By Nhlanhla Nyathi
NECESSITY is the mother of invention. Certainly if the Malaysians did it when their country was literally under attack from the effects of Asian crisi
s in 1997 which had robbed them of a decade’s worth of growth within a month, what could stop equally determined Zimbabweans from following in their footsteps?
Malaysia proved against all odds that International Monetary Fund (IMF) inspired austerity measures are not the only successful policy tools that can be used to deal with an economic recession effectively.
The highly controversial experiment which culminated in the success story of the solution of the 1997 financial crisis for Malaysia stands out like a sore thumb to orthodox economic proponents and the IMF.
Zimbabwe has limited options open to it for successful economic recovery under the current circumstances and from government’s perspective has nothing to lose by implementing radical measures of the proportion seen in Malaysia during the 1997 crisis.
An analysis of the Zimbabwean economy will show that the government in 2003, which also happens to coincide with the appointment of the current Reserve Bank of Zimbabwe (RBZ) governor, Gideon Gono, started to initiate economic revival strategies reminiscent of the unorthodox Malaysian economic reform measures.
Whether by design or just a mere coincidence, the appointment of Gono in 2003 provided the government an opportunity to have a technocrat that would implement the Malaysian survival plan for Zimbabwe.
The Malaysians realised back in 1998 that a well structured and capitalised financial services sector is vital for productive sector funding in an ailing economy.
Just as the Malaysians had systematically restructured and capitalised the financial services sector to prepare it for economic revival in the micro and real economy, Zimbabwe engaged in the same restructuring and recapitalisation exercise when Gono was appointed in 2003.
The entry of Gono was heralded by a radical shift in RBZ policy compared to the previous governor, Leonard Tsumba, who had employed a rather passive strategy. Prior to the appointment of Gono, the financial services sector was a shambles, characterised by briefcase businessman who operated unregistered asset management firms, money lending institutions, and undercapitalised banking institutions that prioritised insider loans and speculative non-productive sector investments.
Such a confused set-up would have not facilitated the expected economic revival as per the Malaysian survival plan since the sector consisted of badly structured loan books ill prepared to turn around a faltering economy in the absence of multilateral institutions.
So as Gono set about to restructure the financial services sector, initially high interest rates, which peaked at one point to 1 000% per annum, were deliberately used to bring down banking institutions and asset management firms that had tied up significant portions of their liquid funds into speculative non-productive investments.
This led to the now spectacular fall of a number of banks and asset management firms in 2004 and 2005. All licences to asset management firms and money lending institutions were cancelled and a rigorous re-registration process was undertaken under the auspices of the RBZ to register bona-fide asset management firms with solid management structures and business plans. Banks that had fallen victim to the high interest rates of 2004 were either shut down permanently or put under curatorship and subsequently amalgamated into what is now known as the Zimbabwe Allied Banking Group.
The other banks that had remained unscathed by the high interest rates were required to capitalise to an equivalent of US$10 million in local currency. And later, as part of the process of indirectly helping banks to have capacity to lend, Gono initiated the Agricultural Sector Productivity Enhancement Facility which was open to all banks for onward lending to the productive sector.
The aggressive restructuring exercise which began in 2004, culminated into the current solid and organised financial services sector, which theoretically should have been ready to play its role in reviving the economy. The first part of the Malaysian survival plan was successfully undertaken by Gono, save for the fact that Malaysia financed part of the capitalisation of banks during their crisis from external funding sourced from Japan.
Having successfully restructured and recapitalised the financial services sector, Zimbabwe was ready to implement the second part of the Malaysian survival plan which entailed the lowering of interest rates and reducing statutory reserve limits to encourage productive sector lending.
As part of that process, the RBZ engaged in quasi-fiscal operations with the primary purpose of expanding concessionary loans to the productive sector. While general market rates and statutory reserve limits have in some instances remained prohibitively high to discourage speculative borrowings, productive sector rates have remained consistently low to facilitate the expected economic revival.
The third part of Malaysian survival plan entailed fixing the Malaysian ringgit at 3,80 to the US dollar and subsequent de-internationalisation of the currency from external markets. This was done to prevent the uncontrolled depreciation of the currency, to curb an external debt servicing crisis, and to limit speculative pressures on the currency.
Just like Malaysia, Zimbabwe has had a fixed foreign exchange policy for the greater part of the economic recession. The Zimbabwe dollar is currently fixed at $30 000: US$1 after being lifted from its previous level of $250: US$1 in September 2007.
The Zimbabwe dollar was also officially de-internationalised in an indirect way in August 2006 during the slashing of the three zeros and subsequent introduction of a new currency. Readers will note that during the slashing of the three zeros, currency traders in external markets holding old Zimbabwe dollars were burdened with the task of repatriating back all old Zimbabwe dollars to exchange them for the new currency.
Pursuant to that, it was not easy for the same currency traders to externalise the new currency to external markets officially as there were unworkable limits imposed on what could be taken out of Zimbabwean borders. The overall effect was to reduce Zimbabwe dollars in circulation outside Zimbabwe to limit speculative tendencies.
The fourth part of the Malaysian survival plan required capital inflows and outflows to be controlled. Exchange control approval from the RBZ is required for any transaction involving foreign currency.
It looks apparent that Zimbabwe is looking to reform on borrowed Malaysian strategies. The entry of Gono on to the scene brought some renewed hope for Zimbabweans initially in 2004-2005 but appeared to falter after successfully restructuring the financial services sector. If the radical Malaysian plan is to work, inherent fundamental weaknesses need to be addressed urgently.
The financial services sector was successfully re-organised and theoretically ready for economic reform but unfortunately massive funding has been poured into a productive sector that has been eroded by successive years of economic recession and simultaneously affected by a massive brain drain; hence its non-responsive nature.
External funding was also necessary during the capitalisation process of banks — even Malaysia did it with financial support from Japan.
In addition, the grossly misaligned exchange rate has also caused serious pricing distortions giving rise to corrupt practices and political interference. As long as pricing distortions are part of the economic fabric, revival will be elusive. Zimbabwe’s plan seems to be failing because there is no clear commitment from the government to drive the process forward.
If the truth be told there seems to be clear line between what the government wants and what is needed for the economy to recover. Surely regressive policies like the crackdown on business in July cannot help the economy’s recovery programme. Attacks on businesses and entrepreneurs like the one we witnessed in July do not send a positive picture to an outside investor whom Zimbabwe needs urgently to resuscitate the ailing economy.
* Nhlanhla Nyathi is an independent financial analyst. He can be contacted on 0912 250 092.