Ncube suffers early setback

Tinashe Kairiza

NEWLY-appointed Finance minister Mthuli Ncube last week pronounced an ambitious set of reforms to solve the liquidity and cash crisis in the country, but he suffered an early setback when President Emmerson Mnangagwa and other authorities told him his plan to remove bond notes by year-end was impractical.
Ncube got a reality check on Tuesday when Mnangagwa told Parliament that the multi-currency system will be upheld until the economy rebounds.
In remarks that sparked raging debate, the new Treasury chief had proposed the scrapping of bond notes by year-end, among a raft of other ambitious measures. Mnangagwa, in his address to officially open the Ninth Parliament, effectively shot down Ncube’s plan for immediate currency reform.
A distinguished scholar and respected banker, Ncube is among a cast of cabinet ministers assembled by Mnangagwa to arrest the country’s economic free fall.
Shortly after arriving from Switzerland last week amid a wave of optimism generated among the generality of Zimbabweans, Ncube immediately outlined a raft of measures key towards mending Zimbabwe’s broken economy. Among his policy reforms, Ncube announced that Zimbabwe would abandon the bond note — a surrogate currency introduced in 2016 in a bid to solve the chronic liquidity crisis.
He also said he was considering joining the Rand Monetary Area or fully dollarising the economy, while also working towards clearing the country’s huge debt stock estimated at US$18 billion.
Ncube also eloquently spoke about the need to foster disciplined fiscal and monetary reforms, addressing the yawning budget deficit standing at US$1,4 billion, unlocking fresh lines of credit and revitalising the country’s shrinking manufacturing base.
While his proposals generated a wave of excitement among Zimbabweans buffeted by the headwinds of economic implosion, resolving the country’s multi-facted problems would require a healthy dose of pragmatism and huge financial resources.
It will be difficult for Ncube to uproot the new administration from its entrenched culture of profligacy.
Mnangagwa’s government has since backtracked on plans to purchase vehicles worth US$20 million for cabinet ministers, channelling the resources towards fighting a cholera epidemic currently gripping the country and has claimed 32 lives. Government has since launched a fundraising campaign to mobilise US$57 million to contain the cholera outbreak.
Already, Ncube’s policy proposals to abandon the bond have rattled the markets, with the surrogate currency trading at nearly US$1:2 (bond).
Zimbabwe has multiple exchange rates for the US dollar, bond note, Real-Time Gross Settlement (RTGS) and mobile money transfer, a situation which has created a thriving black market and arbitrage.
However, with government currently swimming against a vicious fiscal tide, abruptly abandoning the fiat currency in the short term would almost immediately ground Mnangagwa’s administration — which has tried to keep the economy afloat through printing and creating money through quasi-currency instruments and illegal borrowings from the central bank.
Government has breached the statutory 20% limit for its borrowings from the Reserve Bank of Zimbabwe, meaning its now raiding the central bank funds unlawfully.
Discarding the surrogate currency via dollarisation requires a country to have healthy reserves of US dollars, which Zimbabwe does not have. Zimbabwe only has US$1,5 billion and about $400 million in bond notes in circulation.
The market is dry in terms of hard currency because of a shrinking manufacturing base and dwindling exports.
Forging a currency plan pivoted around official dollarisation would also require the blessings of the United States which recently renewed its raft of sanctions against Harare. Seeking admission to the Multilateral Monetary Area will be near-impossible as Zimbabwe does not meet the convergence criteria, which include the requirement that a member must have its own domestic currency. There are also many other benchmarks which would restrict Harare from immediately solving its chronic foreign currency and cash crisis.
Under the strict rules guiding admission into the Multilateral Monetary Area, member states, namely South Africa, Namibia, Lesotho and Swaziland, would also need to agree on whether to admit Zimbabwe or not, taking into account its macro-economic imperatives and economic indicators.
Economist John Robertson said abolishing the bond would be prudent, but a cautious approachwas needed.
“Scrapping the bond note is very important. Government should have never brought the bond currency into circulation. We now have a situation of bad money driving away good money,” Robertson said.
Ncube’s task would also require him to address a deep-seated malady, punctuated by fiscal indiscipline triggered by government’s habit of financing its expenditure through quasi-currency instruments. Zimbabwe had a budget of US$1,4 billion in the first quarter of 2018, an indication of persistent fiscal indiscipline.
Felix Chari, a commerce lecturer at the Bindura University of Science Education, said given the gravity of Zimbabwe’s macro-economic challenges, it would be difficult for Harare to join the Rand Monetary Area, fully dollarise or introduce a local currency.
Broad money supply increased by 40,81% on an annual basis, from US$6 491,67 million in June 2017 to US$9 140,89 million in June 2018, according to the RBZ June monthly bulletin. This reflected yearly increases in transferable deposits, 93.31%; and negotiable certificates of deposit 1,79%. Time deposits, however, declined by 5,18%.
The former African Development Bank (AfDB) vice-president’s intention to revive the Lima Plan as a strategy to settle Zimbabwe’s gigantic debt stock of US$1,8 billion to the World Bank and AfDB will require Harare to first pay the outstanding payments before accessing fresh lines of credit.
Zimbabwe’s debt arrears amount to US$5,6 billion shared between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million).
It owes the Paris Club about US$6 billion. Arrears contribute about US$1 billion. The amount overdue to non-Paris Club creditors is US$476 million.
Economist Prosper Chitambara cautioned that before Zimbabwe plunges headlong into implementing the far-reaching reforms proposed by Ncube, the country needs to first initiate dialogue among various players aimed towards finding a lasting solution to stop the economy from haemorrhaging.