Zim on the brink of meltdown

Source: Zim on the brink of meltdown – The Zimbabwe Independent October 20, 2017

The recent economic disturbances in Zimbabwe have left many wondering where we are heading as a country.

Persistence Gwanyanya,Economist

Turmoil has tested the resilience of our economy, which has been unfortunately found wanting.

Clearly, the Zimbabwe economy is operating on the margin and any market disruptions could trigger a crisis. This could have been the case in the last three or so weeks when a social media frenzy, projecting an economy heading towards an explosion could have sparked market panic that almost brought the economy to its knees. This is, however, unsurprising given the unbalanced state of Zimbabwe’s economy typified by a high level of consumption unsupported by production, thus resulting in high import dependence.

Worryingly, this economic state occurs at a time when the country has limited access to the United States dollar capital markets, making it difficult to sustain dollarisation. All successfully dollarised economies, like Panama, have managed to sustain this currency regime because of their access to the US dollar capital markets.

Had it not been for Afreximbank support, the multi-currency system in Zimbabwe would have collapsed. A reflection on the previous weeks’ developments would reveal this.

Afreximbank had to intervene immediately to avert a crisis by availing the US$600 million Nostro Stabilisation Facility to the country. Part of it was immediately used to pay for electricity to Eskom before it switches off the country and to increase foreign currency allocation to basic commodities and necessities, to ease panic buying of the same.

The recent turmoil can be traced to the much-hyped social media frenzy about stock market irrational exuberance. Admittedly, the stock market bullrun is not supported by economic fundamentals, but driven by the need to hedge against currency risk as cash challenges intensify.

The Zimbabwe Stock Exchange (ZSE) has been on a growth trajectory since the beginning of the year, breaking new records everyday.

Within a week, to September 15 2017, when the turmoil started, the industrial and mining indices grew by more than 40 and 11% to 400,03 and 91,46 points respectively. This saw a massive 50% depreciation of bond notes and electronic money in the parallel market to around 45 and 60% against cash US dollar respectively.

This could have sparked panic buying of basic commodities and necessities, with the concomitant effect of creating shortages of basic commodities, which ignited a bout of price increases. These market disturbances coincided with reduced forex inflows following the end of the tobacco selling season, which exacerbated the forex situation in the country.

It so happens that Afreximbank was having its board meetings in Zimbabwe from September 21 to 23, and the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya took advantage of this to present a request for an early drawdown on the US$600 million Afreximbank Nostro Stablisation Facility to meet pressing country needs.

That is how the country managed to pay some US$32 million or so to Eskom to avoid electricity supplies being switched off. That is how the country managed to increase the weekly forex allocation for fuel and cooking oil to US$10 million and US$4 million from US$7 million and US$1,5 million respectively.

Importantly, this is how we managed to break the vicious cycle of currency depreciation, shortages of basic commodities — which were allocated an additional US$30 million per week — and price increases, thus normalising the situation.

Consequently, the cash premiums for bond notes and electronic money have come down to their pre-crisis levels of 30 and 45% respectively, which has also seen normalisation of the prices of basic commodities.
After this fire fighting, one is naturally eager to know what is the next plan for the country to avoid recurrence of such turmoils in the future.

While Afreximbank has indicated its commitment to increase the US$600 million facility — which is intended to provide nostro payment relief until the next tobacco selling season — to US$1 billion to cater for import requirements of the productive sector, these facilities may not be both adequate and appropriate to sustain the economy into the future.

Needless to mention that, debt is not a viable growth option for Zimbabwe today. At US$11,3 billion, the public and publicly guaranteed debt is about 69,3% of Gross Domestic Product (GDP) and 0,7% shy of the maximum that can be contracted under the Public Debt Management Act, which suggests that the country is highly indebted. Any further borrowings, especially for consumptive purposes, would be unsustainable and burdensome to future generations.

As such, economic rebalancing is the most viable and sustainable growth option in Zimbabwe today. This economic imperative takes the form of increasing production and exports, while reducing consumption of mainly imports. Being a commodity-dependent economy, which relies on five commodities, namely gold, platinum, tobacco, ferro chrome and diamonds for more than 80% of export revenue, the best path to take would be to then leverage on revenue from these sources to industrialise, through mainly the revival of the manufacturing sector.

Clearly the bulky of the commodities that we rely on as a country are in the mining sector, which underscores the need for implementation of sound investment business policies to unlock value from this sector.

The mining sector requires an estimated investment of US$5 billion to realise its full potential. Supported by the investments in electricity, which will add about 2000 megawatts to the electricity grid, including the expansion of Kariba South, which is expected to contribute an additional 300MW to the grid by December 2017, will result in significant improvement in the economy.

The mentioned investments in electricity would be key to achieving the value addition and beneficiation imperative required to unlock value from our commodities, which are largely from the mining and agriculture sectors.

Being an agro-based economy, the country should prioritise investments in agriculture, especially in farm mechanisation and irrigation equipment. This is necessary for the achievement of food self-sufficiency as well as surplus to export and generate the much-needed forex.

Our favourable climatic conditions support the need to resuscitate the horticulture sub-sector. Zimbabwe used to be number two producer of horticulture products in Africa after Kenya, with contribution to GDP of 3 to 5% and peak export revenue of US$143 million recorded in the 1999/2000 season, which was second after tobacco in the agriculture sector.

With appropriate interventions, the sector can be turned around for sustainable export growth within a relatively short space of time. The same applies to soya beans (for cooking oil manufacture) and a number of other grains. Needless to mention that the tobacco sub-sector should continue to be supported by sound policies which promote more investment and production of the golden leaf.

The same applies to cotton.

Revamping the manufacturing sector should be a long-term objective of the country. As indicated earlier, the ideal situation would be to use revenue from our commodities, which are mainly from mining and agriculture, to revamp the manufacturing sector, which has lost it share of GDP from a high of 20% to about half. One area of concentration for quick wins is agro processors, which can easily beneficiate from agricultural production.

While increasing production and exports would be a key panacea to our economic challenges, it will be weighed down by the high-level consumption and imports.

It is advisable for the government to bite the bullet and exercise fiscal discipline. However, what is more concerning is what could be uneconomical the utilisation of foreign currency in Zimbabwe.

The recent RBZ statistics show that the country generated about US$4 billion export revenue in the last nine months to September 29, which is already higher than US$2,8 billion recorded the whole year in 2016.

However, cash challenges have actually intensified, which may suggest uneconomical use of forex. This could be traced to corruption, externalisation among other nefarious activities, and this calls for urgent government intervention. Without government commitment to fight these nefarious activities, we are going nowhere as an economy.

Even the current regulations, which outlaw the trading of foreign currency by unauthorised deals and the accompanying penalties of up to 10-year jail term for offenders would be ineffective without this commitment.

Needless to mention that in the absence of a permanent solution to the cash crunch, the black market will re-emerge with more force and impact.

Clearly, the solutions to our economic challenges are with our abilities. The country has immense potential to grow. It only require a proper mix of short term and long term measures.

Commitment to implementation of these policy measures would be key. This calls for each and every one of us to play their roles. Government should start by showing commitment to turning around the economy and the rest of us will naturally be compelled to rally behind its efforts. Without this we should forget about any economic turnaround.
The choice is ours to make.

Gwanyanya is the Founder and Futurist of Percycon Global Fund Managers (Pty) Ltd. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society, E-mail: kadenge.zes@gmail.com and cell +263 772 382 852.