Fiscal consolidation critical for govt

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A Zimbabwean man shows off new bond notes outside a bank in Harare on November 28, 2016. Picture: Philimon Bulawayo/Reuters

THERE seems to be an acknowledgement by the Reserve Bank of Zimbabwe (RBZ) that the country is fast being pushed out of dollarisation due to failure by mainly the government to observe the rules of this currency regime.

Persistence Gwanyanya,Economist

The essence of dollarisation was to remove the government from the printing press and reduce artificial money creation to satisfy its insatiable demand to consume, which got us into hyperinflation in 2008 which was only cured by dollarisation in 2009. However, it seems the government is resisting adjusting to the dictates of the multiple currency regime as seen by the increased tendency to seek unconventional measures to print money to satisfy its ever-increasing appetite to consume through mainly the issuance of Treasury Bills (TBs) and other means.

While it is desirable to have our own sovereign currency, it is clear that the country is not ready for this imperative, which appears to be the reason why the RBZ is rather advocating for strengthening of the multiple currency regime. This leaves us with two big questions: will the government ever change its consumptive behaviour and is it ever going to be ready to reintroduce our own sovereign currency?
Enter nostro and RTGS FCAs

These two accounts seem confusing as they suggest a separation of foreign currency into Real-Time Gross Settlement (RTGS) and nostro. However, this is correct as it simply shows us that Zimbabwe is still officially dollarised and does not have its own sovereign currency.

The need to separate the two accounts comes in the backdrop of artificial printing of RTGS money which is now significantly greater than available foreign currency, thus exerting substantial pressure on the latter. This has necessitated the need to ring-fence foreign currency for foreign exchange earners that include international organisations, diaspora remittances, free funds, export retention proceeds and loan proceeds. As such, anyone whose money is in RTGS and bond notes can no longer walk into a bank and claim foreign currency though officially they can still buy it at 1:1 if it is available.

However, we all know that there is a serious shortage of foreign currency in the import-dependent Zimbabwe emanating from the huge RTGS balances against a constrained foreign currency earning capacity, which implies that it will be extremely difficult for one to walk into a bank and withdraw US dollar cash or make a foreign payment.

This is why the RBZ has maintained the foreign currency retention scheme for major foreign earners to meet the nation’s requirements for necessities such as fuel and electricity.

Forex retention for exporters

The RBZ has reviewed the foreign currency remittances on gold, platinum, diamonds, chrome, tobacco and cotton, which earn more than 85% of the country’s foreign currency to 30% for gold, 35% for platinum, diamonds and chrome and 20% for tobacco and cotton to benefit the rest of us who do not earn foreign currency by continuing to buy imported necessities such as fuel, electricity and medical drugs with RTGS balance and bond notes. All other exporters can now retain 100% of their foreign currency to meet their import requirements, which incentivises them to export more.

Clearly, these measures will not stop the black market for currencies as the bulk of importers who are currently sourcing foreign currency from this market will continue doing so, knowing that banks no longer have any obligation or pressure to pay foreign currency to all holders of RTGS FCAs. This means the US$700 million-plus foreign payments currently queuing at the RBZ will flock into the parallel market and drive demand for forex. This could be the reason why Finance minister Professor Mthuli Ncube increased the intermediated money transfer taxes as discussed below.

Interrogating the money transfer tax

The announcement by Ncube that he is reviewing the intermediated money transfer tax from five cents per transaction to two cents per dollar transacted, effective 1 October 2018, was not well received as it implies an extra tax burden on the already overtaxed economy. It also negates the efforts to increase savings as these charges are far much higher than the interest of 5% on the savings bond. One would be tempted to think that this is a temporary measure to discourage the parallel market for currencies as well as a deliberate attempt to right-size the private sector. However, it is widely acknowledged that it is actually the government that needs to right-size more than anyone else.

Right-sizing the government

As indicated earlier, the country’s currency instability can be traced to artificial money creation by the government. Since 2013, government borrowing through TBs and central bank overdraft has surged 67% from 10%.

Domestic debt has grown from US$276 million in 2012 to US$9,5 billion. TBs have grown to US$7,6 billion from US$2,1 billion in 2016 and overdraft on RBZ has increased to US$2,1 billion against a statutory limit of US$764 million which is the required 20% of previous year’s revenue. The total national debt at US$16,9 billion has also breached the statutory limit of 70% of the GDP at around 100%.

Given the current status, the RBZ governor John Mangudya is right when he talks about right-sizing the government as the starting point to achieve currency stability, which should be anchored by measures to increase production.
This means, as also stressed by Ncube, the overdraft window to RBZ has to be tightened so that we reduce it to the statutory limit of 20% and the government has to significantly reduce the issuance of TBs through introduction of the transparent auction system as opposed to the opaque private placement system which has also proved to be price inefficient.

Difficult for government to reform

The idea to right-size the economy is noble but difficult for Mangudya to implement due to government resistance to reform. In the absence of RBZ independence, the governor cannot enforce tight monetary policy measures on government, which is notorious for resisting austerity measures since Esap in 1991.

Just a cursory look at the previous budget statement by the erstwhile Finance minister Patrick Chimanasa will reveal this. An array of credible austerity measures that were intended to reduce the fiscal deficit from 14% of GDP then to 3% remain unimplemented. In fact, the government domestic debt has grown by US$5 billion and the TBs-to-GDP ratio has increased sharply to 36,5% by end of August 2018 from 4,4% in 2014. All because of lack of political will.

In the absence of political will to implement austerity measures, we may as well forget about the currency stability and currency reforms. Suffice to say that it is not RTGS or bond notes that are not performing but the government expenditure.

Enter private sector right-sizing

Right-sizing should also extend to the private sector because the excess liquidity created by central government ends up with the private sector through sale of goods and services, hence the need to also right-size the private sector. This is why in line with the normal banking practices the RBZ has imposed a Statutory Reserve Requirement of 5% on RTGS balances to mop up liquidity in the economy.

Brace for actual right-sizing

The fact that the exchange rate for the RTGS FCAs and nostro FCAs has been maintained at par could only be the starting point always noting the need for a soft landing. Going forward, the exchange is certainly going to be adjusted to reflect the shortages of foreign currency. This rate should not be very different from the parallel market rate where most of us are currently sourcing foreign currency for our import requirements.

Recovery is a two-way street

As indicated by the RBZ, economic right-sizing should be supported by measures to improve production. Being a commodity-dependent economy, increasing revenue from our commodities, mainly gold and tobacco, will be a quick-win to earn a significant amount of foreign currency to sustain our own sovereign currency and grow the economy.

The RBZ contends that with proper financing there is huge potential to increase our gold production to 100 tonnes a year from the current 30 tonnes to earn an estimated US$4 billion, which is equivalent to our national budget. The same applies to our tobacco, which has potential to generate about US$1,5 billion a year. The revenue from these commodities should then be used to diversify the economy by supporting mainly the manufacturing sector. This is important to address joblessness and the country’s de-industrialisation problem.

Gwanyanya is a financial and economic expert. He is also founder of Percycon Global Fund Managers and Bullion Leaf Zimbabwe. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. Mobile: +263 772 382 852 and e-mail: kadenge.zes@gmail.com

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