation was to miraculously secure the finance required to recapitalise all strategic companies in one go, the time lag before a supply response could be felt would still mean that STERP has to go beyond Dece-mber, the date when the programme is presumed to have successfully run its full course and a successor programme put in place.
The architects of the document appear to have been imbued in some kind of “recovery euphoria” so much that they even forgot that it is impossible to have numerous agricultural seasons between February and December within which to produce fertiliser, seed and other inputs, supply them to the agriculture sector, harvest and deliver the raw materials to local agro-processors and raise manufacturing output to 60 percent and automatically cut imports.
The question is: if Zimbabwe’s economy is capable of that kind of magic bullet adjustment, then how did it collapse in the first place to a magnitude where it would even require a push almost on all its fronts?
While there may be grounds to expect a modest positive supply response in the manufacturing sector, especially if individual companies initiate contract farming programmes with farmers, industries such as engineering and construction can only recover through infrastructure development projects and other public works that create employment and boost corporate sales through an increase in government procurement.
The only hope for the two sectors is the proposed road construction and rehabilitation through toll fees collection on the country’s major highways.
Zimbabwe’s centrality in southern Africa has strategically positioned it as a busy trade route for landlocked countries in southern and central Africa, which pass through the country to access South Africa’s ports. But to pin hopes entirely on trade-based toll revenue expectations in the context of a global meltdown continually battering international trade would also be to commit another policy suicide.
Mistake number four:  Timing, sequencing of reforms
There also appears to be a blatant conceptual incoherence in the underlying industrial focus of STERP in terms of the timing and sequencing of reforms such as exchange controls and foreign direct investment (FDI). According to Finance Minister, Tendai Biti, “Every single day in the Ministry of Finance we are talking to investors, every single day. There are those that you see that are rich and famous; there are those that are quieter and the quieter exceed the famous and private-jet business people.”
Indeed the last four weeks have seen an influx of business delegations from a number of developed and emerging economies, including South Africa, and many more may be on their way. The approach has sent ambivalent policy signals — it is not clear whether the country’s priority is to revive the local productive sector or to open the economy to a foreign private sector through FDI.
Given all these and many other short-comings, a greater proportion of the STERP document may need extensive blue-pencilling as it is a shot in the dark.

Singapore issues

ALTHOUGH unpredictable aid poses many challenges for public finance, the biggest hazard lies in the accompanying conditionalities — especially being forced to adopt and implement Singapore issues, which have been thrown out of the World Trade Organisation because of their anti-development character.
Despite a general Third World resistance, all donor-dependent countries have gulped the hook and signed omnibus agreements that encompass provisions on investment, government procurement, competition policy, intellectual property rights and services, which are not in the least development-friendly.
Provisions on investment, for instance, oblige aid beneficiary governments to remove restrictions on sectors and open them to foreign investment; on the number of foreign companies in any given sector; on the size of shares that can be held by foreign investors in a company and on capital movement.
Mozambique, Tanzania and Zambia, SADC’s main donor-dependent countries have already liberalised exchange controls to allow for 100 percent profit repatriation by foreign investors and allowed foreign entrepreneurs to penetrate every sector of their economies, however small the investment may be. The investment agreements tend to go at variance with their development needs as import-dependent and single-commodity exporting least developed countries (LDC).
Government procurement provisions on the other hand force donor-supported governments to consider foreign suppliers for any tender, however small, with an obligation to award the supply contract to the “most efficient supplier,” which in all cases favours transnational companies.
Proffered under the guise of encouraging cross-border supply or modernizing Africa’s procurement markets, the procurement policies and rules paradoxically strip LDC governments of an important macroeconomic policy tool with which to fight a recession.
An article by Inside Southern African Trade, a quarterly trade publication of Botswana-based Southern African Global Competitiveness Hub, quotes a 2003 World Bank report as saying government procurement contributes nearly half of GDP in LDCs. In Tanzania alone, government procurement constitutes about 70 percent of public expenditure, according to the Bretton Woods institution.
This is the business that developed countries would snatch from local companies through aid agreements.
More bluntly stated, the agreements are actually detrimental to the development priorities of low income countries and have the effect of reducing poor countries into “donors.”