RESERVE BANK Governor John Mangudya openly admits the country messed up in 2009 when it dollarised. Now, he’s trying to right the economy, by introducing new bond notes — notes that the general public are not too keen on.
IOL
However, Mangudya hopes by introducing the notes, cash flow will be stimulated which, in turn, should boost the economy.
Mangudya’s endeavours come as Zimbabwe is facing a massive cash crunch, with long queues at banks, as citizens try to withdraw cash. Withdrawals are limited to between $100 and $200 a day, Independent Media has been told. Investors have also been fleeing, leading to the Zimbabwe Stock Exchange weakening.
Investments have also taken a knock, with trade revenue on the Zimbabwe Stock Exchange hitting its weakest in the past seven years last month.
Speaking to IOL, Mangudya says Zimbabwe also needs to increase foreign direct investment. To do this, he says, the country needs a conducive climate, and to improve investment sentiment. Currently, Zimbabwe is seen as high risk — so high that, in fact, it doesn’t even have a rating. Mangudya admits “it’s a hard sell”.
As a result, the government is putting in place policies that are consistent and conducive to investment, he says. He cites security of tenure as one example, because foreign companies don’t want to invest and see their property taken away.
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In addition, says Mangudya, government entities need to speak with one voice, which is part of the plan. He adds ease of doing business is another aspect that must be sorted out.
“We need to walk the talk.”
Vision Mangudya says Zimbabwe is a polarised society and its citizens don’t have a shared vision of the country’s development. Despite this, the economy has many opportunities in areas such as mining, tourism and manufacturing.
Yet, Mangudya says, Zimbabwe is importing more than it exports. Although this has created a cash crunch, it is also an opportunity. Mangudya says Zimbabwe has two main challenges. One is its current account deficit because it’s importing so much, and the other is its fiscal deficit.
Mangudya explains the country is spending 85% of its revenue on salaries and wages. The 15% that’s left over is just not enough to pump money into capital spending, let alone operational expenditure. It’s not enough for the country to invest in areas that will create employment, he explains.
The actual unemployment rate in Zimbabwe varies, depending on which statistic is used, but the official rate in 2014 — the last time numbers were reported — was just shy of 12%. Some commentators put it as high as 80 percent.
Mangudya, however, has a strategy that he hopes will boost Zimbabwe’s growth from the anticipated 1,5% this year to 9% by 2018 — a rate that many have decried as unreasonable.
His strategy is mostly hinged on boosting exports, and increasing local industry. Currently, manufacturing is only using about a third of the available capacity.
Mangudya believes that, by increasing exports, and reducing a reliance on imports — and, thus, keeping cash in the country — the economy will be revived.
Dollarisation Zimbabwe’s current woes date back to 2009, says Mangudya, when the country introduced dollarisation. This, he says, happened more by default than design.
Because the country used its reserve currency as a medium of exchange, it gave the impression that it had enough forex, and it also allowed money to flow out the country without restriction, says the governor.
Mangudya adds that the investment environment was not conducive to foreign companies, so money flowed out of the borders, and Zimbabwe also did not benchmark its currency properly.
This, Mangudya says, is what led to the hyperinflation seen around 2009 — when a loaf of bread would cost quantum times more between when a shopper stood in the back of the queue to when they made it to the front.
Hyperinflation, says Mangudya, is one of the reasons why Zimbabwe is currently so costly — as a legacy of hyperinflation, retailers are used to huge mark-ups. This also means Zimbabweans cannot afford to spend, which means the economy is not stimulated. As a result, says Mangudya, growth started stalling in 2012.
Boosting growth Since then, the government has — from 2014 — put measures in place to boost growth. These include addressing fundamental problems, going back to basics, managing forex, and implementing policies so the country isn’t buying back cash that has left the country, what Mangudya calls a “wash account”.
In addition, the country has been pushing exports such as tobacco, gold and platinum — its major offshore sellers.
To boost this, says Mangudya, exporters can earn up to 5% of what they’ve exported once the cash lands in the bank. The Reserve Bank, he explains, will deposit the amount in the form of bonds — the currency Zimbabwe is trying to introduce — into the bank. This currency trades on par with the dollar, and the account holder can choose their currency on withdrawal.
Mangudya explains this will increase cash reserves in the county, as money circulation will go up, reducing Zimbabwe’s reliance on dollars. In addition, it will incentivise exports, which will bring more money into the country, he says.
Exports, says Mangudya, are his “printing press”. He explains the system will not lead to hyperinflation because the amount of bonds introduced is on par with the amount of dollars earned from forex through exports. And, he adds, the ratio is fixed at 5% of exports. This, he says, will give Zimbabwe room to breathe. “We are foolish people, we made mistakes, this is the fixing period.”
In addition, Mangudya says, once the countries reliance on a currency it does not print drops, its interest rates will drop. Currently, Zimbabweans pay as much as 23% on a bond. This will also stimulate the economy, as cash is freed up, he says.
Mangudya anticipates $200 million to be added to the economy a year through exports alone. While this is a drop in the ocean compared to the $14 billion economy, he says this system will have a multiplier effect.
“There are plenty of opportunities here.”
Import limitation Another way Zimbabwe is aiding the economy is to allow limited imports. Imports are now categorised on a necessity basis, explains Mangudya. This keeps forex in the country, and encourages industry.
Zimbabwe’s largest stationery producer, Rank, is currently benefiting from Zimbabwe’s import limitation policy, as it has grown plastic manufacturing capacity from 25% in January to 80% currently, while book production has gone from 40% to 100%, around the clock, financial director Ketan Naik, says.
Last year, the company had a large boost when government imposed an effective 60% duty on imported books, says Ketan Naik. On the back of this protection, the company has introduced a new line to make counter books because imports are too costly, he notes.
Ketan Naik says the company struggled in the last five years, and he is glad things are turning around. The group now aims to expand its distribution, and even export to SA in the future, he says.
