HomeAnalysisSticking to the fundamentals

Sticking to the fundamentals

In seeking to remedy the many problems confronting Zimbabwe at this time, we need to keep our ideas anchored to the fundamental principles that are located in each of the sectors involved.

By Eddie Cross

Any deviation from this when we seek to propose solutions runs the risk not only of not achieving our goals but making the situation very much worse.

Just take a few examples from our current state of crisis. We are faced with a national debt that we simply cannot service. So the Ministry of Finance has been working hard since 2012 to reach an agreement with the IMF on how our debt is to be managed and eventually brought under control.
Under the Lima agreement reached in September 2015, we are supposed to clear our arrears to the multilateral agencies International Monetary Fund (IMF), World Bank (WB) and the African Development Bank (AfDB) amounting to US$1,8 billion. The IMF was easy – it was small, just over US$100 million and we had the funds in our reserve accounts with the Fund and simply releasing those reserves cleared the debt. The World Bank and the African Development Bank are a different matter – at US$1,7 billion they are larger and we simply do not have the resources to clear these.

So the ministry has been trying to secure a loan from a consortium of banks which could then be used to settle the arrears.

This solution was close to being achieved when the IMF pointed out that there was little point in paying back loans from the multilateral agencies with borrowing from other sources which were more expensive and on less favourable terms. Common sense really, but the clincher came when the Fund said that even if we cleared our arrears, our political and structural macroeconomic fundamentals remained so far out of sync with their policies and principles, that no new funds would be forthcoming.

It is a question of addressing the fundamentals that are the bedrock of any relationship with the Fund – sound fiscal and monetary policies, a reputation for transparency, good governance and a low level of corruption. Then you have to have the support of the major shareholders – it is not rocket science.

Then there is the issue of our burgeoning budget deficit which stood at 30% of expenditure in 2016 or US$1,4 billion dollars. In an economy of just US$14 billion and a budget of US$4,8 billion, this is an issue which even a first grader in primary school can understand. Spend more than you earn and you are in trouble. In our case we have firstly, not been totally transparent on the issue, we have fudged the extent of our creditors and borrowings, our domestic sector borrowings have mopped up all liquidity and the cash crisis is a direct consequence.

Because of these new borrowings our national debt has doubled since 2013 and we have nothing to show for it. Our infrastructure is crumbling, Air Zimbabwe is falling out of the sky in operational terms, the National Railways is no longer a going concern, our roads are a “national crisis”.

All our cities are short of clean water. That is what happens when you borrow to eat. Former finance minister Tendai Biti’s dictate that we should “eat what we kill” was not a slogan; it was a plain statement of fact, sound common sense and fiscal policy. You always borrow to invest in productive capacity so that future growth covers the cost of interest and repayments.

When you violate such fundamentals, there is always a price to pay and Zimbabwe is now paying a heavy price for this violation and, like the era of “Gono economics” when inflation reached staggering levels and destroyed not only our currency but our economy, this crisis is again driving also our private sector into liquidation.

Then there are the fundamentals attached to successful private sector growth and stability. Private players need security – they need to know that when they invest, they, and no one else will reap the benefit. They need to know that when they deposit money in a bank – it will be available to them tomorrow, they need to know that when they buy land or invest in a hole in the ground, that it will remain in their custody until someone comes along to pay a fair price to take it over.

China, the only remaining Communist power in the world, recognises these principles and has strictly observed them since they opened up to private capital and free enterprise. The results have been spectacular – the global business community has loaned them US$250 trillion at very low historical rates of interest, they have flooded the world economy with their goods and spurred growth in the world on an unprecedented scale. When we obtained our Independence, China was just starting its spurt to middle income status. We were halfway there with a highly diversified economy, a balanced budget and an educated and hard working population. We were far ahead of China in 1980.

Today, Zimbabwe is the third poorest state in Africa, 70% of our population – double the percentage in 1980, is classified as absolutely poor. China is now the second largest economy in the world and has lifted nearly one billion people out of poverty to middle income status. We are isolated, bankrupt and no one will lend us money. Why? It is simple, we broke the rules and China complied. It is not a question of the ideology of the regime in power – China remains a Communist and centrally managed state, it is a question of carefully and consistently sticking to the fundamentals. Money knows no ideology – just fundamentals.

Now we have a new boy on the block and he is called “Command Agriculture”. The other day the president of the MDC, Mr. Tsvangirai called me up and said can I find an expert to explain this new phenomenon to him. It is Zanu PF’s answer to the critics who say the fast-track land reform programme has been an abject failure.

The reality is that there are no more independent characters on earth than farmers – large or small. They make their own decisions and always in what they see as being in their best interests. No one can “command” farmers to do anything. Stalin tried and failed miserably, China tried and tens of millions died of starvation.

What farmers need is no different to other private sector players — security, security of tenure, because the land is their life, security of assets and livestock, market access at prices that will give them a decent return and infrastructure to ensure they can transport their goods, energy when it is needed and the many different inputs when they are required. Good farming is a matter of timing as much as anything else. If you are late, you lose the season.

So I stand on the sidelines and watch along with everyone else, just what this investment of borrowed money – all of it – is going to yield. Certainly the maize crop looks better than it has in years, but I doubt if we will reap more than 1,1 million tonnes and we will still have to import from Zambia and South Africa who both have a record crop. The reason for the better maize crop is not any command given by a minister, but a producer price that is higher than in any country in the world and has increased the basic price of our main staple food by at least 50% in the past six months. In addition, millions has been spent by the state (all borrowed) on inputs to selected farmers who signed up to the programme.

My own view is that this will be a US$500 million mess with very little to show for it in the long term. Soyabean production has slumped and we only have 10% of our needs because those who gave the “command” forgot to include the other essential crops.

Finally, there is the key issue of faith in our banks. Every banker knows that all that stands between them and bankruptcy is the confidence of their client base. After Gonomics in the period 2000 to 2008, very few Zimbabweans have any faith in their bankers. We as a country cannot grow without sound and trustworthy banks, until the Reserve Bank respects all the fundamentals and all banks look after the clients’ interests over their own or those of the regime in power, they will never again be trusted as guardians of our currency and wealth.

It is all about the fundamentals, common sense really for those without a PhD.

Cross is an economist, industrialist & member of National Assembly for Bulawayo South. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Email kadenge.zes@gmail.com and cell +263 772 382 852.

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