AS the country strives to grow the economy by 7,4% in 2021, Zimbabwe Independent (ZI) caught up with Finance and Economic Development minister Mthuli Ncube (MN) to discuss several issues, including the new economic blue-print, the National Development Strategy 1, inflation, economic recovery and growth plans. Below is Part 2 of the interview, which was published in the Zimbabwe Independent Special Report launched this month. Go to http://bit.ly/3luBG8K to subscribe to the in-depth report, which is an extensive compilation of forecasts from top economists, financial analysts, legal experts and social scientists for the Economic Year 2021:
ZI: Mining has been identified as a key economic driver including the gold sector but there have been complaints that Fidelity Printers makes the requirements for gold buying licence difficult which contributes to smuggling of gold. What is your response to this?
MN: The correct position is that Fidelity Printers and Refineries (FPR) is not responsible for licensing of gold buyers. The licensing of minerals and associated claims are the preserve of the Ministry of Mines and Mining Development who are also responsible for administering the Minerals and Mining Act. Gold smuggling is, therefore, not a licensing issue, but the diversion of gold from the official market is caused by price mismatches between the domestic and international markets.
ZI: What plans are there to plug the leakages, what needs to be done in your opinion?
MN: Authorities are seized with the challenge of gold leakages and continuously working on instruments to deal with the problem of gold smuggling, which include measures to ensure that gold found being smuggled will be confiscated. Government is committed to ensuring that all gold is sold through official channels. In addition, Government took a decision to introduce gold incentive scheme, which will be given to the producers as opposed to middlemen in order to increase gold output. The Ministry of Finance and Economic Development will issue details on this. The proposed unbundling of FPR to allow private players to participate in gold refining business will also help in the production and marketing of gold and generally improve operations in the gold sector.
ZI: Has there been any progress on getting the SMP back on track this year with the International Monetary Fund?
MN: Government will continue to engage the IFIs, especially the IMF on an SMP during 2021. To kick start the engagement process, an IMF Staff Visit Mission is expected in the second quarter, followed by an Article IV Mission in the third quarter. All things being equal an SMP should be concluded in early 2022.
ZI: Can you please give us a brief on the reengagement processes with IFIs to unlock international funding?
MN: In line with the NDS 1, Government is continuing with its re-engagement and engagement programme with the IFIs and the bilateral creditors for arrears clearance and debt relief in order for the country to unlock new international external financing critical for sustained economic development. This will be under-pinned by an IMF SMP as elaborated earlier.
ZI: How much progress have you made in attracting investors on the Victoria Falls Stock Exchange?
MN: As you will recall the Victoria Falls Exchange (VFEX) was launched at the end of October, 2020. In my initial launch address, I alluded to Government’s keenness to list bonds at the VFEX, with a view to raise funds for various Government projects. Work on this initiative is ongoing. The VFEX management is also in discussions with unlisted entities, mining and other entities listed elsewhere, as well as companies listed on ZSE to consider listing on VFEX.
As this is an ongoing process, Government will keep the public updated on progress recorded.
ZI: Printing of higher denominated notes at a time confidence remains low is likely to see prices soar, what measures have you put in place to instill confidence?
MN: Stability of the Zimbabwean dollar over the last six months has reinforced confidence in the market that the value of the new notes will not be wiped away by inflation. It is standard practice that financial institutions use their liquidity at the Reserve Bank (RTGS balances) to buy new notes; hence no new money is created by issuing out new currency. In addition, the issuance of new currency in the form of higher denominations is demand driven, given an outcry by the transacting public which requires more cash and higher denominations for convenience.
The currency in circulation to deposit ratio is currently at 0,6%, as at end November 2020 against international benchmark of over 10%. This, therefore, demonstrates that the country has not breached the standard international benchmarks and thus the introduction of new notes into the market will not trigger inflationary pressures and loss of confidence in the market.
ZI: Fears remain that the new notes will also increase money supply causing the exchange rates, currently controlled by tight restrictions on mobile and electronic transactions, to go through the roof. What’s your comment?
MN: It is the Reserve Bank of Zimbabwe’s (RBZ) responsibility to ensure that the market understands that printing of notes and coins does not increase money supply. Banking institutions exchange their RTGS balances with notes and coins and this does not change the quantum of money supply in the economy. As already highlighted, no new money is being created, as financial institutions will be required to exchange their electronic balances (RTGS) housed at the Reserve Bank for the physical cash. One of the key monetary policy stances that have been pursued by the RBZ in the fight to stabilise the Zimbabwean dollar has been containing money supply growth, through quarterly reserve money targets.
In line with the monetary targeting framework, reserve money was estimated at ZW$18, 8 billion (US$224 million) as at 31st December 2020, well within the ZW$25 billion (US$298 million) target by the last quarter of the year. This performance in reserve money was due to a combination of liquidity management measures through issuance of OMO savings bonds, and supported by strong fiscal consolidation measures that has seen Government completely refraining from using the overdraft facility at the Central Bank.
The exchange rate pass-through impact on inflation has, therefore, been neutralised by a tight control over base money growth, and this policy stance will continue to be pursued in 2021.
ZI: A change crisis or unavailability of smaller denominations of the US dollar has been with us for a while largely due to high costs of importing new bills and repatriation of old notes, what is Treasury doing to improve the situation?
MN: The issue of small denominations is a challenge for most countries that use US dollar, either in a partial dollarisation or in a full dollarised environment. This explains why these countries continue to use their own local currencies for such small transactions. As you may recall, for Zimbabwe the issue had been with us since the inception of official dollarisation in 2009 and was further compounded by the de-risking of our traditional corresponding banking relationships.
As a result of the lack of small denominations, Reserve Bank introduced coins in 2014 and released ZW$2 and ZW$5 bond notes in 2016. In this regard, in the current circumstances, where the US dollar has been allowed to co-circulate with the local currency, the issue of small denominations should not really arise or be a challenge as the local currency should amply cover the gap for small US dollar denominations. This is the international experience for most countries with co-circulation of currencies the world over.
This notwithstanding, individual banks have been importing US dollar notes including small denominations to cater for their clients taking into account their client base, particularly for free funds, while considering the cost of importing notes and other pertinent factors. Most important, the use of swiping and local transfers in US$ is also going a long way in easing the challenge of change in US$ transactions.
ZI: There are fears that the current exchange rate stability is managed on the back of the auction system and won’t last .What is your comment?
MN: The current exchange rate stability is not managed and neither is it manipulated. It is a reflection of underlying demand and supply fundamentals, and the auction system simply assists in the discovery of the appropriate market based price for foreign currency. At the introduction of the Auction system in June 2020, the parallel exchange rate premium on the US dollar had risen to more than 300%. Allowing the interplay of market forces to establish a market based exchange rate has seen the premium falling to less than 20% by the end of 2020 before the setting in of the festive season. Parallel market premiums of between 10% and 15% are considered normal and tolerable by other country experiences; e.g. the premium on Nigeria’s Naira has gone up to 30%, for the Kenyan Shilling up to 12%; for the Tanzanian Shilling up to 9% and for the Malawian Kwacha up to 15% without noting extreme cases such as Argentina where the premium on the Peso exchange rate has gone up to more than 100% in the recent past.
The recent pressure on the ZW$/US dollar parallel exchange rate premium has, however, been a result of multiple exogenous factors; especially the seasonality factor caused by the closure or low operation capacity for most companies, including exporters between December and January, which has increased activity in the parallel market. As business operations normalise into the year, market stability is anticipated to be re-established.
The Reserve Bank has also announced and implemented a number of supply and demand measures in January 2021; which among them include moral suasion for the banks to increase their support and participation in the foreign currency market and a more liberalised market for foreign currency conducive to exporters and diaspora remittances. The Bank and Government will continue to improve the efficiency of the Auction system to ensure its sustenance and stability to preserve the gains already made on inflation and exchange rate stability.
ZI: Who have been the main beneficiaries of the auction system and what have been the benefits to the economy?
MN: Since the introduction of the Foreign Currency Auction system in June 2020, a total amount of US$760 million has been allocated to the various sectors of the economy. Of the total amount allocated, 45% or US$340 million has been allocated for imports of raw materials; followed by 17% or US$130 million allocated for importation of machinery and equipment. The rest of the sectors had almost equal allocations of between 6% and 10% of the total allocation.
The distribution of foreign currency on the auction market has been deliberately targeted and skewed towards the productive sectors, especially procurement of raw materials and capital goods whose supply linkages with the rest of the economy are strongest. The strategy, which has benefited the economy through both up and down stream positive supply effects, is expected to build a strong, resilient and more sustainable productive base for the country in the medium to long term periods; and to create an import-substitution strategy in the future.
ZI: We have had allegations of transfer pricing by companies benefiting from the state. How far have you gone in order to plug the leakages?
MN: We are aware of the allegations that some companies that are benefitting from the auction are engaged in transfer pricing, among other malpractices. The Reserve Bank of Zimbabwe and Financial Intelligence Unit are already investigating such reports.
ZI: Will these companies, if uncovered continue to benefit from the auction system?
MN: At least a dozen companies have already been suspended from participation on the auction pending full investigations following prima facie evidence of various malpractices that include transfer pricing.
ZI: What impact has Covid-19 had on the implementation of the National Development Strategy (NDS)?
MN: As you may be aware, the implementation of NDS1 started on January 1st, 2021. Currently, we are implementing NDS1. However, the placement of the economy under National Lockdown, as a result of the surge in Covid-19 cases, has derailed the implementation of some projects and programmes as intended. It also disrupted NDS1 dissemination programme which was meant to increase stakeholder and citizen buy-in during NDS1 implementation.
With the coming in of the Covid-19 vaccine, and the recent slowdown in new Covid-19 cases and deaths, we expect the lockdown measures to be eased soon, thereby expecting the NDS1 implementation plan to resume and achieve the set outcomes and targets.
ZI: What should we expect in 2021, priority areas for implementation?
MN: Prospects for 2021 look brighter, with the economy projected to grow by 7,4%. The growth drivers are agriculture being spurred by the good rainfall pattern with positive impact on agriculture and electricity generation. The 2021 growth projections are premised on the following macro-fiscal assumptions:
- Recovery from Covid-19 pandemic;
- Resumption of global economic activity;
- Good agricultural season;
- Enhanced revenue collection;
- Sustainability of the auction system;
- Tourism and trade resumption;
- Firming international mineral prices;
- Materialisation of mining investment targets;
- Recovery in domestic aggregate demand;
- Macro stability reflected by stable currency and prices;
- Domestication of value chains; and
- Further control of wasteful expenditures and value of money on all expenditures.
However, there are downside risks to this growth projection emanating from the lethal second wave of the Covide-19 pandemic associated with new variants.
Priority areas for implementation in 2021 are guided by the National Development Strategy (NDS1) and they are:
Inclusive growth, macro-stability
- Implementing sound policies and strategies for continued macro-stability and inclusive broad-based economic growth; and
- Enhancing the role of the private sector including small and medium-sized enterprises as the engine for growth and job creation.
Developing productive value chains
- Developing systems and mechanisms to mitigate the impact of shocks with a focus on agriculture; while continuously improving agricultural productivity and expanding rural non-farm services and dealing with the impacts of climate change; and
- Building productive capacities and fostering structural economic transformation through industrialisation that emphasises on commodity diversification, value addition and value chains.
Optimising value in natural resources
Leveraging on the vast mineral resources for faster growth that also protects the environment; and
Taking advantage of natural heritage and other tourist attractions as low hanging fruits.