via Zim 2014 projections: Optimism or denial? November 7, 2013 by Bernard Mpofu for NewsDay
THAT the forthcoming budget would be a herculean task for Finance minister Patrick Chinamasa is apparent.
First, the source of election funding remained a tightly kept secret and as such, consequences of such funding may not be quantified.
With just 100 days after Zanu PF won the July 31 election, Zimbabwe’s economy seems to be on auto pilot despite poor economic indicators.
In the midst of this, the former Prime Minister Morgan Tsvangirai led MDC, which has since taken a back seat after an election defeat, sees an opportunity. At least another day of political relevance!
Delays by the Reserve Bank of Zimbabwe governor Gideon Gono in announcing the Monetary Policy Statement and the deferment of the 2014 National Budget to either next month or next year has sent no good signal.
For Zanu PF, this could be a cue to go back to the drawing board and craft a document that inspires confidence.
The party, which recently launched the Zimbabwe Agenda for Sustainable Socio Economic Transformation (Zim ASSET), is now pinning its hopes on the new blueprint to turn around economy.
Though the document has not been publicly launched, the ruling party has taken every public gathering to herald it as a panacea to the country’s economic woes.
The blueprint joins other reform programmes introduced by government since independence, but were never implemented.
It promises economic growth and job creation in what analysts equated to a description of a destination without providing the means to get there.
Critics and the MDC-T, however, contend that this procrastination could be a sign of desperation while Rome continues to burn.
The MDC has seized the moment, proposing a stakeholders’ meeting which seeks to come up with urgent measures required to stimulate economic growth. Signs of a frail, limping economy are already evident. Industry is in doldrums and agriculture is no longer the mainstay of the economy.
A recent report by the Confederation of Zimbabwe Industries showed that capacity utilisation in the manufacturing sector had dipped to 39,6% this year from 44,9% recorded in 2012.
Amidst uncertainty around mineral prices and recovery in the agricultural sector, the baseline projections, according to the World Bank, forecast economic growth at 4,2% in 201 4.
Analysts say the wait-and-see attitude that gripped the markets resulted in broad money supply losing 1,5% to reach $3,8 billion in August.
Government figures show that fiscal revenues seem to stabilise around $4 billion, but expenditure pressures continue to mount.
While government revenue marginally exceeded expectations to reach $2,4 billion, supported by non-tax revenue ($238 million mostly from licensing fees in the telecommunications sector) and excise duties, no diamond dividends were remitted to Treasury in the first eight months of the year.
Current expenditure totalled $2,3 billion, but remains heavily skewed towards employment costs which absorbed $1,5 billion (63% of current expenditure and 60% of total revenue).
Against this background, the civil service is pushing for a salary hike as the bread basket continues to soar.
The World Bank country office for Zimbabwe says while the capital-intensive mining sector is expected to catapult economic growth, more measures are needed to boost output.
“Recovery in the mining sector is dampened by easing international prices, amidst still subdued levels of investment . The decline in prices (especially gold) led to the cut in production as costs of production increased, while long -term financing and energy constraints continue to bind,” said the World Bank.
In the eight months of 2013, gold production, the main driver of the sector, declined by 17%, reaching 9 372 kg.
Official figures show that the 2013 budget included a capital budget of $565 million, but only $164 million (7% of total revenue) was disbursed towards capital projects in the eight months to August, compromising the socio-economic recovery.
“The implementation of the 2013 budget remains a challenge and feels the heavy weight of the funding of elections ($132 million),grain imports and debt service payments ($151 million) on some non-concessional loans. An expenditure overrun is expected for 2013,” said the World Bank.
While more has to be done to unlock the human and mineral resources Zimbabwe has, Finance minister Chinamasa believes that the economy will grow by 6,1% next year, anchored by mining. Treasury also expects revenue to climb to $4,4 billion.
“The 2014 national budget thrust is guided by the Zimbabwe Agenda for Sustainable Socio-Economic Transformation which seeks to reverse the economic slowdown and reposition the economy back on a sustainable growth trajectory,” Chinamasa said in a pre-budget paper last week.
Industry and commerce organisations say while the proposed document is noble, measures aimed at deepening the financial sector reforms need to be pursued in order to build confidence and eliminate vulnerabilities within the banking sector.
After all is said and done, Zimbabwe will tell whether delays in setting the tone for the economy were worth the wait.
Addressing the banking sector challenges
THE financial services sector has often been blamed for not fully supporting key economic sectors. In a paper presented at a pre-budget workshop in Victoria Falls last — the Bankers Association of Zimbabwe identified key areas that need immediate attention to ensure that the sector effectively plays its role of financial intermediation. BAZ said addressing the banking sector challenges will be materially enhanced through measures that restore confidence in the economy. Below are some of the submissions by the bankers:
Capitalisation of RBZ
As part of an integrated plan to restore confidence in the banking sector, it is imperative that the Reserve Bank of Zimbabwe be adequately capitalised by Government. Adequate capitalisation of the Central Bank will enable the bank to play its Lender of last resort function, as well as activation of the interbank Market.
Restoration of RBZ lender of last resort function
As highlighted above, adequate capitalisation of the Central Bank is critical for the performance of Lender of Last Resort function. The Lender of Last Resort function is an integral part of money and capital markets development. In addition, the Government must issue both short term (Treasury Bills) instruments and long term bonds for both money and capital markets development.
Restoration of RBZ banker to government function
The function of Banker to Government was transferred to commercial banks in 2009 upon adoption of multicurrency. For orderly functioning of money and capital markets, and development of the same, it is imperative that the function of Banker to Government be restored to the Central Bank. This will also create an even playing field for other commercial banks.
Strengthen RBZ financial and monetary stability function
An important step in addressing banking sector vulnerabilities requires that the Reserve Bank of Zimbabwe’s supervisory and Oversight function be strengthened.
The RBZ requires capacity building and strengthening to allow it to undertake on-sight supervision and audit of the banks to ascertain capital levels, risk management frameworks, stress testing and levels of NPLs, among other things.
Retention of multicurrency
The Minister of Finance has already highlighted that the Multicurrency will be retained and that the economy has to fulfill certain pre-conditions before the re-introduction of the local currency. As BAZ, we support the approach as outlined by the government. This will help restore confidence in the economy.
Repayment of corporate FCAs
Restoration of confidence in the banking sector also requires that the government pays back the corporate FCAs amounts that were utilised by the RBZ prior to Multicurrency. This will engender confidence and enhance functioning of the financial markets.
In light of the recent legal developments and possible litigation against commercial banks, it is more urgent now to address the above to minimise uncertainty.
BAZ recommends that the 2014 Fiscal Budget incorporate payment plan for corporate FCAs. The Government could issue debt/coupon instruments of varying maturities covering all the Corporate FCAs.
Develop money and capital markets
Priority should be accorded to the development of money and capital markets through deliberate efforts including issuance of money market instruments and longer-dated bonds for secondary market trading.
Capitalisation of banks
BAZ acknowledges and appreciates the statement by the Governor of the Reserve Bank, extending the time lines for capitalisation of banks, having taken cognisance of the current challenges and how these are adversely affecting capitalisation efforts.
Going forward, BAZ is of the view that monetary authorities could give a specific extended deadline for capitalisation; for instance requiring that banks achieve $50 million capitalisation by December 2015. Any further review of the capitalisation thresholds can be done beyond December 2015.
Flexible approach to indigenisation and empowerment
The government has indicated their readiness to modify the Indigenisation and Economic Empowerment framework to incorporate sector specific factors and also to focus more on wealth creation, rather than distribution. This is a commendable approach and BAZ supports the new approach, which has beneficial wider positive gains for the economy.
Revisit deposit protection Board subscriptions
BAZ recommends that a limit be set at 0.3% and a cap of $50 000 be considered as contributions to the Deposit Protection Board. Further, supplementary payments be suspended in 2013, pending a comprehensive actuarial study to determine the optimal level of Fund and a review of the Deposit Protection Modus Operandi.
Non Performing Loans
As highlighted above, NPLs are impinging on banks capacity to extend lending. It is recommended, as was done in Malaysia and Nigeria, that a Special Purpose Vehicle be created to house NPLs. Funding could be through long term bonds. The institution could be private or public but adequately protected by relevant legislation. Some years back, this was also done for ZB (Climax) and CBZ (CBZ Nominees) and these arrangements were sufficient to allow the banks affected to avail new credit.
Impact of the MoU
Going forward, BAZ anticipates the review of the MoU and revisit some aspects of the MoU that have impacted adversely on banking sector viability.
The MoU has had the immediate impact of reducing income for banks – an estimated $73 million reduction in income is envisaged from March to December 2013. At the same time banks are required to achieve new capitalisation thresholds while also capitalising the Deposit Protection Board.
Engagement with regional financial institutions for lines of credit
Improving liquidity conditions is critical for revival of the economy and growth. In this regard, it is prudent that the Government focuses on securing lines of credit from regional institutions such as the PTA Bank, AfDB, Afreximbank, DBSA and IDCSA. These institutions have traditionally supported Zimbabwe under Western imposed sanctions and have provided critical lines of credit for the economy.
Engagement with multilateral institutions
BAZ acknowledges that the government is engaging with Multilateral Institutions and the Minister of Finance has indicated that Government will sustain this engagement (with IMF, AfDB and World Bank) and continue on the Staff Monitored Program. BAZ commends the Government and supports this approach, as the most optimal.
An effective external debt clearance strategy
Access to international capital markets is critical for long term funding to the key productive sectors. Zimbabwe’s capacity to access such long term capital is constrained by the current external debt overhang and arrears. It is therefore prudent for the Government to continue engaging the international community with a view to achieve both debt cancellation and debt rescheduling, which are critical conditions for access to capital markets for long term funding.
Enhanced financial support to the agriculture sector
Enhanced financial support to agriculture requires several intertwined gains on structural issues affecting the agriculture sector and the whole economy:
- There has to be improved liquidity in the economy, preferably longer term deposits or lines of credit;
- Finalisation of 99 year leases, so that they are transferable as security; and
- Functioning Stop Order System.