Ncube’s collision with reality

SUPERNORMALISATION is a concept first uncovered in medical social psychology. Heart attack victims trying to portray normality have a tendency to engage in excessive physical activity, increasing the risk of another heart attack.

The Brett Chulu Column

The authorities, in their public communication, have been supernormalising the state of our economy — statistics such as a reduction in forex-to-money supply ratio, rise in exports, surplus in the forex trade account, declining month-on-month consumer price index-based inflation, budget surplus and a 3% real gross domestic product (GDP) growth forecast for 2020.

It took the Covid-19 crisis for the authorities to clamber down from over-optimism to realism as witnessed by the admission by our Treasury political head, Mthuli Ncube, in his letter to the Bretton Woods institutions that the economic patient was not well after all. The letter is arguably a confessional of some sort, pleading for both leniency and clemency in dealing with Zimbabwe’s humongous multilateral debt that has cleared the US$10 billion mark on its relentless northward march.

The full context of the letter needs to be appreciated. Written on April 2, the letter came seven days after the International Monetary Fund (IMF) had published the full Article IV report forensically detailing its findings on Zimbabwe’s performance against the IMF’s Staff-Monitored Programme (SMP), a voluntary programme Zimbabwe entered into with the global financier to track Zimbabwe’s performance against the Transitional Stabilisation Programme (TSP).
The key goal of roping in the IMF as an independent evaluator of progress against the TSP was strategically leased in order to build an accepted track record of economic reform, a pre-requisite for debt relief eligibility with the African Development Bank (AfDB), World Bank Group (WB), IMF, the European Investment Bank (EIB) and the Paris Club (a grouping of bilateral lenders).

Ncube came face-to-face with reality. One phrase, “policy missteps”, in the IMF report, spelt disaster. That phrase is diplomatic speak for dismal performance — that is not the assessment our Treasury was expecting, as passing the SMP litmus test was a central pillar in the economic revival stratagem. We have not forgotten that nearly a year ago our Finance minister was bubbling with confidence that debt relief was an almost done deal, citing that he had been given assurance by the G7 countries that they would give Zimbabwe a bridging loan of about US$1,7 billion to settle arrears with the AfDB, EIB and the WB. This writer questioned the viability of this approach as it was tantamount to the same creditors who are major shareholders in these banks and are all members of the Paris Club giving a loan to a bad debtor to settle debts they are owed.

Giving the minister the benefit of the doubt that the financial novelty would see the light of day, the SMP failing mark shuts the door on that idea. It was once reported by the Zimbabwe Independent that our Treasury spurned a financial offer that was to be underwritten by four big global banks; Treasury was so confident of winning over the G7 support that the offer was dismissed. Amid unguarded euphoria, the adage that cautions us to avoid counting chickens before they are hatched was forgotten.

Another zinger from the IMF report that seems to have unsettled our Treasury is that, for the first time, the IMF included contingent debt in its analyses and forecasts. This writer raised the issue in this column that Zimbabwe’s national debt was heavily understated.

My argument was that farmers’ compensation contingent debt exceeded the entire external debt even without including accrued interest. Ncube, later, correctly stated that the farmers’ compensation was the “bigger elephant in the room”. The inclusion of farmers’ compensation contingency debt even before the government and the Compensation Steering Committee (CSC), the body officially representing dispossessed former white commercial farmers in compensation negotiations, is telling. The IMF has a compensation estimate it worked with — the matter could not wait until the government-CSC agreement has been hammered out.

Ncube promised that the compensation figure would be ready by June last year; without explaining why there has been a year’s delay, Ncube wrote to the IMF that the compensation figure would be ready this July.

Summarily put, the farmers’ contingency debt inclusion in the IMF report is a gentle rebuke that our Treasury has been understating our overall debt stock.
The IMF also raised a concern that government’s guarantees on command agriculture loans given by banks to farmers are a potential risk to loading more debt. The IMF made it clear that any continued contracting of non-concessional debt (a veiled reference to the debts from our go-to pan-African bank and similar loan schemes) would scuttle any future debt relief deal brokered by the Bretton Woods institutions.

The letter to the IMF was, to all intents and purposes, a response to the key deal-breakers flagged by the IMF. This explains why the Treasury head responded to those items, pledging that the flagged areas would be addressed.

One such recommendation was the removal of forex exchange controls and the liberalisation of the forex market. The authorities preferred to gradually liberalise the forex market. In the IMF letter, Treasury pledged the liberalisation of the forex market. Though Ncube did not give the timeframe for the operationalisation of the undertaking, it would seem, judging from the urgency, the timeframe is compressed.

The announcement of the ZW$18 billion stimulus in connection with the setting up of the Victoria Falls (Stock) Exchange (VFEX) by Ncube shows the gravity of the financial dire straits we are in. The VFEX, according to Ncube, will deal in forex and is targetted at foreign investors. It should be recalled that Ncube, in a knee-jerk reaction to the rapid loss of values of the Zimbabwe dollar, outlawed the fungibility of three shares (Old Mutual, PPC Zimbabwe and Seed Co).
This writer cautioned that such a move would curtail free capital flows as per the Mundell-Fleming complex or trilemma. The VFEX idea is an attempt to silently correct the miscalculation. Now with the chances of financial assistance from the multilateral institutions very slim, the VFEX idea is all about mobilising forex by selling the impression that foreign investors will be able repatriate their capital and returns from their equity stakes in the companies that will list on the VFEX. There is a challenge with this latest initiative: the fundamentals for the investment case have not changed.

Latest research shows that investors broadly consider three criteria in choosing where to place their capital; industry/country attractiveness (33% decision weighting), financial performance (29% decision weighting), leadership quality (28% decision weighting).

The attractiveness of Zimbabwe in terms of land-based resources and human resources is unquestionable; that accounts for only 33% of the investment decision.
Even here there are gaps such as low Ease of Doing Business ranking and the constrained movement of capital out of Zimbabwe. It is in the remaining 67% where we are found wanting; poor husbanding of economic affairs (policy missteps, policy inconsistencies, free-market stifling), extractive economics, extractive politics, to mention a few well-known issues.

VFEX, on paper, is a noble idea, but investment hurdles for the foreign investor are still steep. The ZW$18 billion stimulus, supposedly, to be mobilised by VFEX, could potentially be scuttled.

Let us hope the reality check is the beginning of a genuine commitment to reform. Optimism without realism is delusion.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.