Bankers — reeling from market turmoil and currency volatility eroding their balance sheets, earnings and savings — say government must urgently tackle the root causes of the country’s economic problems and not just tinker with symptoms to fix the broken economy, the Zimbabwe Independent can report.
By Melody Chikono
Sitting at the heart of financial intermediation with aggregate deposits amounting to US$9,5, banks have massive leverage and their voice on the economy matters.
This comes ahead of Finance minister Mthuli Ncube’s presentation of the 2019 national budget statement this month amid an intensifying economic implosion.
Ncube faces an unenviable task: tacking deepening foreign currency and cash shortages; unsustainable high budget and current account deficits; rising inflationary pressures; slow re-engagement process and arrears clearance strategy; infrastructure bottlenecks and poor social service delivery.
The minister, at the coalface of the smoldering crisis, also has to deal with unmanageable subsidies, especially on fuel and agriculture, and a series of austerity measures and reforms.
A document written by the local banking sector, submitted to President Emmerson Mnangagwa at a high-profile meeting between government officials and business executives at State House in Harare on Monday, seen by the Independent this week, shows bankers are anxious about the current economic emergency.
Bankers say government must speedily rein in public expenditure to address the fiscal disequilibrium, craft a comprehensive debt clearance plan and restructure moribund state enterprises as part of a broader strategy to address current economic problems. The surging fiscal deficit is inflationary and is crowding out the private sector.
“In order to address the current challenges and lay foundations for future sustainable growth of the economy, there is need to undertake comprehensive reforms. The reforms should tackle the fundamental causes of the problems that are visibly manifesting themselves in terms of foreign currency shortages and low production,” the bankers’ document says.
“The high fiscal deficits recurrently financed through the Reserve Bank of Zimbabwe (RBZ) overdraft and Treasury Bills (TBs) issuance are the greatest source of imbalances in the economy.
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“Addressing underlying imbalances in the economy will require elevated focus on the root cause of the problem — high recurrent budget deficits that are monetised through the RBZ.
“It is important that comprehensive fiscal consolidation and austerity measures be put in place to reduce the fiscal deficit and control money supply growth.”
Ahead of the budget presentation, fiscal and monetary authorities last month presented sweeping reforms which rattled the market.
These include ring-fencing nostro foreign currency accounts (FCAs) from Real-Time Gross Settlement (RTGS) balances — an admission that local quasi-currencies and the United States dollar are not trading pari passu or in fact de-dollarisation — and a new 2% tax on intermediated electronic transactions. The measures plunged the market into chaos.
Bankers say Zimbabwe, battling to settle US$1,8 billion arrears to international financial institutions, namely the World bank and African Development Bank, would require global financial support to ensure recovery. Harare has already paid its US$108 million arrears to the International Monetary Fund.
Executives controlling the financial levers of the economy also say government must undertake far-reaching macro-economic reforms “necessary for the economy to gain confidence and traction”.
“This requires that the country makes progress on debt clearance, in particular multilateral debt clearance, which will enable Zimbabwe to access medium and long-term financing critical for liquidity and the recovery of the economy,” the document says.
The budget deficit in the first six months of the year was about US$1,4 billion. It is expected to scale double digits at US$2,3 billion by year-end.
At the centre of the current fiscal imbalances is the huge budget deficit which has had destabilising implications, not only to the financial sector but also to the rest of the economy.
Financing of the deficit has mainly been through domestic borrowing through TBs, RBZ overdraft facility and cash advances, arrears and loans from the private sector.
The deficit has fuelled expansion of the domestic debt from US$275,8 million in 2012 to current levels of US$9,5 billion. The external debt is US$7,4 billion. This brings the total public debt to US$16,9 billion.
Given a shrinking tax base, Ncube has cast his revenue collection net wider to rope in the informal sector with his regressive 2% tax that sparked off public outrage.
To address the yawning budget deficit, bankers say government should increase customs and excise duty for consumptive and luxury goods, particularly where local alternatives are available. For instance, on beer, wine, and milk products, among other consumables. They also say these imports and second-hand cars should be taxed in foreign currency.
The rise of parallel market and different exchange rates for the RTGS, bond notes and mobile money transfers is fuelling inflation, they also say.
Bankers are proposing that the re-engagement and debt clearance strategy be accompanied by fresh funding and new lines of credit.
“Within the context of an internationally agreed reform programme, it will be immensely beneficial if such a programme came with balance of payments and budget support as part of the macro-economic reform package,” their document says.
“The macro-economic reforms framework should prioritise policy sequencing, unless a concrete budget framework or a roadmap for reduction of the budget deficit is in place within the context of an internationally agreed macro-economic framework that addresses both domestic debt and external debt and arrears — any peripheral measures outside these core will yield sub-optimal results.”
Tackling state enterprises reforms is also critical, bankers further say.
“State enterprises reforms, commercialisation and privatisation should be prioritised to ensure they do not drain the fiscus. Again, there is need to see traction within the first year of reforms and only critical parastatals should be held back. The reduction in the support of state-owned enterprises should be quantified for budgeting purposes,” the document adds.
There should also be elimination of subsidies and, where immediate elimination is not possible for strategic purposes — for example on maize — such subsidies should be reduced, they say.
Ncube — who has a clear roadmap of how to tackle the current problems, although he is being disrupted by politics — also wants subsidies eliminated and prefers private sector funding for programmes like command agriculture which has cumulatively gobbled up billions.
Apart from dealing with fiscal imbalances and the deficit, the minister also wants a credible economic reform and recovery programme; compensation of farmers; upholding of the rule of law and property rights (Bippas), creating of equity funds; private-public partnership; deepening of capital markets and currency reforms, as well as liberalising the exchange rate.
He, however, lacks political influence and experience, hence sometimes he is swayed under pressure and flip-flops like on the currency and exchange rate.
Bankers also say ghost workers and duplication of duties, as well as operational inefficiencies and distortions in the economy must be removed. They are also pushing for business cost alignment — review of all major business costs — and labour law reforms, flexible labour markets.
“The above reforms will be associated with significant costs of adjustments and in particular the pain of adjustment with potential for social unrest unless delicately and comprehensively addressed with equity and fairness. Communication will be critical, especially the steady communication by government that the costs of adjustments will be borne evenly including government, business and labour,” their document reads.
Bankers also propose tax regime reforms to “allow for more taxes to be collected in the informal sector, where most of the economic activities are taking place”.
“Overall, the proposed measures will complement expenditure controls and enable government to drastically reduce the budget deficit, promote private sector growth with a bias on employment creation and import substitution,” the document notes.
“Government borrowing to finance unproductive expenditure should be eliminated. It is also important to recognise that these measures will have an impact on the efficient use of foreign currency and will result in the country rebuilding its foreign currency reserves,” the document says.
Bankers advised only such bold and sweeping measures can change the situation. Mnangagwa this week said the reform process will include tough and painful measures, likening it to an agonising but unavoidable life-saving surgery.