The mid-term monetary policy review presented by the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya carries the theme: Walk the talk to restore trust and confidence. Before I delve into this novel-like theme or topic that the Reserve Bank chief coined, I need to acknowledge the difficulty of being the central bank governor of a country without a currency, without firm monetary arrangements and backed by a government without the will to implement any policy framework that is viable.
Daniel Ngwira,Chartered accountant
With his theme to the mid-term monetary policy statement, who is the governor talking to? Who should walk the talk between government, the RBZ and the people? Of the three parties, who has spoken more without implementing their pronouncements? Is the governor admitting or is he a mouthpiece to admitting that indeed someone has not been walking the talk? Is the theme ideal when the Governor tells the citizens that “I hear you” yet goes on to introduce the bond notes against the will of the people?
Mangudya has it well when he says that the economy is in need of production and productivity and that the nation needs to do things differently. He points that the wage bill chews over 90% of revenue and correctly notes that this is worrying. The nation is ready but the government is not. We saw it last week when government rejected Chinamasa’s proposal to suspend bonuses for two years and to implement related measures which would bring closer, chances of the economy becoming more productive than more consumptive. So both Mangudya and Chinamasa have a big role of persuading their colleagues in power that the economy is mightier than everything.
Armed with information that diaspora remittances have dwindled in the face of a stronger US dollar, government should use money wisely.
What it simply means is that VAT would be affected while the extent of economic activity, some of which would ordinarily generate some form of taxes and government revenues, would be curtailed.
In the face of this, Zimbabweans sincerely hope that government will not go ahead to install some arbitrary presumptive taxes on an already strained diaspora population, which was mostly pushed out of this country by a lack of jobs.
The governor faces real challenges. Since 2014, the economy has experienced very low levels of inflation and deflation. During Gono’s days, inflation was considered number one enemy because it was too high. Today, in Mangudya’s days, deflation is very worrisome. A certain level of inflation is desirable for the well being of an economy. Japan struggled with deflation for years. Deflation is problematic in that it reflects, among other ills, weak aggregate demand. It is regrettable that government has very few tools and options to stimulate aggregate demand. That global fuel prices have been strengthening and thus could bring inflation onto the table is not what our economy is looking for. That form of inflation could erode the households’ disposable income while curtailing the volume of goods. It could lead to lower output.
The central bank chief notes that among other things, ‘the unfinished business on land security tenure’ has impeded both domestic and foreign direct investment. This observation is paramount, coming from Mangudya as a professional whose job is to guide government. What the main actors will do with such advice is beyond any advisor.
It does appear that the monetary policy statement is communicating with the fiscal policy statement which, barely a week after its announcement, was thrown into disarray as government disowned the significant part of the statement by the minister which would have seen the country move along a different but more viable trajectory in streamlining costs. The Governor is spot-on in identifying the problems facing the country though I differ with him when he attributes them to sanctions as opposed to leadership.
He goes on to say that some of the “unattractive domestic investment policies” adopted by the country include “wrong choice of trading currency.” Half way into his term as governor of the RBZ, what has Mangudya done to change the country’s course regarding choosing the right currency? Where are the results? Is the introduction of bond notes underpinned by the Governor’s belief that Zimbabwe is using a wrong currency? Besides, he managed a bank which had some of the functions of a central bank and still did not manage to help the country change course. Why is that so?
Not that I believe that the currency is wrong; of course the currency in question is the US dollar. If the US dollar is the wrong trading currency, why is it that it has been part of the United States of America’s success story for decades? Why is it that almost everyone including the second biggest global economy, China, treasur this currency?
Whether a currency helps an economy and its people or destroys them is dependent upon the policies of the primary environment. The reason why the United States dollar was the most ideal currency at the time the multi currency regime was adopted in Zimbabwe is that it is a defensive and resilient currency. At a time the economic agents had lost faith and confidence in the country’s currency and economy, they surely needed a currency that would restore the same. There is no doubt that the economy benefitted immensely from the use of the US dollar. At its worst, the local credit and money markets traded the US dollar at a rate of 50% per annum in 2009, with outliers charging as much as 120% per annum. Can we blame this upon a currency or upon a people, worse still upon speculators in the market place?
Mangudya notes that due to the unfavourable investment climate, external capital has been coming through as loans as investors seek to manage their risk. This is because when they invest through debt, the borrower has an obligation to pay both capital and interest. Besides, in cases of shortage of foreign currency, like the current situation, debt servicing is of more priority compared to payment of dividends or capital reduction through a share buyback. It therefore entails that the current economic environment places a huge burden on business; debt imposes a fixed charge on the company’s income statement and a mandatory cash outflow from the treasury side of the borrowing entity. Yet when we consider that for the half year to June 2015 total approved facilities of 185 had a value of US$1,2 billion compared to the comparable period in 2016 which yielded 156 facilities amounting to US$976 million, investor fatigue can be noted. This is a red flag which needs to be taken note of to avoid losing this liquidity stream after all.
This situation is not helped by the fact that outgoing foreign currency payments were 24% lower than for the prior year. This reflects the biting liquidity situation that has manifest itself in the form of a cash crisis and also the lack of funding in primary dealers’ nostro accounts. There is no need for us to celebrate the decline in the current account deficit yet from US$1,5 million to about US$1 billion as it appears more to do with liquidity constraints than anything else.
In Appendix II of the monetary policy statement, the governor took the opportunity to explain the difference between the RTGS and nostro balances and accounts. This form of education is timely, given the current liquidity situation the country finds itself in, although not sufficient to turn a corner. While the central bank must be commended for arranging US$215 million facilities for stabilising the import dependence ratio at 45%, it needs to be emphasised that the best way of achieving or maintaining this ratio in the long term is to tilt the economy towards production and for industry to be competitive in the global market. This will ensure the country generates the much-needed foreign currency which will boost the banking sector’s nostro balances. To achieve this, both the fiscal and the monetary policies must play a key role in reducing the cost of doing business. Perhaps it explains why the governor stated that it cannot be business as usual.
The RBZ boss is pressing ahead with his plans to introduce the bond notes which he says will be zero-coupon, tax-exempt debt instruments. The policy is silent on whether they will have a maturity date. The Governor has tried his best to make the introduction of these notes appear like a non-event, stating that he anticipates that only US$75 million is expected to be in circulation by December 2016. The avowal is that these notes will be issued as export incentives. If that is so, why not have these as real bonds which can only be redeemed, say, 90 days after export proceeds have been received? What is the main motive behind introducing these as ‘currency in circulation’?
when they are not intended to be for general circulation. The statement that they will not be forced on people confirms that this could be currency in circulation. The temptation is high, given that the central bank has since published a foreign currency priority list which reminds us of the currency shortages both on RTGS and in nostro accounts. On a positive note, if Mangudya can live by his word that he will only print notes as backed by the US dollar facility, he could help restore confidence. Obviously this will not happen overnight.
Given the prevailing economic environment, for businesses to be competitive on the global market would take unprecedented measures. Already, the local businesses lost an opportunity of reducing their costs when fuel prices hit rock bottom. This is because government levies were too exorbitant, resulting in higher fuel prices which were not in line with the global declines of the commodity. A raft of measures must be put in place at many state enterprises as they are enablers in business. They affect both the ease and cost of doing business. Particular emphasis should be made on Zesa to improve efficiencies as it has a direct bearing on the costing of manufacturing entities.
Significant investments must be made in the NRZ as it is key in reducing the transportation of goods and ultimately the final price to the consumer. In addition, exploitation of the country’s coal reserves should be heightened as coal is a low-cost source of energy. Naturally, to achieve the best of the coal, rail transportation is of paramount importance.
Overall, the governor acknowledges that fiscal prudence is sacrosanct in creating an enabling environment that Zimbabwe so needs to achieve economic transformation. This underscores the significance of the measures proposed by the Minister of Finance, some of which have been rejected by a section of government. It is important for government to think carefully and listen to both Mangudya and Chinamasa as the key people in managing the national economy.
The governor advises government to leverage and securitise the country’s vast resources. As a banker and economist, Mangudya knows that one cannot fall short of liquidity when they are sitting under vast assets. In simple terms securitisation entails the process of converting an illiquid asset into security. While it involves complex financial engineering, the ultimate is that liquidity is generated. The specific policy advice that Mangudya has given to government must not be ignored. Government has been advised before, as now, that they should dispose some state enterprises. Mangudya is also urging government to align the indigenisation Act to the policy clarification made by the President in April 2016 (when Zhuwawo clashed bitterly with Chinamasa on indigenisation). Indeed without this alignment, the policy clarification remains political rhetoric. Several years after land redistribution, government is yet to make the 99-year lease a bankable document. Scores of bankers have made the recommendation but not much has been achieved.
The governor notes that statistics available at the Reserve Bank show that the country would need to devalue by up to 45% over a three-year period. While I agree with him on internal devaluation, it must be emphasised that government must also play its part. Indeed private players have been in the lead in terms of salary reductions.
Regrettably, utilities are not coming down. In fact, we have seen a disturbing trend where the authorities have been trying to increase these. Notable examples include Zesa. ZERA must be commended for trying to put their foot down.
There seems to be a big problem at Zesa. A 49% tariff hike would be very damaging to the economy. What are they funding? An investigation must be done; we could be, at the taxpayer’s expense, financing the millionaires being created out of the enterprise, some of whom are throwing around dollars in apparent benevolence.
Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — firstname.lastname@example.org, +267 73 113 161.