AS government winds up the Transitional Stabilisation Programme (TSP) amid a plethora of challenges it faces in turning around the economy, the Zimbabwe Independent (ZI) caught up with Finance minister Mthuli Ncube (MN, pictured) to discuss a variety of issues, which include the TSP, the foreign currency auction and the target to reduce inflation to 300% by the end of the year
ZI: You are winding up the Transitional Stabilisation Programme. Economists have highlighted some of the successes of the programme. What in your view would you say have been the successes achieved by this economic blueprint?
MN: The major objectives of the TSP as outlined were to stabilise the macro-economic environment, including of the financial sector, by introducing necessary policy and institutional reforms for transformation towards a private sector led economy, addressing utility and infrastructure shortfalls, and launching quick-win initiatives to stimulate economic growth, improve productivity and create jobs.
Significant progress has been made in the implementation of the TSP across its various pillars. These include fiscal consolidation; the restoration of monetary policy; liberalisation of the foreign exchange markets; implementation of governance reforms; intensification of re-engagement efforts with the international community; speedier facilitation of investment, and increased infrastructure spending and development; as well as strengthening of the social protection framework.
Notable milestones have been recorded in the implementation of a number of reforms outlined in the TSP despite the negative impacts of exogenous shocks such as Cyclones Idai and Kenneth, a major drought, the Covid-19 pandemic and its impact of the domestic and global economy.
We have instituted unprecedented currency reforms without international support and that is a major achievement. As a result, we now have a domestic currency which we are now using as legal tender alongside with foreign currencies which we have allowed to circulate in the economy during the adjustment period. The introduction of our own currency has enabled the Government to have access to the complete range of fiscal and monetary policy tools for efficient macro-economic management, which was impossible under dollarisation.
To strengthen monetary reforms, the Dutch foreign exchange auction system has fostered immediate price and exchange rate stability. The introduction of a transparent foreign exchange auction system on June 23, 2020 and strict adherence to the monetary targeting framework as a way of containing money supply growth to curb inflationary pressures in the economy have been key milestones in the currency reform agenda.
On Budget Transparency, Zimbabwe has been ranked number three in Africa in terms of budget transparency by the Open Budget Survey (OBS) of 2019, with a Budget Index Score of 49, up from 23 recorded in 2017. This huge improvement in rankings reflects the strides made in increasing the quality and timeliness of budget information made available to the general public and all key stakeholders.
Under the Ease of Doing Business reforms, Zimbabwe has been ranked within the top 20 improvers on Doing Business Reforms by the World Bank in September 2019. Resultantly, Zimbabwe’s 2020 ranking went up 15 positions to 140 from the previous position of 155.
The Zimbabwe Investment and Development Agency Act which was gazetted on the 7th of February 2020 to repeal and replace the Zimbabwe Investment Authority Act, the Special Economic Zones Act, and the Joint Ventures Act, and provides for the establishment of the Zimbabwe Investment and Development Agency (Zida), a one stop shop for investment into Zimbabwe.
Through Fiscal Expenditure Containment measures, Government managed to reduce the civil servants wage bill from around 97% of the National Budget in 2016/17 to below 50%. Budget deficits have been turned into surpluses since January 2019.
A cumulative surplus of ZW$395,5 million was registered by December 2019 and surplus of ZW$800 million was recorded for the period January to June 2020.
These fiscal surpluses have served as a buffer for exogenous macro-shocks such as the impact of Cyclone Idai, the El Nino induced drought and Covid-19 pandemic.
The surpluses have been used to supporting social services delivery, deepen the social protection framework and enabled the government to increase the pace of infrastructure development. For example, the ongoing re-construction of the Harare-Beitbridge-Chirundu Road, and of dams such as Marovanyati, Chivhu, Gwaayi-Shangani, and Causeway, are all being financed from the national fiscus. Government has also availed resources to address the water situation in Bulawayo by financing the rehabilitation of boreholes and the drilling of 20 new boreholes at the Nyamandlovu Aquifer.
In Harare, over €10 million (US$11,7 million) was provided for the rehabilitation of water infrastructure.
Government has strengthened social protection framework by increasing budget allocations for cash transfers and in-kind distributions aimed at reducing food poverty. These social protection interventions have for the first time in 40 years been extended to beneficiaries in urban areas.
Arrears on school fee waivers, which accumulated since 2016 under BEAM, have all been cleared, and a heavily subsidised public transport system has been re-introduced in order to mitigate the impact of economic reforms on the urban poor. Subsidised agricultural inputs for vulnerable rural households under the remodelled Presidential Inputs Scheme have been introduced and this has been supported by a revamped, private sector-led Smart Agriculture financing model, which has replaced the previous command agriculture.
National Venture Capital Fund: government has created a National Venture Capital Fund (NVCF) which will assist the youths and women to set up businesses. The NVCF will provide patient equity investment in start-up businesses as an anchor investor, thus making them more bankable and enhancing the chances of success. The Venture Capital Fund is part of government’s broader plan to deepen and broaden Zimbabwe’s capital markets.
Government Employees Mutual Savings Fund, GEMS: Government has established the GEMS Fund, which is a mutual savings and loan fund through which civil servants will be supported through affordable loans which will improve the welfare of public service employees.
Victoria Falls Securities Exchange (VFEX): The 2019 National Budget Statement highlighted government’s intention to set up an Offshore Financial Services Centre (OFSC) as part of efforts to develop the financial services sector, through provision of opportunities for global investment. To this end, Government is launching the Victoria Falls Securities Exchange in order to drive foreign investment into the country.
Re-engagement and Arrears Clearance: As part of the roadmap to arrears clearance and debt relief aimed at unlocking the much needed investment, government has embarked on a rigorous Arrears Clearance and Re-engagement agenda.
EU, USA and Commonwealth Dialogue: The re-engagement process, aimed at reintegrating Zimbabwe to its rightful position within the community of nations, both at bilateral and multilateral levels, has also underpinned the on-going dialogue between Zimbabwe and the EU under the Cotonou Agreement. The first official dialogue at Senior Officials’ level was launched in May 2019, whilst the second dialogue which is at political level, took place on 21st November at Ministerial level. In the same vein, re-engagement with the USA continues, currently mainly at officials’ level. Furthermore, as part of the re-engagement process, negotiations for Zimbabwe’s re-admission into the Commonwealth are also progressing well.
Compensation of former commercial farmers: On July 29, government and commercial farmers signed Global Compensation Deed Agreement. The agreement settled for an agreed amount of US$3,5 billion to be paid to former commercial farmers for improvements, land clearing and biological assets.
Alignment of laws to the Constitution almost complete: By end of March 2020, 144 laws had been amended out of 183 that need to be aligned to the Constitution. Efforts are underway to work on the remaining 39 laws.
ZI: Can you outline areas where you feel more could have done better and why? What were the stumbling blocks?
MN: Diaspora engagements: prioritisation of diaspora engagement is critical to enable this community to positively contribute into the national development agenda, through skills transfer, investments back home, in addition to remittance inflows, which have been useful in providing both foreign currency and supporting local expenditure at household level.
Resilience to External shocks: The economy was adversely affected by external shocks as alluded earlier. The government has acknowledged the need to build resilience to such external shocks, including the use of market based risk transfer and risk mitigation mechanisms. The country however benefited from the US$1,5 million drought insurance pay out from the Africa Risk Capacity. On Covid-19, we managed to put together ZW$18,2 billion (US$224,6 million) as a stimulus package in support of businesses affected by the Covid-19 pandemic. Electricity production: This was hampered by the droughts caused by the El Nino Effect. Government is working to increase investments into solar and other natural and clean energy sources.
ZI: Would say you achieved what you set out to achieve?
MN: The TSP achieved what it was intended to do. The programme has achieved notable milestones on fiscal consolidation, monetary policy restoration, liberalisation of the foreign exchange market, enhanced social protection, structural and governance reforms, re-engagement, investment promotion and provision of support for the productive sectors. The economy is now on a firm foundation for a private sector-led recovery, under the National Development Strategy 1.
ZI: What’s next after you wind it down?
MN: In line with Vision 2030, the end of the TSP marks the beginning of the first five-year National Development Strategy (NDS1)-(2021-2025); and the second five-year National Development Strategy (NDS2)-(2026-2030. The National Development Strategies will be Integrated Results Based Management (IRBM) compliant.
The process of developing the NDS started in October 2019 with the crafting of indicative National Priorities. Cabinet approved a Concept Note for coming up with an IRBM Compliant NDS in April 2020. An NDS1 National Steering Committee was set up and Thematic Working Group (ThWG’s) Chairs and Co-Chairs appointed. First tier and second tier consultations have already been done by the different ThWGs. Currently the NDS is under consolidation and further consultations will be done and final approval processes will follow once the draft NDS is in place by end of October 2020.
ZI: You have started the foreign currency auction market on a weekly basis. Of what benefit has this been on the availability of foreign currency?
MN: The foreign exchange auction system has greatly assisted in improving transparency in the foreign currency market and has facilitated the discovery of a market-based exchange rate. In addition, the system has been critical in fostering exchange rate and price convergence over a very short period of time. The re-direction of the foreign currency demand pressure from the parallel market to the auction, coupled with improved foreign currency supply and the Bank’s contractionary monetary growth stance, will assist in fostering sustained price stability going forward. The subsequent introduction of the auction system for SMEs, running concurrently with the main auction, will further support current efforts to improve the management of foreign exchange in the economy in an inclusive manner. The country recorded a positive foreign currency net position of US$1,3 billion for the six months ending June 30 2020, compared to a deficit of US$738,7 million for the same period in 2019. Sustained export performance is critical for the steady supply of foreign currency needed to sustain the economy.
ZI: Members of Parliament have recommended that the foreign currency auction be held on a daily basis. What is your response to this proposal?
MN: Forex trading processes in the banking system are conducted throughout the week using the auction rate and this is working well. Any further adjustments will be considered if they are economically sound.
ZI: Why is government reluctant to let the auction market float?
MN: The Auction System is in effect a floating system because buyers and sellers trade at the prices which they themselves determine.
Exporters are free to participate at the auction as sellers and have done so. That is why the exchange rate changes every week since the auction was introduced. From our own assessment, the Dutch Auction System has been very successful in bringing price and exchange rate stability translating to strengthening confidence in the running of our monetary policies.
ZI: There have been widespread complaints over surrender requirements of foreign currency which they say is not fair. What is your view on this?
MN: Government gets its resources from tax revenues, fees, levies etc. Following the decision to allow the use of free funds in the pricing of goods and services in the economy, the growth of the foreign exchange balances in the domestic foreign currency accounts from US$352,4 million in January 2020 to over US$1 billion currently is testimony that currency reforms are having the desired effect of transforming the United States dollar into a reserve currency as opposed to a transaction currency.
In order to ensure that some of the domestic-generated foreign currency is utilised to sustain the auction for the benefit of the economy, and to bring equity between exporters and non-exporters, 20% of the foreign currency receipts of providers of goods and services which are charged in foreign currency now have to be liquidated at the point of depositing in the Domestic FCAs. With effect from 1 August 2020, the Intermediated Money Transfer Tax was also extended to cover foreign currency transactions in order to make the Tax more equitable across tax payers using different currencies in the domestic market.
ZI: What have been major achievements and benefits for the economy from the introduction of the auction system?
MN: The introduction of the Dutch foreign exchange auction system has so far achieved its key objective of price stability and has greatly assisted in creating transparency in the management of foreign exchange and in price discovery of the market exchange rate.
This has restrained the speculative pass-through effects of the exchange rate on the pricing of goods and services in the economy.
The resultant stability and predictability in the exchange rate is envisaged to help stabilise prices of goods and services. Consequently, annual blended inflation that stood at 435,27% is projected to taper-off over the remaining part of the year as inflationary pressures continue to ease. The month on month inflation rate of 1,4% should also drop further.
ZI: You insist that de-dollarisation will be achieved despite the current use of the dual currency. How do you intend to address this?
MN: We already have our own currency and a Monetary Policy which can always be employed to control market activities in the economy. Government is also promoting the use of plastic money as is the norm in many countries across the globe. In Europe, Asia, etc, one can trade using visa and other cards linked to hard currencies without any hustle and that is where we are going as a country.
ZI: With inflation above 700%, are you optimistic that you can reduce inflation to around your target of 300% by the end of the year and why?
MN: We remain optimistic that inflation will be around 300% or even below that figure by the end of 2020. The supportive measures put in place by the Bank to sustain the auction, including strict adherence to the monetary targeting framework, suspension of mobile money agents for bulk transactions and improved monitoring of electronic transactions, have also started to bear fruit as evidenced by the muted activity on the foreign exchange parallel market.
To this end, adverse expectations, which were the primary drivers of exchange rate and price instability are now expected to subside rapidly and this should entrench further stability of the price level going forward.
ZI: What has been impact of sanctions, in particular Zidera on the Zimbabwe economy?
MN: Restrictions on various targeted entities and individuals have the undesired effect of raising the risk profile of the entire country, which therefore affects a much wider spectrum of Zimbabweans and businesses in their quest to seek external resources.
However, the country has benefited immensely from the re-engagement dividend that has come through due to sustained re-engagement efforts by the Government.
This is evidenced by the removal of sanctions on key institutions such as the ZB Bank, CBZ and Agribank. The re-engagement effort has also ensured that country continues to get humanitarian assistance from many co-operating partners and this has made it less difficult for the country to deal with external shocks, including natural pandemics like Covid-19 and the Cyclone Idai disaster.
ZI: There has been a new wave of land invasions, how have these impacted on FDI?
MN: There are no new land invasions.
ZI: There have been proposals on how the government should raise money to compensate dispossessed white commercial farmers, with many saying the new farmers should pay. How in your view should the money be raised?
MN: According to the Global Compensation Agreement, the US$3,5 billion to be paid to former commercial farmers for improvements, land clearing costs and biological assets will be mobilised by a Joint Resource Mobilisation Committee, which has been set up by His Excellency the President, to spearhead the resource mobilisation effort from potential local and international financiers.
To this end, the Joint Resource Mobilisation Committee has initiated a process of engaging independent financial advisors for the purpose of designing appropriate and efficient financing structures and instruments. The Public will be kept full informed on the progress of the fundraising effort.