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‘There is no drive for reform in govt’

Ashok Chakravarti

ZIMBABWE is facing an economic crisis which has been worsened by a chronic liquidity crunch and cash shortages. Attracting potential investors has been a challenge under such an environment which also has stringent conditions and policies for business. This week Zimbabwe Independent reporter Hazel Ndebele (HN) interviewed senior development economist and Ease of Doing Business advisor in the Office of the President and Cabinet, Ashok Chakravarti (AC), to discuss the above mentioned challenges besetting the economy among other factors. Find Below excerpts of the interview.

HN: Since your appointment as advisor on the ease of doing business, what progress has been made?

AC: The major achievement of the programme since it started about two years ago is that there is now a broad awareness in government that Zimbabwe has become an over-regulated economy, and that reforms need to be undertaken to improve the business enabling environment. This will boost production, exports and economic growth.

HN: What specific measures have so far been taken to improve the ease of doing business?

AC: There are too many to summarise. But some of the few are the introduction of an international best practice Companies Act; simplifying the procedures, time taken and cost of registering property, obtaining building permits and business licensing; reducing the cost or entirely eliminating various permits required for the export of goods; making CD1s (customs declaration form number 1) available on-line, and so forth.

HN: What challenges have you and government faced in implementing the reforms?

AC: The main problem has been the lack of understanding amongst some sections of the civil service, and regulatory authorities in particular, to review existing processes and regulations and bring about the necessary changes. It is a mind-set issue. The ease of doing business initiative emphasises that we are trying to do “business unusual”, but many bureaucrats want to continue doing what they are doing as usual.

HN: Zimbabwe continues to rank low in terms of ease of doing business. In the 2017 World Bank’s Doing Business’ report the country was ranked 161 out of 190. What in your view should be done to improve this score?

AC: Improving the ease of doing business is a long term process. The current Rapid Results Initiative under the Office of the President and Cabinet is focused on achieving gains in a 200-day period. The exercise therefore needs to be institutionalised and continued for a longer period of time.

HN: There has been a remarkable demonstration of lack of political will to speed up reforms and hence the glacial pace at which the agenda has been implemented. What can be done to ensure urgency and increased pace in the implementation of reforms?

AC: Unfortunately, although President Mugabe has emphasised the importance of this agenda, all ministries are not equally on board on this policy reform agenda. Where ministers or senior civil servants do not show commitment to bringing about the necessary reforms through amendments to Statutory Instruments and other regulations, progress becomes slow. In my view, this matter should be discussed in Cabinet again and a commitment obtained that all ministries will be equally committed to the reforms. In the export sector for instance, 22 Statutory Instruments have been identified as impediments to exports and requiring change, but the actual progress in changing them has been very slow because the relevant ministries have been dragging their feet.

HN: Corruption has been pointed out as a major impediment in ease of doing business reforms, what advice have you given government on this front?

AC: The ease of doing business initiative focuses on amending laws, regulations, licences, permits, fee levels and procedures which are impediments to business. It cannot tackle everything. There are other institutions and authorities which are in place to tackle the issue of corruption.

HN: You spoke at length at a recent Sapes meeting about the need to officialise the bond note as local currency, why do you think that should be done given that bond notes are not the real currency?

AC: My view on the Bond Notes is based on the experience of other countries which have dollarised, and then attempted to introduce their own currency. The fact that the Bond Note is depreciating against the United States (US) dollar indicates that it cannot be considered a surrogate US dollar, but is a kind of local currency. The only circumstances under which such an introduction can succeed, is for the new currency to be supported by a dedicated currency board. This means that the monetary authorities set aside a fund within their books to defend the value of the newly introduced currency. The emergence of the parallel market has shown that a facility of the type obtained from the African Export Import Bank (Afreximbank) is inadequate to support the introduction of a new local currency such as the Bond Note. Rather the Reserve Bank should have set aside perhaps US$100 million in real US dollars, to back the introduction of the US$200 million Bond Notes. This fund could then have been used to provide appropriate support through market interventions to stabilise the value of the Bond Note. I think that this can still be done. The measures required are therefore: real backing to be set aside, and the Bond Note to be un-pegged from the US dollar. This will result in all the Bond Notes which are trading outside our borders coming back into Zimbabwe and improving the liquidity situation.

HN: While the bond notes are depreciating in the market, the United States dollar remains over valued on real exchange rate and hence is hurting Zimbabwe’s external competitiveness, what is the solution to this?

AC: As I have repeatedly argued since 2009, Zimbabwe needs a weak and non-tradable currency like the Rand. This will result in two things. Firstly, our production will become competitive and our exports will increase. Manufacturing exports have declined from US$1 billion a few years ago, to under US$500 million per annum today. The reason is the strength of the US dollar against other currencies especially the South African Rand. Secondly, our cash crunch will be solved because unlike the US dollar which is being constantly externalised, the Rand is not an internationally convertible currency. The Rand has little value in Nairobi or Dubai or Shanghai. Therefore it will remain within Zimbabwe and the southern African region.

HN: Some officials and economists are opposed to your suggestion that Zimbabwe adopts the South African Rand. How can this be done in terms of approach and procedure?

AC: Introduction of the Rand is a straight forward matter. However, it has to be done officially, not like the use of the US dollar, which has come to be used in Zimbabwe in an informal manner. To start with the government must declare its intent to make the South African Rand its reference currency. At a certain date all prices, salaries and wages, etc. will have to become Rand denominated. The initial availability of the Rand in the market can be brought about by negotiating a short term facility with the Reserve Bank of South Africa, and encouraging the banking system in Zimbabwe – which by the way has close relationships with South African banks, to import adequate Rand cash. Subsequently, this pool will be replenished by remittances from our Diaspora in South Africa, and a more open cross-border trade situation. It must be emphasised that using the Rand as the reference currency in circulation in Zimbabwe does not mean that we have to join the Common Monetary Area. There is no such requirement. However, we do have to have some agreement and accommodation with the South African authorities. I would also like to add that this use of the Rand will continue to be within the framework of a multi-currency regime. The US dollar, and all current US dollar deposits, will not be converted into Rand. On the contrary, they will be re-designated as US dollar Foreign Currency accounts/deposits so that their value is protected in real US dollar terms. In this situation the value of all our deposits will be protected unlike now where the value of Real Time Gross Settlement (RTGS) US dollar deposits keeps on depreciating.

HN: President Robert Mugabe met business last week, where captains of industry expressed concerns over policy inconsistency and incoherency, what can be done to address this?

AC: Such interactions between the Head of State, senior political leaders and the captains of industry, is most encouraging. A modern economy is a complex machine, and correct policy making requires that both state and non-state actors put their heads together to come up with a coherent economic policy package. This is not something that politicians and bureaucrats on their own can do. Therefore, I think the dialogue started needs to be extended and deepened so that all stakeholders get a seat on the table and good policies are both formulated and implemented by consensus.

HN: Parastatals have been bleeding the fiscus and this issue came up between the meeting of business and Mugabe last week. Do you think privatisation or commercialisation can help fix state enterprises?

AC: Zimbabwe has 101 parastatals, almost all loss making. There is consensus amongst economists and policy makers in successful economies- such as in the East, that government should not intervene in the production process in every sector of the economy. Government’s role is to provide a favourable enabling environment, and only enter the production space where it is a matter of providing essential public services which the private sector cannot provide. Therefore, parastatals involved in transport, telecoms, etc. are needed and should be run in a viable manner for instance National Railways of Zimbabwe, etc. All the others should be privatised that is sold off. For example, government has no role in steel production or in holding industrial enterprises under the Industrial Development Corporation. The Zimbabwe Iron and Steel Company and all such enterprises should be sold off. Further, in my view domestic investors should be given access to these assets at severely discounted prices. This will encourage the development of a domestic entrepreneurial class.

HN: With limited access to foreign financial inflows, government is facing unsustainable fiscal imbalances which it is now financing by rising domestic borrowing, how sustainable is this situation and what do you think should be done to fix it?

AC: The current situation is totally unsustainable. The budget deficit is in the region of 10% of Gross Domestic Product, and the stock of domestic borrowing has reached US$4,5 billion or more. Much of this is being held by the banking sector, making their asset base very fragile. All economists, the World Bank, IMF and many senior political leaders agree that the high level of government expenditure needs to be addressed immediately. One set of measures to tackle government expenditure immediately is to privatise most of the parastatal sector. However, the main source of high government expenditure is the wages and salaries of government employees. To address this, there needs to be a high level and strategic dialogue between the government, trade unions and other stakeholders. Only through dialogue and consensus can a solution be found. Unilateral decisions by government will not be accepted by the other parties involved.

HN: The economy is facing chronic liquidity crunch and cash shortages, what is the solution to this?

AC: As I have already stated, so long as we use the US dollar as our unit of account and circulation, the liquidity crunch will continue. We have to move to a non-tradable, non-externalisable currency. Ideally, we should have our own national currency. However, since the conditions do not exist for this to happen, the second best option is the South African Rand.

HN: Considering that that you are also a mining coach on the ease of doing business programme, what is your view on the state of the mining sector and what can be done to improve it?

AC: The mining sector has enormous potential. It is in a position to increase production and exports which could potentially solve Zimbabwe’s foreign exchange and balance of payments problems. For instance, there is scope to double the production of gold, and increase the production and exports of other key minerals – both in raw form and beneficiated. The Thematic Working Group on Mining has just completed a full mapping exercise of the regulatory and other constraints affecting the performance of this sector. We will now start the discussions with the relevant authorities to bring on the necessary changes. To give you one example, artisanal miners – the makorokozas, produce almost half of Zimbabwe’s gold output. But under the existing laws their activities are considered illegal. This is obviously ridiculous, so our committee is taking steps to change the necessary laws, introduce a special mining permit for small miners, and legalise their activities. In this manner we want to provide a better enabling environment for both artisanal and large scale miners to increase their gold output. This is equally true in other areas of the mining sector.

HN: What is your view on the Indigenisation policy?

AC: There is nothing unusual about having an empowerment policy that favours local people. Many countries have introduced such policies. However, what is wrong with our indigenisation policy is that it is only focused on ownership of assets. This is the wrong way to look at empowerment. The better way of looking at it is: ensuring the employment of citizens, giving them preferential access to government tenders or government purchases, ensuring that foreign companies keep most of the value-added within the country, making sure that foreign companies, especially those in resource based sectors contribute to tax revenue and the fiscus, etc. Such measures are more important in ensuring that foreign investment contributes to national development and the empowerment of citizens. There has been some thinking along these lines and some of our leadership has indicated that the current Act should be amended in this direction. However, it is unfortunate that these amendments have not been formulated in the law and implemented. The current Act is a huge deterrent to foreign investment as the statistics show. In 2016 inward long term investment fell to its lowest level ever. Therefore, this Act should be re-vamped immediately.

Fact File: Ashok Chakravarti

  • Is a senior development economist who has worked for 40 years in Africa;
  • Currently an advisor on Ease of Doing Business Programme under the Office of the President and Cabinet;
  • Has advised the governments of Malawi and South Sudan;
  • Has worked for UNDP, UNCTAD, USAID, DFID and other international agencies
  • Holds several degrees from Delhi and Oxford Universities;
  • Author of many academic papers and books on development and the economic performance of nations; and
  • Senior visiting lecturer in the Department of Economics at the University of Zimbabwe, from 2009 to 2014 and also worked as an advisor in the Ministry of Finance during the same period.

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