via Zimbabwe’s Business Environment, April 2014 | Robertson Economics APRIL 17, 2014
Business activity is very seriously constrained by a liquidity shortage that has become evident in delayed salary payments, falling retail turnover values, unsettled debts to banks, suppliers and landlords and reduced remittances to pension funds, medical aid funds and insurance companies. These have caused reductions in taxes due to government, which is now further delaying payments to private sector suppliers.
Injections of credit that might help to dismantle the lengthy trains of unsettled commitments are now desperately needed, but any offers of such accommodation would depend upon the adoption of dramatic policy changes. At present, government is showing no willingness to consider the needed revisions, so it has failed to attract meaningful support in the form of loans.
As the country presently lacks the ability to earn its way out of the impasse, the government’s most immediate priority should be to find ways to become deserving of a rescue package from the international financial institutions. Last year, the IMF agreed to place Zimbabwe onto a Staff Monitored Programme to help place the economy back onto a recovery path, but the programme time limits had to be extended from the December 31 2013 closing date because almost none of the targets had been met. On its current course, it would appear that the targets will remain beyond reach through to the new closing date of June 30 2014.
The lack of liquidity has many causes, but they are all symptoms of the deeper problem of an unattractive investment climate. Among these causes are the recent economic policy choices that forced production volumes down and were directly responsible for the increased dependence on imports. Scarce funds are being drained out of the country to pay for them, but the more serious losses are the goods that formerly earned export revenues.
Deeper issues affecting liquidity include the cancellation of the market value and collateral value of all the farmland that used to support the bulk of the bank lending. The knowledge that property rights might be officially disregarded even now and that savings and bank balances might be appropriated without the owners’ consent is still undermining confidence and seriously discouraging the investment inflows that might have transformed Zimbabwe’s prospects.
To attend to this problem, Zimbabwe will first have to remove the hostile investment regulations and the policies that require every foreign investor to surrender a controlling interest of every business. Government’s intentions to deepen its involvement in business, as proposed in the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim-Asset) policy document, also appear likely to increase the running costs of existing businesses. This will further add to the reluctance of new investors.
Measures to be adopted by the Zim-Asset programme include the “mobilization of resources to recapitalize the Grain Marketing Board” and the establishment of an agricultural commodities exchange market. Neither of these ideas is new, but several years ago when they were last raised, they could not be carried out because the capital was not available. Even now the GMB still owes money for maize delivered in 2012 and as a result the deliveries in 2013 were almost inconsequential.
To assess the buying power of Zimbabwe’s population, an attempt has been made to track recent and possible future developments in employment numbers and disposable income. A number of unknowns affect the quality of the figures for the past few years, so the estimates for 2014 and 2015 are likely to be amended as revised estimates emerge. In particular, remittances from abroad are impossible to quantify accurately, but have to be taken seriously as they are providing for the needs of several million people.
Indications from a number of the formal sectors shown in the table suggest falling employment numbers. Many companies have closed, but a far greater number has chosen to downsize operations. Formal sector wages and salaries might continue rising, but the estimates suggest this will be at a very modest rate that might reflect nothing more than changes in the cost of living.
The net Farm Crop and Livestock Sales line includes most of the tobacco, cotton and cattle sales and the suggested net figure is after debts to contract buyers are settled. More detailed research is needed on these estimates.
Of some concern is the rising trend shown in the percentage off-take through taxation. P.A.Y.E. and VAT receipts shown in Budget statements have produced totals that appear to absorb more than 60% of formal incomes. As some of the VAT payments will be made when Diaspora money and informal earnings are spent, this total might be slightly exaggerated, but the upward trend is unlikely to be reversed if adjustments are made.
This course the country is on now is therefore likely to make 2014 a painful year for Zimbabwe. Growth prospects for the whole economy are weak, mainly because food imports will again absorb most of the country’s export revenues, but also because those export revenues are more likely to decline than increase.
Mining, as the most important exporter, faces the prospects of declining output values and volumes, partly because indigenisation demands have undermined the commitment needed for expansion plans, but also because the already excessive royalty charges are no longer deductable from the taxable amount for profits tax calculations.
With falls in metal prices and mining costs continuing to increase, the companies already in operation have been placed at risk by the increases in royalties announced two years ago. Now that royalties have been disallowed as a deductable expense against taxable income, some of the mines that are working low-grade ore deposits will soon be forced to close.
For the country in general, serious stresses appear likely within weeks, starting perhaps with difficulties finding enough money to pay the public service. As this graph shows, government’s revenue inflows were among the casualties of the downturn experienced last year. Government’s 300 000-strong workforce has been told that its 26% pay increase has to be delayed, but no signs are emerging that revenue improvements will soon make the increases payable.
The 2014 Budget estimates suggest that $193 million a month will be needed to meet employment costs, and this will be $40 million a month more than was needed in 2013. In the final months of last year, monthly tax revenues were only about $250 million. If they remain at that level, employment costs will absorb 77% of total monthly revenue.
In his Budget speech on December 19 last year, the Minister showed that he was determined to convince Parliament and the public that he was fully aware of the wide range of problems weighing down Zimbabwe’s economy.
His claims, however, were refuted at a January meeting of business executives who agreed that the issues identified by the Minister were actually no more than symptoms of deeper problems that he had failed to acknowledge.
This is perhaps one of the reasons why the Budget appears to have done nothing to lift the spirits of the business sector. Another is likely to be the frequent reference in the speech to the recovery programme, Zimbabwe Agenda for Sustainable Socio-Economic Transformation.
This Zim-Asset document also identifies all the issues in need of attention, but deals with them in sentences that claim the resuscitation of just about everything will simply be achieved. In order to fund the work involved, the document states that, “The following, inter-alia, have been identified as financing mechanisms: tax and non-tax revenue, leveraging resources, Sovereign Wealth Fund, issuance of bonds, accelerated implementation of Public Private Partnerships, securitization of remittances, re-engagement with the international and multilateral finance institutions and other financing options, focusing on Brazil, Russia, India, China and South Africa (BRICS)”.
The prospects of any of these mechanisms being successful can be described as dismal while the authorities maintain and even defend the current investment climate. Revenues are already stretched to the limit and trying to make contributions from them into a Sovereign Wealth Fund would make the difficult situation worse; local support for bond issues would be negligible and foreign support will not materialise while substantial debts and arrears remain unpaid.
Public Private Partnerships will remain constrained by financing problems; any attempt to securitise remittances will almost certainly force cash inflows to shrink, and Zimbabwe has yet to qualify to be even considered for assistance from the multilateral finance institutions.
And none of the BRICS members is likely to consider Zimbabwe worthy of concessionary or any other funding. This is confirmed by China’s recent rejection of Zimbabwe’s approaches and by China’s earlier demands for what the President described, at the December ZanuPF conference, as excessive quantities of Zimbabwe’s assets as security for Chinese loans.
The more severe weaknesses of the Zim-Asset document are that its descriptions of the problems, however detailed, do not amount to a plan. Also, the policy measures that caused the massive shrinkage of the whole economy are not even recognised in the document, let alone addressed.
Further stretching its credibility are claims that “The Plan is expected to consolidate the gains brought about by the Land Reform, Indigenisation and Economic Empowerment and Employment Creation Programmes, which have empowered the communities through Land Redistribution, Community Share Ownership Trusts and Employee Share Ownership Schemes”.
If there were gains from any of these measures, they accrued only to a small number of well-placed individuals; as a nation, Zimbabwe declined steeply as a direct result of their introduction.
However, the document goes on to claim that: “Zim-Asset will ride on the opportunities of the Indigenisation and Economic Empowerment Programme for the funding of public utilities in the communities such as schools, hospitals, housing and other social amenities with the intention of creating employment for the youth and women thereby improving the standards of living of the populace.”
How this funding stream is supposed to arise is not explained, but this, and many other similarly structured assertions, shows how wishes can become claimed achievements within a single sentence.
On the recognition of the causes of the country’s recent fall, Zim-Asset’s Executive Summary accounts for it with these words:
“Zimbabwe experienced a deteriorating economic and social environment since 2000, caused by illegal economic sanctions imposed by the Western countries. This resulted in a deep economic and social crisis characterised by a hyperinflationary environment and low industrial capacity utilization, leading to the overall decline in Gross Domestic Product by 50% in 2008.”
The figures in this paragraph and the effects are reasonably accurate; the claimed cause confirms the continuing determination to ignore the facts.
Looking to the future, the document states that the execution of Zim-Asset will be guided by its Mission, which is: “To provide an enabling environment for sustainable economic empowerment and social transformation to the people of Zimbabwe”. However, no mention is made of the need to ensure that investor interests will be protected.
Almost half of the 129-page Zim-Asset document consists of pages that form a Matrix that is said to be there “to ensure the institutionalisation and mainstreaming of a results-based culture in the public sector”.
This statement, together with the contents of the Strategies and Lead Institutions columns that run the full length of the Matrix, offer the most telling indications of the document’s true purpose: it is a Central Planning statement that shows how government ministries are supposed to plan, regulate and control the private sector’s economic and social functions.
As the Strategies column of the document details the dozens of ways that the authorities will be empowered to regulate business, this interpretation of the document suggests that it is intended to help the government take charge of investors.
Depending on how compliant and how important their companies are, their breathing space might be moderately or severely restricted, but government will want to be seen to be in charge. It might be safe to assume that companies showing a lack of compliance will see the tightening of the government interference mechanisms listed in the Strategies column.
While the entire document appears to be unworkable, in that it offers no means to take the country from its present state to the promised destination, where everyone will be prosperous and everything will work, the Strategies suggest that Zimbabwe should brace itself for more authoritarian government.
The January Monetary Policy Statement also reflects unquestioning faith that Zim-Asset is a solid foundation on which Zimbabwe will build its recovery. The Acting Reserve Bank Governor closes the statement with these words: “…the economic recovery prospects for Zimbabwe remains bright if the country’s export and growth potential is unlocked through the effective implementation of bold policy measures embodied in Zim-Asset”.
One of the very few policy issues from the Reserve Bank was a proposal to place interest rates onto a more formal platform by working to a yield curve, the benchmark for which will be the overnight accommodation rate the Reserve Bank will apply to loans to the banking sector when it can again act as Lender of Last Resort. Before this can happen, the recapitalization of the Reserve Bank has to be achieved, and March 31 is the target date.
On the basis of the proposed yield curve, the rates will be 6,6% for 91 day instruments, 7,2% for 180 day instruments and 8% for 365 day instruments. To help restore an active money market, the Reserve Bank intends to make more regular offers of Treasury Bills to the market.
This, they believe, will permit banks to acquire financial assets that they can use as collateral if they are in need of overnight facilities. The money raised by the sale of the Treasury Bills will also help government to bridge short-term financing gaps.
Another proposal is to establish a secondary market for mortgage bonds. Government believes that by allowing parcels of mortgage bonds to be sold to buyers who are in need of dependable income streams, liquidity will be released and this will become available for new homebuyers and other investors.
However, the Monetary Policy does not address the core issue that is affecting all of these. The interest rates, the recapitalization of banks and the sale of Treasury Bills are all being held up or prevented by the severe liquidity shortage. This shortage will also make the sale of parcels of mortgage bonds very nearly impossible.