Reforms:Zimbabwe’s elephant in the room

 

by Justice Zhou

How best can a broke and debt-ridden government in Zimbabwe fix its economic problems in the run up to  crucial elections in 2018?The answer, according to economists, is very simple: it must cut back on reckless spending, reduce the budget deficit and repay the money it owes to lenders.

Structural reforms would be unpopular, but a necessary evil for a country whose economy is weak, with a yawning budget deficit, high unemployment and declining revenues. This is despite President Robert Mugabe, who was expected to defend his rhetoric to the hilt for obvious reasons anyway, insisting the country wasn’t fragile at the just-ended World Economic Forum on Africa in Durban.

And the term"reforms”, by itself, is probably the global lender IMF’s polite way of telling Mugabe’s government that it must carry out fiscal consolidation and austerity measures before help in the form of loans could be offered.

The budget deficit for this year is projected to be roughly $400 million, accounting for 3 percent of GDP. Normally, a government would finance a shortfall by borrowing from capital markets or major lenders, but the prospects for credit availability aren’t looking very good at the moment.

For instance, Zimbabwe will have to reduce the size of its civil service or curb the wage bill, restructure state-owned enterprises and cut back on reckless borrowing, among other cost-cutting measures.

That would definitely mean that a huge elephant is in the room for the finance minister, Patrick Chinamasa, who now has to try to strike the balance between the structural improvements and his waning party’s competing political needs.

The next elections are barely a year away, so spending cuts would obviously be deemed to be self-defeating and unpopular among the ruling party elites. In the months leading to polls, Zanu Pf has often ensured there were freebies to lure voters, even if it meant the cash-strapped government was living beyond its means.

                                                       Shrinking tax base

Perhaps one of the biggest catches is how to boost revenues when the corporate sector has hit the skids, unemployment has spiralled, and as a result, the tax base rapidly shrunk. In a desperate bid to make up for the drought of revenues, Chinamasa has revealed his intentions to go after informal businesses, but that even does not seem to be encouraging.

However, fiscal consolidation and austerity sometimes don’t always yield the desired results. They may worsen the situation and result in lower tax revenues. Sometimes they may cause a possible risk of stalling economic growth if attempts to balance the books by tightening the fiscal purse are made.

State-owned companies, the so-called parastatals, have for a long time been the centre of political patronage and ensuing corruption, proving to be a drain on state coffers. With no scrutiny at all as to how funds at loss-making state firms are managed, executives still pocket hefty salaries and perks, raising the ire of the opposition politicians.

The health of Zimbabwe’s banking system has increasingly become the focus of attention, with calls for closer supervision as a number of smaller lenders recently collapsed. Reserve bank authorities maintain the system is safe and sound, and smaller banks posed no systemic risk.

Calls by the IMF would be a litmus test for the treasury chief, who has to get the approval of his party on whether to forge ahead with the structural reforms that the global lender requested him to carry out.

But Mugabe’s government will rue the day when it discredited donors and threatened to enforce laws that would compel foreign investors to surrender part of their shares to locals.

The legacy of that political rhetoric continues to linger even as desperate efforts are being made of late to dispel it, amid investor fears. Confidence has, as a result, been at the lowest ebb, while investment and foreign exchange inflows are increasingly drying up.

The lack of foreign capital has prompted the government to depend mainly on tax revenues to support its budget, 90 percent of which is gobbled by civil service salaries.

As the economy slows down and some companies lay off workers or halt operations altogether, critics have lambasted Chinamasa for failing to rise to the occasion and rein in the shrinking tax base, high unemployment and the crippling cash crunch.

To make matters worse, limited infusions of the dreaded bond notes have not helped stem the cash crisis as initially intended by the central bank.

The flight of capital and smuggling of cash may have largely contributed to the cash crisis. But the situation would have been much better had earlier calls by economists for stricter measures to stem the needless importation of consumption goods, which also led foreign exchange shortages to spiral out of control, been heeded.

At the same time, Mugabe’s possible departure from office is increasingly looming due to his advancing age and deteriorating health. This has sparked sharp disagreements within his Zanu Pf party by factions jostling to take over from him.

The infighting has heightened political risk, prompting investors to keep withholding their money, perhaps hoping that a new leadership after Mugabe’s exit from power will usher in a safer and friendlier environment to do business in the southern African country.

In what it hoped was a landmark achievement towards being allowed to resume borrowing after a 15-year stand-off, Zimbabwe finally cleared its outstanding arrears with the IMF in 2016.

If reports that the country is also on the verge of settling the $1.75-billion arrears it owes the World Bank and AfDB are anything to go by, the government would have pulled out a dramatic surprise, because nobody knows how it  managed to obtained this amount of money.

The treasury has projected the economy will grow at a pace of 3.7 percent this year, compared with a 3.8 percent forecast by the World Bank. The IMF has revised down its projection to 2 percent, from an initial 2.5 percent estimate.

Claims that the country will have a bumper grain harvest for the first time since the chaotic land reforms at the turn of the millennium also remain to be proved, a development expected to ease cash shortages as imports for the cereals will hence not be required.

Isn’t it time Zimbabwe shored up its gold and forex reserves?

by Justice Zhou

Alarmist opinion about the early return of the Zimdollar is rearing its head again. This is despite the central bank authorities reassuring the public they will only be able to reintroduce it once they have enough foreign exchange (forex) or gold reserves to back it.

Forex reserves are deposits of foreign currency held by the central bank of a country, while gold reserves refer to a quantity of gold held to support the issue of currency.

Statistics on how much the bank holds in forex and gold reserves are not precise, but it’s anyone’s guess that not much has been done in terms of rebuilding them.

However, the local dollar will definitely bounce back at some point in future and hence there should be proper contingency plans and sufficient resources for its safe return. Isn’t time ripe for Zimbabwe to shore up gold reserves, then?

One of the most important suggestions put forward by economic and financial experts is for the Reserve Bank of Zimbabwe to consider building gold reserves to diversify its holdings in the run-up to the reintroduction of the local dollar.

At a time when a number of central banks are boosting their gold stocks due to its status as a safe haven amid geopolitical concerns and economic headwinds, it boggles the mind why Zimbabwe has not followed the same route.

Rather, it appears much joy is derived from seeing more of the yellow metal being commercially mined for the purposes of export, ignoring the fact that its property as a store of value can also be taken advantage of to buttress the local currency.

Bullion is reportedly Zimbabwe’s biggest mineral foreign currency earner, accounting for over 50 percent of the country’s total annual export earnings together with platinum.

Reserves play a key role in instilling confidence in the monetary and exchange rate policies of a country, and it seems gold has an edge over foreign currencies because currencies’ are more vulnerable to external risks as they fluctuate from time to time.

On the other hand, gold is a haven for investors who seek to avoid currency risk; hence its value always appreciates in times of crisis.

Nonetheless, the same should apply with forex reserves. Zimbabwe’s forex reserves also need to be propped up to provide a way in which the central bank could intervene in the foreign exchange market and manage exchange rate fluctuations, promoting a stable environment for economic growth.

In times of crisis, foreign exchange reserves have proved to be useful in absorbing the misery related to economic and currency meltdown.Investors also have more confidence or are willing to put their money in countries that have strong foreign exchange reserves and stable currencies.

When South Africa sneezes, Zimbabwe and the region catch a severe cold

by Justice Zhou

It is still too early, if not ill-conceived, to predict an apocalypse for South Africa and the region simply because international ratings agencies have just downgraded its sovereign credit rating to junk status.

The eventual downgrading of Africa’s second biggest economy is viewed as long-overdue by some critics of the incumbent government, while others suggest the move by the ratings agencies was exaggerated.

Standard and Poor’s cited the latest cabinet reshuffle by President Jacob Zuma as the reason why it arrived at that decision. In other words, political risk was deemed to be the main contributing factor. 

Fitch Ratings has followed suit, arguing the cabinet reshuffle is likely to result in a change in the direction of economic policy, whereas Moody's has delayed its decision.

However, there is no denying that when South Africa sneezes, Zimbabwe and the entire southern African region are likely to catch a cold.

With Nigeria, Africa’s biggest economy, already battling to contain a crippling recession, the continent can’t afford a fall-out from adverse shocks by yet another one of the most influential economic giants.

In fact, much of the continent isn’t decoupled because South Africa’s investment footprint in Africa grew significantly over the years. Its role, to some extent, as investor and trading partner of last resort in the region and the rest of Africa, cannot be overemphasised.

So it is very important for Zimbabwe to follow the specifics of the dramatic events taking place in the neighbouring country very closely, as any major economic trends are bound to have knock-on effects on the regional economies.

South Africa’s downgrading is another way of warning investors or lenders that there is a possible risk that the country may default or be unable to repay the money it borrows especially from international lenders through various financial instruments.

But, honestly, the move doesn’t guarantee that the country will definitely fail to repay loans. It also doesn’t mean that South Africa, Zimbabwe and the entire region should now start to quack in their boots, preparing for the much-anticipated doomsday. The downgrading may soon turn out to be a mere blip.

The extent to which Zimbabwe has in many aspects integrated with its southern neighbour explains why it matters for South Africa’s economy to be stable.

If it were to face a major downturn as a result, Zimbabwe would be one of the hardest hit because South Africa is its largest trading partner, apart from being a top investor, in a country already beset with its own economic meltdown and persistent political instability.

On top of that, South Africa hosts millions of Zimbabwean nationals most of whom work there. They are a crucial source of disposable income for their kith and kin back home, while also playing a key role in providing the remittances needed to finance Zimbabwe’s yawning current account deficit.

Greater integration and trade partnerships of this magnitude can only heighten the chances of contagion or a domino effect.

While acknowledging, on the one hand, that South Africa is experiencing an elevated political risk, on the other hand, the country’s economy has proved to be resilient in the face of unfavourable headwinds.

For instance, a poll by Reuters suggests that South Africa’s rand will be relatively stable against the dollar until the year is out.

South Africa's net foreign exchange reserves are still pretty much in a favourable position when compared with other countries in the region, showing that it has some firepower to draw on in the event of a crisis.

Economies exposed to financial crises often employ foreign exchange reserves for the purpose of intervening in the market to influence the rate of exchange.

It, therefore, would be convenient to have cautious optimism and still hope that the country will prudently handle its political challenges in due course and hence weather the expected economic storm.

Debunking Zimbabwe's currency myth

by Justice Zhou

At long last! Zimbabwe finally has a currency of its own. But how do you celebrate such an achievement if despite the introduction of the bond notes, you still face a critical shortage of them and the economy is on a bumpy ride once again?

Anyhow, it remains my strong belief that Zimbabwe’s current economic problems didn’t come about because of the much-hyped “bond currency” or bond notes. The liquidity or cash crunch was a long time coming; it’s a no-brainer!

It would be disingenuous for anyone to think that the reserve bank shouldn’t have introduced bond notes in the first place, even though they provide no ultimate solution to the country’s economic problems.

In other words, it would be a serious dereliction of duty on its part for the bank, which is required by law to perform its monetary policy functions.

At the same time, I do not believe the US dollar-denominated money will be the solution to the capital flight and meltdown that Zimbabwe has experienced since the results of the 2013 elections were announced.

There can be no doubt in my mind that the gradual outflow of capital has been the result of lack of confidence in the face of negative political events. The run on the banks, coupled with the smuggling of the US dollar out of the country, have been the last straw, adding to already existing liquidity woes.

Ironically, “the bond currency” or notes were introduced as a measure to stem the same liquidity problems or cash shortages that some are now apportioning all the blame for Zimbabwe’s meltdown on. This is quite unfortunate.

The solution to Zimbabwe problems doesn’t lie in currencies, no matter which one we introduce, the source of these problems isn’t necessarily the currency.

Perhaps, because of the misery of hyper-inflation which the Zimdollar era brought on us, we have obsessed ourselves with currency to an extent that this has clouded our focus on the real source of these economic problems.

Here are some of the most important issues that Zimbabwe needs to watch out for to gauge how fragile our economy is:

First and foremost, we should pay attention to the fragility of the banking system. When commercial banks are frail, they may not be in a position to lend or make new loans. This is not good because they are the backbone of consumer spending and corporate investment.

Without stability, lenders may only direct much of their efforts towards deleveraging their balance sheets and strengthening their liquidity buffers in order to cope with deteriorating depositor confidence, rather than creating loans to help boost economic growth.

The overall ratio of the local banking sector’s loans to deposits isn’t encouraging at all, also with a very high possibility that the lenders are highly-leveraged or rely too much on borrowing from abroad to fulfil their domestic lending duties, meaning that they are exposed to possible failure.

Secondly, Zimbabwe’s current-account balance is characterised by a yawning deficit at a time when the portfolio inflows, diaspora remittances and the inward foreign direct investment flows needed to finance it are scarce and exports revenues are low.

Although not classified as a highly-indebted country, and hence not qualified for debt-cancellation, Zimbabwe has to repay or roll over its sovereign debt. It has already gone to the IMF with cap in hand for loans without any success. Alternatively, it must run down its reserves, but these are not available.

In a nutshell, Zimbabwe’s problems are not as a result of currency. There’s more to them and we need to take a step back, reflect and apply our critical thinking skills.

Otherwise, you might soon realise that politics is the epicentre of what has roiled the local markets and put our economy back on the skids. If it is, then that’s probably were the solution lies.