The Sunday News
Nkosikhona Ndlovu
– Continued from last week
However, this favourable interlude for affordable investment conditions was quite short-lived. In 1992, interest rates rose very fast, trebling in the process to nearly 40 percent. Corporate borrowers began to reel under a tremendous debt burden. The fiscal regime which evolved as a consequence of liberalisation had a sharp, negative impact on investment by most firms. The objectives of achieving high positive interest rates and substantial increases in investment levels became mutually contradictory during this period.
A perverse situation developed in which it became far more profitable in the short-term to invest in money markets than in new productive capacity. Indeed, the high cost of domestic borrowing lay behind the contraction of operations by some firms and outright liquidation by others. Organised industry, under the auspices of sectorial industrial associations and the Confederation of Zimbabwe Industries, made numerous agonised appeals for a relaxation of the tight fiscal regime.
Some of the heaviest borrowers were in the textile, clothing and sub-sectors and their exposure contributed to the crisis which they experienced. The combination of high interest rates and the sustained devaluation of the Zimbabwean dollar discouraged firms from completing their expansion plans. Furthermore, it was contended that in addition to its impact on the manufacturing industry, devaluation would lead to shifts in overall relative prices in the economy, that would encourage resource movements into productive sectors in general and exporting activities.
It was, therefore, recommended that the Zimbabwe dollar be devalued by up to 40 percent in 1987. The Government was not in principle opposed to devaluation. Indeed, substantial depreciations of the Zimbabwe dollar were effected in the early 1980s and late 1980s without much publicity. However, this was considered inadequate when Esap was launched in 1991.
Thus, between July and September 1991, the Zimbabwe dollar was devalued by nearly 20 percent; and by October 1992 the real level of devaluation was 33 percent against a basket of trading currencies. There was another devaluation of 15 percent in 1993, and yet another in early 1994 of the order of 17 percent. In July 1994, the official exchange rate was abolished, and a floating unified exchange rate system adopted.
The devaluation exercises did not necessarily lead to an upsurge in manufactured exports. Indeed, due to other elements in the fiscal regime — the significantly high interest rates — there was a decline in manufacturing investment. Firms saddled with large debts reduced their import bills significantly.
High budget deficit and collapse of textiles
The budget deficit swelled significantly during the Esap period. Originally, the deficit amounted to just over 11 percent of the GDP at independence but was rapidly brought down to about four percent in1981-82. However, the ratio rose over the next seven years to reach an estimated nine percent of the GDP in 1989-1990. The deficit can be funded either by domestic borrowing, foreign borrowing, monetisation of the deficit, or by some combination of the three. However, over-reliance on domestic borrowing can lead to the crowding out of the private sector due to either high interest rates or credit rationing. Excessive dependence on foreign borrowing can cause appreciating real exchange rates, widening current account deficits and unsustainable external indebtedness while over-reliance on money creation may trigger higher inflation. The budget deficit in the1990-1995 period was clearly unsustainable, standing as it did at an average of 10 percent of the GDP. A negative outcome of the heavy domestic borrowing by the Government was the “crowding out” of private sector investors and the persistence of high interest rates which hovered around the mid 30 percent mark in 1993-1994 and mid-20 percent mark in 1995.
This compounded the fiscal crisis in the textiles sector and that began the collapse of the beautiful Bulawayo industries of Konthuthu Ziyathunqa to the current Bulawayo industrial space that has been turned into venues for mega churches.
ν Nkosi Ndlovu can be contacted on 0747834432 /0843022972.
