This is a abridged presentation by the Bankers Association of Zimbabwe president Sam Malaba at the 2014 Confederations of Zimbabwe Industries meeting recently held in Mutare
OVER the past few years, economic activity has contracted measurably with real GDP growth declining from 11,5% in 2010 to 3% in 2013. The economy is projected to achieve a marginal rebound of about 3,3% growth in 2014 underpinned by maize and tobacco growth in agriculture.
Banking sector developments
The Reserve Bank highlights in its May bulletin that annual growth in broad money supply increased by 7,66% in May 2014, from 6,65% in April 2014. Expansions were registered in all deposit classes with savings deposits recording the highest annual growth of 12,5%. The growth in money supply continued to be driven by tobacco sales.
Deposits still remain largely short term with long term deposit constituting only about 16% of total deposit in October 2013.
Pressure on the fiscus will continue for the remainder of the year, with revenues in decline against the background of increasing company closures.
During the first six months to June 2014, total fiscal revenues amounted to US$1,718 billion (7% below target) against total expenditures and net lending amounting to US$1,772 billion, giving rise to a cumulative deficit of US$53,6 million.
As much as US$1,65 billion was current expenditure (93%), with employment costs and current transfers amounting to US$1,53 billion (86,5%).
The following are some of the key structural barriers to economic growth:
The macroeconomic policy environment;
Banking sector vulnerabilities;
External debt overhang and arrears;
Declining capacity utilisation
Infrastructure deficit and ICT
Declining aggregate demand
The macroeconomic policy environment
The Government has no room for either monetary or fiscal stimulus measures, as necessary to get the economy back on growth path.
The banking sector faces vulnerabilities, in the main:
Undercapitalisation of banks;
Rising non performing loans;
Short term deposits;
Several banking institutions are struggling to achieve adequate capitalisation, particularly local banking institutions. The Reserve Bank is to be commended for extending banking sector capitalisation deadlines to 2020, allowing more time for banks to achieve new capitalisation thresholds.
As part of addressing banking sector vulnerabilities, Government and RBZ are working on the modalities for a Special Purpose Vehicle (SPV), to house non performing loans, creating scope for enhanced financial intermediation.
The current liquidity crunch is a function of many intertwined factors:
Poor export performance;
Few lines of credit;
Widening current account deficit (hemorrhage through imports)
Low FDI and portfolio flows; and
Short term deposits
External debt overhang
Zimbabwe’s inability to borrow from abroad reflects the impact of external debt overhang and accumulated external payment arrears. The total external debt overhang amounts to US$8,9 billion and cumulative external debt payment arrears amount to US$4,9 billion. As much as US$2,4 billion is owed to multilateral financial institutions.
Until this is addressed, Zimbabwe cannot access international capital markets like other countries.
The Fiscal budget pressures are forecast to persist against the background of declining revenue performance.
The economy faces structural challenges in key enablers such as energy and power, transport and communications and water and sanitation.
For Zimbabwe, the US dollar, which brought much needed price stability, has been the emblem of Zimbabwe’s uncompetitiveness – with no recourse to internal exchange rate adjustment through monetary policy. Accordingly, the only avenue for adjustment of the economy remains wage adjustment (specifically wage decline) and/or productivity gains.
As productivity gains is a function of all other factors such as energy availability; plausibly, the economy’s only avenue for adjustment is wage decline.
But this is constrained by the current inflexible labour laws, hence the continuing quantity adjustment – protracted real GDP decline, as currently obtains.
Declining aggregate demand
Rising unemployment due to corporate closures and the current account hemorrhage have combined to undermine domestic demand. Low disposable incomes and huge imports have cumulatively weakened domestic aggregate demand.
Addressing the structural challenges
The above impediments to economic growth can be addressed through a comprehensive package of measures that are mutually reinforcing.
Above all, the economy requires substantial amounts of capital for investment in infrastructure – energy and power, transport communications, roads and rail networks, water and sanitation as well as agriculture infrastructure such as dams and irrigation infrastructure. The capital requirements amount to several billions of dollars.
As such, it is imperative that Zimbabwe creates an environment that attracts huge flows of inward investment, typically FDIs, to catalyse growth of the economy.
Going forward, it is imperative that the Government retains the current multicurrency for the foreseeable future; in light of the need to maintain price stability as necessary to strengthen confidence in the banking sector for overall economic growth.
The public still retains residual fears regarding the early retain of the local currency, following the experience of 2008. An early re-introduction of the local currency is certain to cause panic withdrawal of all US dollar deposits – a stampede that will occasion a banking sector crisis and an economy wide meltdown will ensue.
Once the economy reverts to ground zero, as in 2008, it will be very difficult to engineer sustained recovery. This may inadvertently trigger social instability due to sustained contraction in economic activity.
Addressing banking sector vulnerabilities
The Government is making progress regarding addressing banking sector vulnerabilities. This is critical for restoring confidence in the banking sector. The major issues relate to:
Capitalisation of Banks;
Recapitalisation of RBZ; and
Lender of Last Resort function
The Government has also secured a US$100 million Afreximbank facility to kick start the interbank market. Accordingly, interbank market activity is envisaged to commence soon, once the operational modalities have been finalised.
The capitalisation of the Reserve Bank will capacitate the Central Bank to undertake the Lender of Last Resort function, which is critical for effective functioning of the interbank market.
Concurrently, de-monetisation of the Zimbabwe dollar will go a long way towards re-establishing confidence in the banking sector, particularly if the process is implemented transparently. This must embed wide stakeholder consultations on the most optimal methodology for all stakeholders.
The process of de-monetisation must not confer any special advantages to any particular group or individuals, nor disadvantage others. The public must have complete faith that the process is balanced, fair and transparent.
The Government has been on cash budgeting since 2009. It is a difficult proposition but there is no alternative to cash budgeting as the current situation prevails. It would be prudent for Government to streamline its operations and reduce recurrent expenditures so as to work towards a balanced budget.
The Government must create an environment that attracts FDI in the infrastructure sectors, in light of the huge capital demands.
Already, commendable progress has been made by Government in respect of the energy and power projects – Kariba South and Hwange 7 & 8, which are likely to be completed by 2017. The two power projects are expected to add an additional 300 MW and 600 MW respectively to the national grid.
Similar arrangements have been made for roads rehabilitation, such as the Plumtree — Mutare highway. The Beit Bridge — Chirundu Highway is also expected to come on stream shortly. These arrangements need to be expanded to include all infrastructures.
In this regard, Government is to be commended for visible efforts underway to create a conducive environment, in particular as this relates to Indigenisation andE conomic Empowerment measures, being reviewed, in line with the guidance given by President Robert Mugabe in his independence speech.
Such a review is necessary to give clarity and direction on the implementation of IEE vis a vis the need to attract FDI into the economy. The review seeks to deal with the wide discretionary powers at the disposal of the Minister responsible for implementing the IEE Act.
A visible initiative for inward investment (FDI) There is need for Government to work together with private sector – a joint initiative to attract FDI in key sectors of the economy – agriculture, mining, and Manufacturing. According to the business member organisations, (CZI, ZNCC, Chamber of Mines);
Agriculture requires about US$2 billion including for infrastructure rehabilitation;
Industry requires about $8 billion;
Mining sector requires about $7 billion;
Infrastructure (energy & power, Roads, and rail; water and sanitation) about $10 billion
In aggregate, this implies a total national requirement of about $27 billion – about, the amount that is required to finance ZIM ASSET as per the Ministry of Finance and Economic Development.
A Visible Initiative For Inward Investment (FDI)
The economy requires substantial amounts of capital for recovery and growth. The only viable alternative is FDI – there is need for a focused programme/initiative dedicated primarily for inward investment in key productive sectors.
In respect of macroeconomic policies to attract inward investment, the following are imperative:
Review of indigenization
Strengthening property rights; and
Reform of labour laws
It is imperative that the Government reviews the current IEE measures to ensure that they are aligned with the overall thrust to attract significant capital investment in the economy, notably non debt creating FDI flows in key sectors of the economy.
Similarly, there is need to signal to the international community that Zimbabwe is strengthening property rights protection and outstanding BIPPAs are being rectified.
Important also is the need to re-align the labor laws to ensure flexibility in the labour markets. Current labour market rigidities are choking many companies and forcing many that could survive into liquidation and insolvency.
Addressing the Cost of Doing Business
The Minister of Industry and Commerce, Mike Bimha has instituted a study to examine the cost structures in business. The findings of the study are critical in shedding light on the cost of doing business in Zimbabwe. The cost of doing business in Zimbabwe is very high and there are many factors contributing to the high cost environment – unsustainably high cost business environment. Among the key factors include:
High wage costs;
High utility costs – energy and power, water and Telecoms Tariffs;
High domestic interest rates;
Antiquated equipment inefficiencies;
Bureaucratic Red Tape/Border Delays; and
In order to improve the doing business conditions in Zimbabwe, there is need to address fundamental structural factors giving rise to high domestic costs. Principally there is need for Government to work jointly with Private sector to achieve:
Labour market reforms as necessary to ensure flexibility in labour market conditions and lower wages. Given the absence of the exchange rate as an adjustment mechanism, against the background of an appreciated US dollar, the only avenue for adjustment in Zimbabwe is wage adjustment or productivity gains or both. Labour market flexibility is therefore critical; otherwise the economy will continue to adjust to imbalances through the current quantity adjustment – which is real GDP contraction.
Cost of Doing Business
There is need to examine the cost build up for utilities – our domestic costing has residual influences of the Zim dollar era and this has been carried over to the US Dollar environment. Whereas goods prices continue to fall due to low aggregate demand, services and utilities remain high. Some services, notably education are as much as 25% higher than the overall CPI basket.
High domestic interest rates are symptomatic of the shortage of money in the economy and access to international capital markets and higher FDI inflows can address the challenge of high domestic interest rates. Border delays and red tape have spawned corrupt tendencies. There is need for Government, working with private sector to deal decisively with all red tape and bureaucratic delays. Similarly, Government must declare and actively pursue Zero Tolerance for corruption, both public and private.
Modernisation, factory retooling, new equipment and Technological innovation are critical for addressing antiquated equipment related inefficiencies.
Declining Capacity Utilisation
Recovery in capacity utilisation is a function of the capitalisation that is required by many companies across all sectors of the economy. Such recovery is also enhanced by energy and power availability, water, as well as reforms to the labor laws, to allow greater flexibility for firms in wage adjustment.
Malaba is Agribank CEO and Baz president