‘Govt should stop sending mixed signals on currency’

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FINANCE minister Mthuli Ncube recently unveiled the Mid-Term Fiscal Review which has generated a lot of debate about the direction of the economy and effectiveness of his policies amid numerous headwinds buffeting the country. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) interviewed economist and Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga (CM) to unpack some of the issues in the fiscal review statement, as well as to discuss other matters, including the power outages, fuel shortages, ease and cost of doing business and state of the economy. Below are the excerpts:

KK: Treasury has projected that the economy will contract by at least 2%. What is your projection?
CM: There is certainly nothing strange about forecasting a negative headline Gross Domestic Product (GDP) growth for Zimbabwe, worse still given the resident headwinds bedevilling this economy ranging from energy crisis, political friction, unfavourable commodity prices on the international market, drought, as well as antiquated infrastructure which has been pushing up the cost of doing business in the country.
In fact, we foresee a -3,5% GDP growth for the current year and this is a view we had maintained since the first quarter of the year. Such a negative trend might also threaten the twin surpluses at both current account and fiscus levels given that a potential reversal of the surpluses is imminent, notably in this third quarter.
The two potential drivers of growth for 2019, which are tourism and mining, are also not spared from the negative impact of currency distortions which complicates travelling procedures for inbound tourists, with unfriendly export retention ratios in the mining sector threatening to worsen the forex shortage impact on mining houses.

KK: Some have argued that the tax-free salary threshold of ZW$700 is too low given the ravaging effects of inflation. Do you agree with this and, if so, what threshold do you think should have been put in place?
CM: It is vital to balance between increasing citizens’ welfare through an upward revision of tax-free threshold, as well as balancing government accounts through capturing as much Pay As You Earn as possible. The new revised thresholds might shortchange the fiscus of almost ZWL$300 million in lost revenue monthly as opportunity cost to PAYE. The focus must be on containing inflation, not tampering with the tax-free threshold given that even assuming the tax-free band was moved to ZWL$1 500, it will still be way below the poverty datum line if proper exchange rate adjustments are to be factored in.

KK: We have seen the price of fuel continuing to go up. What impact will this have on the market?

CM: The major crisis regarding our fuel market is the oligopolistic nature of the industry, as well as continuous reliance on unsustainable subsidies to our domestic fuel prices. Any attempt to continue pricing fuel below ZWL$10 is confirmation of how market forces are not allowed to settle the market prices of fuel; in addition, it also implies our lack of faith in the interbank market considering that the prevailing official exchange rate will not be recognised through continuous pricing of fuel way below the regional prices.

The debate does not end on fuel, but can also be applied to electricity tariffs within the entire energy mix. Obviously, an increase in fuel prices is inflationary, as businesses are carrying such costs. Unfortunately, about 80% of such cost build-ups are transmitted to consumers through price increases.
Today the cost of not having fuel is implicitly higher than the pump price given the opportunity costs and other attendant inconveniences associated with fuel shortages. The solution lies in allowing market forces to determine the fuel prices.
KK: Government has criticised business for increasing their prices at a time they have increased prices of their own services. Is this not a contradiction?
CM: I believe the debate must not be on whether criticism comes or not, honest and frank engagement between the private sector and government remains the viable solution to such a stand-off.
Unfortunately, the Zimbabwe government has a well-documented history of denialism when it comes to dealing with the cancer of inflation, you can relate to bodies such as National Incomes and Pricing Commission, which used to be chaired by Goodwills Masimirembwa, the price slash of 2005, which left corporate tombstones scattered all over corporate Zimbabwe with notable cases being the Makro shop and the famous Barbours shops collapsing following the then price decree. So to business, it must never come as news when the blame is levelled, but, in the same vein, the culture of profiteering must be nipped in the bud.
I remember, just a fortnight ago, buying 300ml of mineral water for ZWL$30; surely, what justification can be given for such a pricing pattern? However, the warning to government is to avoid sending mixed signals, notably when it comes to dealing with the currency conundrum currently obtaining, once you legalise pricing in forex by selected players, it can only delay but not deny re-dollarisation in the medium to long run.
KK: Let us come to the issue of power outages. You said that it has cost between US$150 million and US$200 million weekly in lost revenue, production and exports. How long will it take for industry to recover from the losses?
CM: My worry is not even the losses which are already like a sunk costs, but the potential losses which we must mitigate against. We are told that the government has entered a payment plan of honouring almost US$900 000 weekly towards paying our Eskom debts.
If government is to default on this plan, it obviously will spell more doom for the industry given the trust deficit which comes with defaults. Therefore, it is a precarious situation we are in, the best way to solve this crisis is to invest in infrastructure, notably the thermal one. I don’t see a challenge with solar projects, but I think it’s a bit too early to expect such projects to power the demanding manufacturing sector in particular.
As long as there is no credible plan to capitalise Zesa, to make the Zimbabwe Energy Regulatory Authority as independent as possible and also to expedite the Hwange 7 and 8 extension projects, it will take forever to recover from these losses. The risk to industry remains very elevated and we will not recover from the losses we have incurred but rather begin to limit the losses we will incur in the short run.
KK: We have seen workers continue to demand increments in salaries, with some arguing that wages should be increased in line with the interbank rate. What in your view is the solution to this continued demand for salary increases?
CM: Raising the salary levels without factoring in the total factor productivity levels can only be suicidal. Wages and salaries are just but a reflection of labour market dynamics and it is a signal on the state of the economy and industry in particular. So the solution lies in respecting the Tripartite Negotiating Forum by all parties who are signatories to it; the solution lies in producing, producing and producing even more.
The solution lies in addressing the power and forex shortages holistically. However, a debate is raging on that the government has adjusted its Zimbabwe dollar budget by a factor of about eight in almost all expenditure lines except wages and salaries.
I think that is the only way to walk the talk of austerity otherwise any attempt by the government to adjust civil service salaries in line with the interbank market will wipe the much-touted budget surplus overnight hence putting more pressure on the government to fund the fiscal gap domestically.
In the same vein, the private sector has been challenged to also review salaries of its labour, which is a justified call given the levels of poverty the majority are swimming in. Interestingly, before the new local currency was introduced, a number of private sector players were introducing cost of living adjustment with a portion of salaries being denominated in hard currency, but all this stopped with the consummation of Statutory instrument 142 which brought in the local currency .
KK: What are your expectations for the 2020 budget to be presented by the Finance minister in a few months’ time?
CM: The 2020 national budget might not be significantly different from what we saw in the Mid-Term Budget Review, I have to applaud the Treasury boss Mthuli Ncube for attempting to tackle a number of challenges quite resident in the economy. He is announcing a budget for a comatose economy which had turned into a “walking textbook of pathology”.
Nevertheless, I expect the Finance minister to expedite the state-owned enterprise reform process. We continue to see a culture of patronage, where subsidies are being doled out to sustain a business model which will not stand to see the light of the day if free market is allowed to thrive. Take for example the Zupco case, I’m fully aware that minister s leverage on such a case is very limited, but at the same time who is paying for the inefficiencies and the subsidies to keep Zupco and its extended “Star Alliances” of local bus company operating as Zupco in the road?
Ncube must also push for political support to see to it that fiscal support to agriculture is limited. For an agro-based economy like Zimbabwe, we need to see support to our agriculture, but it must come through market funding more than state funding, there is empirical evidence since the times of (former Reserve Bank of Zimbabwe governor) Gideon Gono that splurging cash or resources on this sector will not necessarily grow the sector. We need to see the land tenure system being revised. The 99-year leases continue relegating land as a worthless asset.
This, therefore, means the minister must engage his fellow politicians to find ways to fund agriculture outside the mainstream budget. This is also a call to private sector players to come on board and support agriculture but not as a pro bono intervention but rather modelled in a business spirit.
The Finance minister also has to climb down on his assertion that he is done with macroeconomic reforms because he is far from it. With a budget surplus also comes a very robust informal economy. Such a surplus might be interpreted as reduced import bill since most commodities are now coming through smuggling, transfer pricing or under-declared invoices. It might also not be sensible to do an analysis of the current account in isolation from a capital account which is under pressure following a gyrating season of currency flip-flopping.
In other circles, there is also a palpable feeling that there is no cohesion between Treasury and the central bank. The last mid-term budget was offering stimulus while the central bank is tightening interest rates, almost 50% to date.

The private sector can no longer afford local facilities since all lending rates are facing northwards which therefore means the stimulus from Treasury might not amount to anything except abuse, be it rebates or waivers on certain laws.

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