Implementation and Sincerity key to Budget’s Success

LAST year I was privileged to be the guest economist at the post-Budget seminar organised by the Harare Chamber of Commerce at the Crowne Plaza.

After my presentation, I was described by one of the guests of honour as one of the very few worst economists he had come across.

My crime was to predict that the targets set (then forecast at 1 979% for inflation in December and a Gross Domestic Product (GDP) growth of 4,5% would never be achieved and as such the whole Budget was premised on wrong assumptions.

Times are changing. The 2009 Budget and monetary policy statements exhibited strongly how the policymakers are shifting toward practicality, though there are many miles to go before there is full acceptance of realism.

Excessive government interference with the market mechanism has created a huge output gap over the years, something that will take years to correct.

The punitive price controls and slashing mechanisms, exchange rate manipulation, interest rate ceilings and the era of free money have taken us where we are. During these times the policymakers, notwithstanding the public outcry and criticism, stuck to their guns and labelled critics saboteurs and enemies of progress.

Now we have come to the crossroads, where the critics and the policymakers’ minds have come to meet.

A decade-old mentality is slowly paving way for practicality and tolerance. But because it’s in its blood, the government cannot faithfully let go of the desire to exploit the market once more.

The temptation is high and so are the pay-offs.  New taxes are coming on the market in one form or another, something that will create huge distortions in the market place.

The 3,5% charge on ZSE sale proceeds, the 7,5% charge on export proceeds, the 5% open market sales to the RBZ, the licensing charges etc are all different faces of implicit taxation as the government is trying to raise the revenue target of about $1,7 billion to kick-start the dollarisation in the absence of multi and bi-lateral arrangements.

The reference to an “interbank” exchange rate that will be used to offset US dollar sales to the RBZ is, like predecessor exchange rate regimes, an unsustainable framework that will be conveniently used to execute the implicit taxation.

The government is technically insolvent in terms of the US dollar budget, and will likely continue to print Zimbabwean dollars to leverage its position in buying the amounts being taxed from the market players.

Subsequently the Zimbabwean dollar will continue to be valueless as the source and growth rate of monetary expansion emanating from its issuance will not necessarily be linked to production on the ground.

Inflation should no longer be a target for policy makers as the economy dollarises. The basic market rules of purchasing power parity will apply and as such the inflation should become very moderate, and in US dollars a target of single digits is very achievable for January 2010, taking January 2009 as the base.

This should not worry corporates in planning purposes, but what should worry them are the rising costs of production. All these last five years companies in Zimbabwe have not known the real costs of doing business from the labour, capital, services and power perspective.

Engulfed in the huge ball of protectionist government policies, companies have enjoyed free water, free insurance, costless electricity, cost-free working capital (adjusted for real inflation) and rapidly declining real labour costs.

Operating at 10%, many have afforded to sustain month-on-month huge salary increments for their staff and keep other basic operations running.

Now with dollarisation, these fictitious costs will become real costs overnight, raising operational costs and squeezing margins in the face of competition from the regional producers who have been perfecting their art of production over the said years when our plant and equipment were gathering dust and wearing off without replacement. 

A quick switch to new thinking in the wake of the changing operational environment will save the day for many companies. Very few however will doubt the resilience of Zimbabwean corporate managers when, at a time the exchange rate was depreciating 100% on a daily basis, saddled with price controls and a biting fuel crisis, these managers managed to steer their small canoes in the tempestuous environment where big ships would have sunk to the sea bed.

The banking sector, which has suffered and consumed capital in underwriting Zimbabwean dollar transactions and holding TBs over these turbulent years for fear of liquidity risk, will overnight realise it has no capacity to meet the demands of industry for working capital.

It is at such a time that the RBZ should consider licensing more deep pocketed banks to take the challenge. Organic Zimbabwean dollar growth of bank balance sheets will take a slow and cautious process, and for the first time in 7 years, banks will face a new risk on their balance sheet; non-performing loans.

Gleaning through bank balance sheets today would make one conclude we have the most prudent bankers in the world where, despite inflation in billions and company closures spiralling, non-performing loans are very negligible. These are the benefits of swimming in a ballooning sea of monetary expansion.

The adjusted real US dollar cost of borrowing stood at just above -97% for three successive years to 2008, implying borrowing an equivalent US$1 would see one repaying less than US$0.03 at the end of the year, capital plus interest.

Which corporate would fail to pay back a Zimbabwean dollar loan in such instance? The cleverer ones ran highly leveraged positions and, when time allowed, managed to spruce up physical capital accumulation in preparation of sunny days to come after an unprecedented decade of winter. Now the tables have turned.

Corporates will borrow real money, pay real costs of production and from poor experience gathered over the years from intoxicating cheap BACOSSI money and very negative cost of capital, some may just find defaulting a better option.

And the banks will need more capital for the charge of bad debts now than ever before. The adjustment mechanism for the corporates to real costs of production versus strong regional competition is a challenge few banks will gamble with on lending consideration.

Just a few weeks ago there have been plenty of Zim dollars in the economy to lend to corporates, and because the money has been valueless for a long time, no one cared to borrow, even for free. Suddenly with the liberalisation of the markets and exchange control regulations, a credit crunch will strangle the market.

 Zimbabwe needs some acceleration multiplier to catch up with the region and elevate the status of its people in the region. Disposable incomes are at their lowest, more so now the Diaspora remittances have been hit hard by the global correction.

Consumer credit will need to be the beta in the acceleration programme, and that can only come from healthy banks with generous but careful lending to consumers.

Multilateral institutions will need to be convinced to come in handy in providing consumer credit and micro-finance, although the high unemployment levels and the subsequent thin disposable incomes will be a hard stumbling block.

It’s only through an accelerated process of bringing forward future consumption that will assist in hastening the recovery process in other sectors of the economy where consumer income matters most.

In SA, household debt as a percentage of disposable income is around 78% and these levels, although with potential of creating overheating, create a sustainable captive domestic market with the potential to pull the economy ahead.

This aspect of financial leveraging, albeit its disasters now seen in the current global mess where banks had more faith in mathematical models than common sense, has improved the lives of many around the world. And our banking sector, with more players, will bring the dream closer.

What happens to employment creation? Fighting poverty and suffering amongst the majority of the people is a major policy challenge in Africa. Vulnerability has increased sharply, with healthcare, education, food, transport and communication beyond the reach of many for Zimbabweans.

For the low income and jobless, there is little immediate respite from the policy statements. And to expect that something would have come from the fiscal policy that would reduce poverty soon would have been very ambitious and out of touch with reality.

Job creation will come from increased productivity in the farms all the way up to the public sector. Communal farmers, with the era of free inputs gone, are now left to face the bear on their own after years of being short-changed on the value of their output through irrational pricing set by the government.

After a sweet promise of import parity pricing for output last season, most farmers faced one of the worst pricing for output in a decade, resulting in the few that managed to withhold output selling some crops like maize at almost three times the import parity price through the black market.

The promise has come again this time under a new theme. As the heavy shadow of policy inconsistency continues to sweep across the land haunting even the policy makers  themselves and victims that toiled in the fields, one hopes that genuine change of heart at the policy making levels has come.

With sustainable pricing, normalcy in farm output will return, but after two or so years as confidence building steps up. And that will begin to create the vital industrial linkages that will begin to create jobs and sustainable incomes for the rural and urban poor.

The many challenges confronting the nation sobered the Minister of Finance to put GDP growth at 2%. A 10% GDP growth is not a miracle for a country whose production capacity is at 15%.

Successfully increasing production capacity to around 40%, coupled with respect of property rights and honest engagement of the investment community, can see GDP growth coming to about 10% or more because our base is so low.

It’s unlike trying to push a 5% growth in SA where the production capacity is 80%. The major challenge however is the lack of a stimulus for the labour intense sectors to kick-start the recovery process and more importantly, the source of the growth process. 

A good sounding figure of GDP growth that would not be addressing the levels of poverty amongst Zimbabweans is a poor measure of progress, and as such more policy emphasis would need to be towards sustainable job creation.

The insolvency of the central government in real terms implies that organic growth would need to provide the stimulus.

Inasmuch as the government is coming up with many schemes of implicit taxation to get the foreign currency, the pool is so small compared to the challenges and demands at hand.

And PAYE, which traditionally would contribute more to the revenue collection, is not going to be meaningful as many companies, in tax avoidance, will probably provide the scarce foreign currency to their employees as non-taxable allowances, leaving generously the worthless Zim dollar portion for the taxman.

This leaves a big question on the collectability of the target US$1,7 billion to provide the central government with the right ammunition to influence the growth process.

The donors will need to come in and play a big role, whilst false nationalism in keeping non-performing state assets as “strategic” will need to be replaced by the patriotism of a prosperous people. The challenges of power cannot be underestimated in the recovery process.

Although the global financial crisis is seeing regional demand for electricity slowing by about 4%, that’s not enough comfort for our challenges should more industries begin the 24-hour shifts of yesteryear.

The matrix is complex, and the future remains as uncertain for us as it is for the whole world. But the major challenge in Zimbabwe has never been lack of policies.

It’s the implementation and sincerity on policy makers that fail the system. I have faith in Zimbabwe, and believe we will be able to pass on a prosperous future to the next generation. After all I am a proud Zimbabwean.