bY Christopher Mugaga
WAKING up to a monetary policy which defied the expectations of all and sundry was reminiscent of former Reserve bank governor Gideon Gono’s days.
I recall how the announcement of a monetary policy statement was often hyped as a big national event during those days. Politics was different then, people did not care about the monetary policy until a bank was closed or new zeroes were slashed. Policymaking today is too “short term”. In an era of 24-hour news and instant analysis on social media, policymakers are too nervous to propose tough but necessary changes.
It will be quite difficult for anyone, including preachers in synagogues, to ignore the big fiscal challenges facing Zimbabwe. The change in tack has to be motivated more by economics than politics.
Many ruling party figures were wavering over whether to support Finance minister Mthuli Ncube, after the intention to escalate the highway to austerity has been elevated.
However, after a feel-good budget was announced, they became less likely to make a fuss. This is even complicated by a monetary policy attempting to take away the 1:1 privilege from big fats who would wantonly loot the few greenback balances in the market. The Zimbabwean economy, once among the most advanced in sub-Saharan Africa, has become one of the most vulnerable. The land reform since the late 1990s has seen agricultural production plummet and productivity decline, while excessive fiscal deficits have led to external payment arrears.
Achieving a sustainable fiscal stance is also a sine qua non for stabilising the monetary regime and restoring confidence.
It is quite vital to refrain from monetary financing of the deficit and to contain the issuance of Treasury Bills to prevent an accelerating discount of the local paper to the greenback and a further worsening of a dire forex liquidity situation, not forgetting the need to refrain from borrowing at unsustainable terms or by collaterising future export proceeds worse still with the increasing role of “young money’ from Beijing which seems to come with a murky tranche of conditionalities.
A significantly overvalued real effective exchange rate suggests challenges for external stability. Zimbabwe s external position is substantially weaker than implied by its short to medium-term fundamentals. The current account gap is almost 8% of GDP, and the real exchange rate gap varies between 35 to 45%, in addition the international reserve shortage, almost 1% continues to worsen the current state of affairs. The real exchange rate depreciation worsened post 2010, as the depreciation of the rand against the greenback was outweighed by South Africa s higher inflation. However due to low productivity, promulgation of statutory instruments to ban imports and forex shortages is symptomatic of a bigger overvaluation of the real exchange rate and the urgent need to depreciate it.
A year ago, Zimbabwe did not have a currency crisis but rather a production headache. The past two consecutive years, however, have ignited a currency conundrum which the government tackled in the recent monetary policy. The courage and audacity to liberalise the foreign exchange market is a commendable move given how the parallel market was distorting pricing. According to ZimStat, the year-on-year inflation jumped to 20,9% in October 2018 from 5,4% in September 2018. Month-on-month inflation stood at 16,4% in October 2018, from 0,9% in September 2018.
Also, the expenditure patterns for the first half of this year shows a government with gargantuan appetite for unavailable resources, notably when compared with same period last year. The first half of 2018 saw expenditure sitting at $3,85 billion compared to $2,67 billion same period last year. Surprisingly, the expenditure figure for H1 2015 was $1,9 billion, testimony to a government on a spending spree. This saw the fiscal deficit for H1 2018 perched at $1,34 billion from a deficit of $185 million same time period in 2015.
Closer analysis of these expenditure figures shows that it is not necessarily employment costs alone which have escalated. In fact, the employment costs have been steady whilst capital expenditure has been cruising; moving by 242% from H1 17 to H1 18 to the tune of $1,47 billion. In my attempt to really profile what constitutes capital expenditure, I concluded that command agricultural financing has been the main driver. This, therefore, means announcing a 2019 national budget without a focus on how to wean command financing from Treasury will be but a futile exercise.
If one looks at the Treasury Bills issued in H1 2018, to the tune of $1,8 billion, close to $380 million went towards command farming, that alone can tell a story of the urgent need to restructure the means and ways we finance our agriculture, worse still considering the high default rates by farmers to pay back loans under the scheme.
Zimbabwe needs an urgent-cum-decisive position regarding timeline of reintroducing the local unit without hiding behind the RTGS currency jokes. The 1:1 parity was too heavy a subsidy to fathom for such an ailing government, however announcing a monetary policy statement with no interest rate policy is a job half done. The structural imbalances which have seen liquid cash hovering around $300 million versus ever spiralling RTGS balances which have breached a $2billion mark has been the primary driver of inflationary pressures as we witnessed high RTGS balances chasing few liquid cash. Regardless of how much we want to correct the imbalances, it certainly cannot be a short term stunt, what makes it a difficult exercise is the fact that these illiquid RTGS balances represent trapped deposits which continues usurping market confidence in the banking system.
Therefore, obstacle number one to economic reforms was love for living in a world of fantasy and wishful thinking through continuously “marrying” these RTGS with depleted stocks of liquid cash.
Now it is a challenge which was confronted in the monetary policy head-on, and what is now left is for a voice of reason from the legislature and the executive… they are the biggest culprits in allowing for government expenditure to violate the statutory limits as a percentage of GDP.
Then comes the biggest elephant in the “war room”, the debt crisis. So now Zimbabwe has approached a zone of twin evils which are currency crisis as well as currency crisis.
They are so interrelated that you cannot solve one of them without referring to the other. If this government is remorseful about the unsustainable debt we are deep in, therefore it is not showing.
As of end 2017, with a present value of public and publicly guaranteed debt to GDP ratio of way above the average ceiling of 70%, a present value of debt to revenue ratio of 193%, and a present value of debt to export ratio of 170%, this is evidence that Zimbabwe’s public and publicly guaranteed external debt breached most indicative thresholds.
This is after even factoring in the rebasing which the treasury boss recently executed following years of tinkering on what was claimed to be an understated GDP. So there is a clear case that Zimbabwe remains in debt distress. Domestic debt has also been on the rise, even much more significantly leaving the country as a high risk profile zone for investors. The increase in the stock of external debt has been modest not because of a lower financing need, but due to Zimbabwe’s limited access to financing.
In pursuit of attaining stability at both currency and debt levels, there is the monster of corruption. It remains an archiles heel to disciplined implementation of set policies. The rate of illicit financial outflows cum externalisation is disturbing at continental level. The official figures from mining sector point to a hazy industry.
As much as it is difficult to rely on official numbers, stories circulating that artisanal miners have been delivering more gold to the fiscus than conventional players cannot be taken lightly. Given the structure of Zimbabwe s mining industry, even if it was to operate at 15%, its numbers are expected to continue outweighing the artisanal miners output. Small miners delivered half a tonne of gold last year it could be 75% Weak processing efficiency is an albatross to the success of this sector, absolute maximum recovery range is in the 50-60% range and the need to legalise the sector are all matters which this government need to urgently deal with.
Corruption is so rife in the industry to the extent of not even accounting for what is spirited out of the country through illegal means, events at Hwange Colliery are even more worrisome as they are to finger the new mines minister into the saga. This government can only make policies effective through tackling corruption using legal routes not as a pawn to settle political scores.
Mugaga is an economist and chief executive officer of the Zimbabwe National Chamber of Commerce (ZNCC). New Perspectives column is a weekly column coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Cell number +263 772 382 852 and email address email@example.com.