THIS week, the focus of this instalment is on two developments: The full International Monetary Fund (IMF) Article IV report released last week and the special winter wheat programme recently announced by the government.
The Brett Chulu Column
Helicopter money imminent
There are a number of salient issues emerging from the 125-page Article IV report released on February 26, detailing the findings of the IMF mission on Zimbabwe’s economic and financial performance against the IMF Staff-Monitored Programme (SMP) targets. This article will dissect one issue due to its disproportionate impact on our economy.
First, the IMF has stated upfront that the report does not take into account the impact of Covid-19 on Zimbabwe’s economy. This writer indicated three weeks ago when Covid-19 had just begun hitting major economies outside China that the IMF projections on economic growth need to be revised. The IMF projection of 0,8% economic growth (real gross domestic product) for 2020 which, qualitatively speaking the IMF refers to as near-zero growth, is likely to be negative as a result of slowed down domestic production and slow global economic recovery affecting Zimbabwe’s major minerals and tobacco exports.
Second, the IMF is projecting increased pressure on the government to resort to monetising the fiscal deficit (printing money to fund budget shortfall). The IMF noted three sources of pressure: below-budget revenue shortfall, unbudgeted expenditures (maize subsidy and gold incentive) and the humanitarian relief requirements. The IMF projects revenue of ZW$49,9 billion instead of the budgeted revenue of ZW$58,6 billion, giving a revenue shortfall of ZW$8,7 billion.
The 2020 budget is ZW$63,6 billion, giving a projected budget shortfall (budget deficit) of ZW$13,7 billion before taking into account the unbudgeted maize subsidy and unbudgeted gold incentive.
The IMF projects ZW$6 billion will go into gold purchase and maize subsidy. In total, the IMF sees an overall fiscal financing gap of ZW$14,9 billion for 2020. It would appear that this ZW$14,9 billion fiscal financing gap excludes the ZW$6 billion expenses from the gold purchase incentive and maize subsidy. The fiscal financing gap does not include the expected huge humanitarian aid expenditure as a result of low food supply as well as the Covid-19 shock.
The IMF gave a chilling diagnosis that if government were to resort to printing money to finance the projected ZW$14,9 billion budget shortfall, our reserve money or high-powered money would treble. In my opinion, a trebling of money reserve would trigger a serious surge in inflation, setting us firmly into hyperinflation (as per the economists’ definition of 50% per month inflation persisting for two consecutive months). That would set in motion a vicious cycle of the Zimdollar’s massive weakening, feeding into more inflation. Here we need to take cautiously the IMF’s currency value and inflation projections for four reasons.
First, the IMF has made it clear that our government has almost nil fiscal space to raise more taxes after the 2% Intermediate Money Transfer Tax and the recent hikes in fuel excise duty.
Second, the IMF correctly identified that the local banking sector has no capacity to lend government to finance this huge budget shortfall.
Third, the probability for external lenders giving our government financial assistance (grants and loans) to cover the budget financing gap is near-zero due to our government’s poor debt servicing record and the US government’s Zimbabwe Democracy and Economic Recovery Act.
Fourth, we have unbudgeted expenses in the form of gold purchase incentive and maize subsidy, estimated at ZW$6 billion. Another concerning development is the special winter maize programme announced last week, whose funding is estimated at ZW$2,7 billion.
Although the undertaking in the 2020 budget is for the special programmes on grain and livestock, popularly known as command agriculture, to be financed wholly by the private sector, with only the funding for the presidential inputs scheme targetted at the vulnerable households fiscalised (funded from the budget), it is unclear if the private sector is wholly funding the winter wheat programme.
Just as the IMF noted that there are huge expenses being funded outside the budget, the possibility of the winter wheat scheme being financed in part or wholly by government outside the approved 2020 budget is a huge possibility, more so with the IMF having noted that our domestic banks have diminished capacity for lending to government. The sum of these five observations is that the possibility of government resorting to money printing to meet the legitimate budget deficit and various unbudgeted incentives, subsidies and quasi-fiscal special farming schemes is arguably very high.
The IMF, despite these known fiscal pressures, based its 2020 decline in inflation and currency stabilisation on the word given by government that it was committed to make sure that it would not print money (disinflationary monetary policy) and fiscal restraint. As an independent analyst looking at the same data (quantitative and qualitative), I am forced, based on social-psychological analysis, to posit that the promises made by the authorities to exercise monetary and fiscal policy restraint are likely to be breached.
Wheat plan over-ambitious
The winter wheat plan recently announced by government is over-ambitious for factual scientific reasons. The planned average yield per hectare(ha) of 5,5 tonnes per hectare (six tonnes per hectare for private-sector financed growers and five tonnes per ha for commercial bank-funded contract growers). As correctly stated by our government that we are producing at a national average of four tonnes per hectare over 24 186ha (independent and reliable sources put it at 25 000ha, making our national wheat yield to be slightly below four tonnes per ha).
Zambia produces six tonnes per ha over 24 000 ha, placing Zambia jointly with seven other countries/national groups (Namibia, Saudi Arabia, Switzerland, Chile, China, EU-27 and Egypt) the world’s second most productive wheat growing nation. Zimbabwe’s wheat growing ambition is to catapult itself to this illustrious league.
The most productive wheat growing nation is New Zealand, at nine tonnes per ha. There are nuances to be noted. The top yields per ha for maize as per the current global production records happen over lower hectarage. New Zealand achieves its nine tonnes per ha over 45 000 ha. Zambia produces its six tonnes per ha over 24 000 tonnes — this is largely due to the skill and knowledge Zambia gained from former Zimbabwean farmers. Namibia produces its six tonnes per ha for 1 000ha.
Saudi Arabia produces its six tonnes per ha over 120 000ha — this is due to its high-tech methods enabled by petro-dollars. Switzerland achieves its six tonnes per ha over 90 000ha — this is as a result of a combination of high-tech and a relatively small area. Chile produces its six tonnes per ha over 230 000ha — this is due to the natural grasslands, accumulated knowledge and modern technology.
China produces its six tonnes per as 23 730 000ha — this is testament to its traditional expertise in grasses, combined with high tech and research. The EU-27 achieves its six tonnes per ha over 26 065 000ha, the result of high tech, research, advanced methods and good funding.
Egypt achieves its six tonnes per ha over 1 370 000ha — this is a result of abundant irrigation, accumulated knowledge and research.
South Africa, with much better organised farming and knowledge, achieves only three tonnes per ha over 540 000ha. To expect Zimbabwe, within a year, to achieve 5,5 tonnes a hectare, with inadequate irrigation infrastructure, thinly spread wheat-growing experience and knowledge, with a 17,16-fold increase in hectarage, is a big ask. I doubt if we have enough farmers in this country with a solid wheat production track record to convince banks.
Let us brace for a roller coaster year.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — firstname.lastname@example.org.