via Economy puts Zanu PF on tenterhooks – DailyNews Live 23 June 2014 by Guthrie Munyuki
HARARE – Zimbabwe remains plagued by a financial “leprosy” to the extent that it is seriously considering securitising its minerals, a move which both economists and the World Bank say is risky and could affect future generations.
Here Senior Assistant Editor Guthrie Munyuki speaks to a leading economist Godfrey Kanyenze who says inclusivity and consensus on national policies such as Indigenisation could help attract the sorely needed Foreign Direct Investment (FDI).
Below are excerpts of the interview.
Q: Since independence Zimbabwe has had 14 economic blueprints but have they really worked and why?
A: The fact that Zimbabwe is characterised by significant social deficits and is susceptible to crises is indicative that the 14 economic blueprints implemented since independence have not leveraged sustained growth and poverty reduction.
There is an emerging consensus in development discourse that for economic programmes to succeed it requires national ownership and stakeholder participation in all the stages of the policy cycle — from formulation, implementation, monitoring and evaluation.
It is for this reason that the international development framework requires government leadership in designing policies, with stakeholder participation to engender national ownership.
Partners then align and harmonise their programming with the national programme, on the basis of mutual accountability.
Q: What are the inadequacies of ZimAsset and is there any room for government to abandon it midstream and have a broader blueprint capturing views of all stakeholders?
A: Firstly, ZimAsset lacks broad-based ownership as it was admittedly derived from the manifesto of Zanu PF and speeches by the President (Robert Mugabe).
While government leadership is essential in drafting an economic plan, however, broader stakeholder participation is critical for national ownership and inclusive participation in its implementation, monitoring and evaluation.
Secondly, ZimAsset requires funding to the tune of US$27 billion, which may not be forthcoming from the dwindling domestic resources, the bulk of which are committed to employment costs, and lack of new lines of credit outside a successful arrears clearance and debt resolution framework with international partners.
Thirdly, the whole Chapter 2 of ZimAsset blames “sanctions” for the challenges facing the economy. Wrong diagnosis of the malaise results in wrong prescription.
Q: Economic revival was largely pinned on mining but world prices are exposed to cyclic changes. What other alternatives are there for Zimbabwe to explore?
A: Indeed, the economy has undergone wrenching structural changes such that export recovery is driven by primary commodities.
Of the export earnings of $14,1 billion generated during the period 2009 to September 2013, $9,2 billion (65,2 percent) derived from the mining sector, with agriculture, horticulture and hunting weighing in with US$4 billion (28,3 percent) and the manufacturing sector contributing the balance of $0,9 billion (6,4 percent).
This implies primary commodities (mining and agriculture) accounted for 93,5 percent of export earnings during the period 2009-13, making the economy highly susceptible to external market conditions.
With the weakening commodity prices on the international commodity markets, export earnings have declined, slowing down growth from the 10,6 percent recorded in 2012 to an estimated 3,4 percent in 2013 and a projected 3,1 percent in 2014.
As things stand, the mining sector appears to be the sector capable of autonomous growth, with potential for a supply-response in the restructured agricultural sector to improved conditions.
Growth in the manufacturing sector is likely to be more dependent on the internal demand arising from the two main driving sectors (agriculture and mining).
Hence, in the short-term, it is the quality of policies in mining and agriculture that will drive growth in the economy. The emerging consensus in development discourse is the need to focus on the most binding constraints in order to leverage and sustain growth.
Q: Zimra has indicated it will garnish Nostro accounts, how feasible is this and to what extent will the economy gain?
A: Nostro accounts are governed by the Reserve Bank of Zimbabwe, and hence any measures that affect them should be done in consultation with the monetary authorities, otherwise if this is done haphazardly, it will undermine the very reason why such accounts were allowed to enable enterprises to capitalise.
Short-term imperatives should be tampered by long-term developmental objectives.
Q: Does Zimra’s garnishing of local companies accounts for defaulting aid government in increasing revenue without liquidating these firms?
A: Again, this should be done in a mutually acceptable consultative manner especially given the hostile doing business environment.
Q: What is Zimbabwe’s biggest economic challenge and how do we mitigate it?
A: The biggest challenge is the failure to address the most binding constraints highlighted above, which has resulted in anaemic growth, liquidity crunch, lack of competitiveness and structural regression reflected in persistent de-industrialisation, informalisation of the economy and entrenched poverty.
Q: Why is Zimbabwe securitising its own minerals as opposed to seeking lines of credit at concessionary rates?
A: Securitisation of minerals is probably being pursued as a desperate measure against the background of dwindling fiscal space (liquidity crisis), and the reluctance to undertake comprehensive reforms and to re-engage the international community. As long as the arrears clearance and debt resolution framework is not adhered to as indicated in the Staff Monitored Programme (SMP) signed between government and the IMF in June 2013, no new lines of credit may be availed at concessionary rates. The limited funding options and the high cost of finance reflects the high country risk.
Q: What impact does securitisation of minerals has on the resource value of these minerals?
A: Firstly, in the absence of a comprehensive geological survey, it is difficult to securitise something whose quantity and quality is unknown.
In the absence of such information, going ahead with securitisation of minerals involves high risks as the minerals may be undervalued.
This will therefore have implications for future generations who may have been robbed of an opportunity to raise revenues from the depleting resources and leverage the various linkages available (forward (value addition), backward (local supply of inputs), knowledge and spatial (taking advantage of the associated infrastructure to develop ancillary industries).
Q: Have there been countries that have taken this route, securitisation of minerals, and succeeded in unlocking financial support?
A: Securitisation of future receivables is often used during a liquidity crisis, when developing countries need innovative ways to raise external finance.
The first future flow securitisation transaction was undertaken by Mexico’s Telmex in 1987.
This mode of financing increased since the Mexican peso crisis in 1994-95, with Latin American issuers dominating this market.
In this mode of transacting, the borrowing entity sells its future product (receivable) directly or indirectly to an offshore Special Purpose Vehicle (SPV), which issues the debt instrument.
Designated international customers are then directed to pay for the exports from the originating entity directly to an offshore collection account managed by a trustee.
The collection agent then makes principal and interest payments to the investors and directs excess collections to the originator.
Because of the importance of the asset quality, most dollar amounts raised via future flow transactions are backed by oil and gas export receivables. Admittedly, securitisation deals tend to be complex, involving high preparation costs and long lead-times.
Furthermore, many issuers are constrained by the burden of timely full disclosure of information. In addition, future flow securitisation increases the level of inflexible debt which can affect the issuer’s (and perhaps the nation’s) creditworthiness.
Finally, it has also been raised that in view of the number of jurisdictions involved in an international securitisation programme and the limited international coherence in this respect, and the various laws applicable to the commercial agreements entered into between the sellers and their customers (the debtors), performing such an exercise can easily become a nightmare.
Q: Has Zimbabwe reached a stage where it needs to have an economic rescue plan that is funded and managed by international donors and financiers?
A: While Zimbabwe is in a structural crisis with far-reaching consequences, its development remains the prerogative of local interlocutors, with external stakeholders playing a supporting role.
It is in this context that a Social Plan, driven by government and the key local stakeholders is probably the most sustainable route to take. As clearly defined in the international aid architecture, external players align and harmonise their programming based on the nationally-owned strategy, however, with mutual accountability.
Q: What are the benefits of legislating the use of the US dollar in Zimbabwe?
A: Zimbabwe did not formally adopt dollarisation when it switched to multi-currencies in 2009. Full dollarisation would have involved the RBZ buying the deposits of the banks and financial system as a whole, and converting them to US dollars.
First, Zimbabwe did not have the foreign reserves to do so, and more importantly, its relationship with the USA and the Western countries whose currencies it adopted were adversarial.
In addition, formally adopting another country’s currency would entail loss of monetary policy control and sovereignty since a currency is a source of national identity and autonomy. Furthermore, formalising is recommended where the decision is seen as long-term as experience suggests that de-dollarising is difficult.
In addition, the future monetary dispensation is still subject to debate in Zimbabwe and also in the region in view of the envisaged objective of attaining monetary union in the Sadc region.
Q: Do you see this as an option available to President Robert Mugabe’s government to lure investors and showing commitment to protecting their investments?
A: Resolving the contradictions arising from the indigenisation law and the need to attract foreign direct investment are related to the discretion applied which results in lack of clarity, predictability and consistency in the application of the law.
Given the declining and limited domestic fiscal space, FDIs have an important role to play in bringing the much needed investment, technology, specialised skills and knowledge of global markets and global value chains.
Q: How do the proposed amendments to indigenisation law help lift investors’ confidence.
A: First, it depends on the extent to which the process is inclusive, both in terms of domestic and external investors and stakeholders.
If it is inclusive and results in policy consistency and predictability, then it removes the suspicion and uncertainty associated with a discretionary framework.
Given the past experiences where government ministries and agencies contradicted each other, inclusivity will help send a clear and unified signal which enhances confidence to would-be investors.
Q: What impact are they likely to have?
A: The impact will depend on the inclusivity of the process and clarity of the outcome. This is where a Social Contract comes in handy in that it binds all stakeholders to jointly formulate, implement, monitor and evaluate policies.