Source: #Coup17: Economic reforms two years on – The Zimbabwe Independent November 15, 2019
THIS month marks the second year since the dramatic military-led machinations that resulted in the ousting of the long-time Zimbabwean leader, the late Robert Mugabe. His unceremonious jettisoning from the cockpit came with high expectations from the long-suffering Zimbabwean populace that a new era of economic recovery and growing prosperity would ensue.
Indeed, the new regime sought to project itself as reformist, promising to depart from the retrogressive economic policies of the erstwhile regime of which it was part and parcel. The new regime branded the promised new era it claimed to be ushering in the “new dispensation”, whose mother lode ethos had the mantra “Zimbabwe is open for business”.
The newly-minted leader, President Emmerson Mnangagwa, was feted in the halls of global economic and political power, favoured with a lot of media airtime from global media powerhouses. In Professor Mthuli Ncube, Mnangagwa tasked one of the sons of Zimbabwe — then based in one of the great citadels of global finance, Switzerland — with the mandate to shape the economic stabilisation and growth agenda which, at the time, was broadly painted as Vision 2030.
What better candidate than the erudite Ncube, who had an intimidating CV, littered with big-name financial institutions such as the Wits Business School, the African Development Bank and a Swiss investment consultancy where Ncube plied his trade at the very highest levels. Ncube’s appointment was also symbolic of government’s “engage and re-engage” charm offensive. Ncube knew his ways in the hallways and boardrooms of multilateral financial institutions.
His very appointment had a sub-text: pacifying fractured relationships with the children of the diaspora who had been villified by the past regime and, with some like Ncube himself, accused of economic “crimes”.
It was that rare confluence of favourable factors, akin to the rare astronomical phenomenon called syzgy where certain terrrestrial bodies straddle the deep cosmos with perfect alignment. His appointment as Finance minister was widely hailed. Ncube hit the ground running, crafting a plan that gave Mnangagwa’s Vision 2030 canvass. Ncube called it the Transitional Stabilisation Programme (TSP), earmarked to run for two-and-a-half years from October 1 2018 to December 31 2020.
The TSP became the roadmap for economic reforms. The TSP identified four areas to focus on, namely: stabilising the macro-economy and the financial sector, introducing necessary policy, institutional reforms, to transform to a private sector-led economy, addressing infrastructure gaps and launching quick-wins to stimulate growth.
However, economic reforms are not an end to themselves — they are a means to an end. Guided by that line of thinking, the framework of my analysis and evaluation will contract the five modern economic objectives. The TSP performance to date will be pitted against the five broad ends of national economic management.
The overarching ends of modern economic policy are an acceptable level of economic growth to maintain an acceptable standard of living, stable prices (domestic and foreign), achieving balance of payment equilibrium, full employment and equity in the distribution of a nation’s income and wealth.
The TSP boldly projected that economic growth would be 4%, later excitedly revised upwards by Ncube to 6,3% for 2018, 9% for 2019 and 9,7% for 2020, based on economic and governance reforms. This economic growth was expected to ambitiously raise per capita GDP from a projected US$1 720 in 2018 to US$1 883 in 2019 and US$2 081 in 2020.
This quick growth would be significantly driven by gross capital formation (investment in new and replacement productive assets) at a level of 16,8% of GDP in 2018, 18,5% of GDP in 2019 and 19,2% of GDP in 2020. The economic growth was to be underpinned by several reforms.
Points 15 and 19 of the TSP document cite reforms in ease of doing business, improving competitiveness and opening the country to international investors and financiers, fair application of the rule of law, human rights and upholding property rights as the key to putting the economy on the desired growth path led by private sector enterprise.
The World Bank recently downgraded Zimbabwe from being a lower middle-income economy to a low-income economy, having been upgraded a few months earlier. National dignity has been compromised; hunger stalks the nation (seven million have registered for food aid), pauperisation is alarming (over 70% of Zimbabweans, according to ZimStat, live in poverty). There is no way growth rates of 9,7% can happen when such poverty levels exist—there is simply not enough consumer spending power to inject the economy into life. Forget Cyclone Idai and drought as causes of economic decline; these just found a population already poor.
In terms of the ease of doing business, there has been some notable progress over the TSP period, with Zimbabwe improving its 2019 ranking by 15 places to 155 out of 190. In terms of the actual score, it improved marginally to 50,44%, with critical areas such as starting a business and getting electricity remaining lowly ranked at 176 out of 190 and 166 out of 190 respectively.
The Zimbabwe Investment and Development Agency Bill that seeks to create a one-stop investment shop is yet to be made into law.
In terms of property rights, there has been an attempt to acknowledge the need to compensate the farmers who lost their farming assets through land seizures. A pittance of ZW$53 million, now heavily eroded by inflation, was made available to farmers who lost farms.
Government has recently indicated that farmers’ appointed valuators and government representatives were working to compute the quantum of the compensation figure. Farmers’ independent valuators put the global compensation figure at US$9 billion. The president is on public record as saying the compensation bill cannot exceed US$1 billion.
The cost of lending to productive sectors was to be revised downwards to 8% per annum from the pre-TSP levels of 12-15%. This has been an absolute failure; the central bank raised overnight bank accommodation rates to 70% in the help of another reactive 50%, making it difficult for banks to extend loans to sectors profitably at less than 15% per annum. Government borrowing is still crowding out of the private sector from credit market.
Infrastructure rollout was seen as a major element of rallying economic growth; the major projects being the National Railways of Zimbabwe (NRZ) re-capitalisation and massive irrigation infrastructural development. The NRZ re-capitalisation recently turned into a mini soap opera with government abruptly cancelling the Diaspora Infrastructure Development Group deal. There is uncertainty around the deal, which deal would have significantly raised the country’s capital formation, giving a flip to economic growth via the multiplier effect. By now we should be having an additional 200 000 hectares of new irrigated land towards attaining the 2030 target of 2,5 million hectares of irrigated land. There has been no meaningful progress towards this end — it remains aspirational.
The economic growth projections made by the TSP are way off the mark. The year 2019 is projected by government to record a massive economic decline of 6,5%. Some multilateral institutions are putting the expected decline at no less than 10%. For 2020, the minister of Finance has made a major climbdown, projecting 3% growth in 2020, a far cry from his 9,7% projection at the outset of the TSP.
Domestic price stability as measured by the consumer price index was seen by the TSP taking the following path: 4% in 2018, 5% in 2019 and 5% in 2020. When the inflationary pressures showed signs of picking up in the wake of the abandonment of the 1:1 exchange rate parity in February, Ncube deftly shifted goal posts, and projected that inflation would close the year at 10% (year-on-year).
The price stability battle is one Ncube has lost. The inflation waters were relatively calm before the pre-mature announcement of the end of the multi-currency regime. Inflation is now three-digit, with the current year-on-year inflation raging in the neighbourhood of 350%, according to independent estimates. The price at which the Zimbabwean dollar is being bought by foreign currencies has become extremely cheap, owing to government’s rush to re-introduce a local currency before the supporting economic fundamentals were put in place. Ncube thinks the ZW$:US dollar rate should be 7:1. He surmises that the rates of 15:1 (interbank) and 21:1 (parallel market) show a confidence deficit premium and political uncertainty.
The TSP pledged to avoid arbitrary policy reversals and policy inconsistencies. Government has gone to do exactly what it pledged not to do. The flurry of statutory instruments churned out by government on the use of foreign currencies and the local currency were done in a rash and panicky manner, introducing contradictions such as selected sectors allowed to charge in forex and others allowed to adjust prices according to the interbank forex rate.
The logic of banning and selective criminalisation of transacting locally in forex is devoid of economic logic. Ncube is expected to know Gresham’s law (bad money drives out good money) and reverse Gresham (good money drives out bad money). Self-dollarisation is reverse Gresham, showing that the market thoroughly detests the local currency.
Ncube foresaw this and put it on record in the TSP when he stated that: “While a new and more competitive currency appears to be part of the solution, it will be a challenge to introduce, given low confidence in its stability and little foreign reserves to support it.” He capitulated to political pressure and let government prematurely end the multi-currency regime.
Fiscal stability through fiscal consolidation was a key reform the TSP promised in order to bring about price stability in terms of domestic prices and foreign currency exchange rates.
The TSP pledged to bring down the budget deficit as a proportion of GDP from double-digit levels to 5,2% of GDP in 2019 and 3,5% of GDP in 2020. The jury is still out on the 2019 outturn of the budget performance; however, a budget deficit is expected. With the pressure for civil service remuneration hikes unrelenting, the prospects of another unsustainable budget deficit cannot be ruled out.
Ncube claims his austerity measures have generated a budget surplus — when challenged to reveal the extent of payment arrears that would have the effect of reducing his claimed budget surplus, he has refused or ignored. We all know that despite his claim of a budget surplus, we have a fiscal deficit (we are not paying interest and arrears to external creditors).
Under the specific fiscal reforms, Treasury were to issue Treasury Bills (TBs) through the Accountant-General, introduce the use of an open and transparent TB auction system, issue TBs at market interest rates announcing to the market the limits of central bank borrowing to government and sticking to the budget.
Fiscal indiscipline reared its ugly head again, with the central bank clandestinely buying TBs from a private entity, going on to electronically print close to ZW$3 billion, in the process swelling cumulative money supply growth in 2019 by 80% to ZW$18 billion, stoking inflation and a dramatic meltdown in the value of the Zimdollar against the US dollar.
As for the private sector “smart agriculture” approach announced in the TSP, it has regressed to the not-so-smart well-beaten path of state-dominated agricultural financing, marred by a lack of transparency and efficient allocation.
The TSP pledged the establishment of a Fiscal and Financial Stabilisation Committee. This is still to see the light of day. Instead, we now have a Monetary Policy Committee, which had its inception meeting on October 28. Its impact is still to be felt.
Balance of payments
In terms of balance of payments, the TSP resigned to accepting the status quo and a possibility of a worsening current account deficit performance, both in actual and relative terms. The current account deficit was envisaged to deteriorate from 2,9% of GDP to 3,3% of GDP in 2020. The envisaged growth of imports were expected to outpace growth in imports.
Currency competitiveness, enhancing exports and improving capital inflows were key elements in bringing balance of payments equilibrium normalcy. Our balance of payment deficit is being currently financed by defaults on external interest and arrears.
By conveniently allowing the political collar to stifle him, Ncube got more than he From D4
bargained for — he prayed for a weak dollar to help achieve his wish to make Zimbabwean exports competitive. His Faustian bargain with the political dons who feared reverse Gresham (re-dollarising economy) has made the ZW dollar weaker than his liking, with reverse Gresham under government resistance stoking inflation.
Ncube has bargain basement exports, but raging domestic prices.
The external debt problem was meant to be expedited by a successful IMF Staff-Monitored Programme. It is now doubtful that external debt treatment can be achieved during the course of the TSP due to failure to show firmness in staying the fiscal discipline path and slow progress in political reforms.
Our balance of payment challenge will persist for the foreseeable future. Diaspora remittances are 13% down and gold deliveries are down 40% despite firming international gold prices, pointing towards lack of confidence.
The currency reforms which were meant to ultimately usher in a local currency to enable rebalance the balance of payment position as well as make traditional monetary policies to work were done in phases.
In October of 2018, accounts were separated into domestic and nostro. The immediate market reaction was to devalue the RTGS balances against the US dollar, shattering the non-logic logic of the central bank that the bond note and the US dollar were at par. Ncube grinned in triumph, telling his audience at Chatham House that he would not fight the market — how could he fight it when it was doing exactly what he wanted, mid-wifing a weak local currency. Harare was not amused, it released a statement affirming that the bond and the US dollar illogical parity was still subsisting. The currency bloodbath ceased.
Five months later, in February 2019, the 1:1 parity was abandoned in favour of a floating exchange rate. The rate fell to 2,5 on the newly established interbank market and held firm for a few days, before it fell further when the market discovered that there were more willing buyers and a lot of unwilling sellers (exporters forced by the central bank to sell on the uncompetitive interbank market).
Then June 24 happened. Multi-currencies were banned without warning, not even the IMF was let in on the planned deed. Confidence went south. Inflation galloped south too.
Last week, Ncube, optimistic as usual, gave a two-year timeline for the ZW dollar to stabilise, this based on opinion, rather than science, in the same vein his utopian estimates of economic growth and inflation have turned out to be an Alice in Wonderland.
The purported decline in the current account deficit is questionable as the effects of smuggling goods, under-invoicing exports and over-stating imports has not been taken into account. Forex leakage as a result of these invisible entrepreneuring behaviours reduce forex availability, quenching imports, but not quelling the appetite for imports.
Income, wealth distribution
Ncube chose to sacrifice wealth-creation by instituting his catch-all 2% intermediate monetary transfer tax (IMTT).
He had hoped the 2% tax, a drag on economic growth, would be offset by his envisaged injections into the economy.
Notwithstanding the TSP pledge to pare down the cost of doing business, Ncube went ahead with the anti-growth tax, which not only dampened growth but also increased the costs of production in an environment of depressed aggregate demand.
The TSP’s pledge to enable micro, small and medium enterprises to be competitive was defeated by the very 2% tax that defies normal business taxation logic — taxing businesses after they spend, not as they spend. This is deformation, not reform. It is no wonder, savings mobilisation is not improving — high taxation is reducing surplus accumulation.
With the indicators of the economy trekking south, the employment objective is a mirage — Ncube did not even bother to put an employmenttarget in the TSP, pledging only to fight to make the firing and hiring of employees easy (labour flexibility).
The non-coup coup has largely failed to leverage on the initial domestic and international goodwill to re-coup Zimbabwe’s lost glory.
Brett 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