OVER and above the need for political stability and sound macroeconomic management policies, business confidence is the single biggest determinant of economic growth in any country.
By Martin Majaji
Economics is a social science, which measures people’s behavioural tendencies and patterns in reaction to certain policy variables and policy actions.
Where certain policy actions or policy announcements engrave confidence, or project a positive outlook towards the future, decision makers, starting with households to corporate managers, and other economic role players, will adjust their risk outlook and start making long-term decisions that increases consumption and investment patterns.
This leads to increased economic growth, a fall in unemployment and a general rise in national income.
The following five key policy factors are the low hanging fruits that could be implemented quickly to immediately engrave business confidence that will lead to sustainable macro-economic stability, economic growth and employment creation in Zimbabwe.
1. A balanced fiscal budget as there are no national savings to fund a deficit
The Finance minister has planned for a budget deficit of 3,5% in the current 2018 National Budget. The minister, in his own words, indicated that such a fiscal deficit level is considered sustainable globally.
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However, looking at Zimbabwe’s financial position, the country does not have the means to finance the planned deficit of around $675 million sustainably without causing fissures to macro-economic stability.
South Africa, which has budgeted a fiscal deficit of 3,4%, which amounts to about R180 billion, in the current fiscal year, has one of the most developed and liquid financial markets in the world. That country’s biggest fund manager, the Public Investment Corporation (PIC), manages R1,8 trillion worth of pensions and other savings funds on behalf of the Government Pension Fund (GPF) and other statutory public funds.
The PIC has an active investment portfolio of government bonds and Treasury Bills issued to fund fiscal and infrastructure programmes. According to the Financial Times: “South Africa’s pension funds pool of almost R4 trillion makes it the biggest system in Africa and the 11th biggest in the world.” The South African banks have total deposits of about R3,8 trillion and a total capital base of about R500 billion.
Over and above these local funding sources, in 2016, 35% of all issued South African government bonds were held by foreigners, reflecting that international funds play an important role towards funding the planned fiscal deficits in South Africa. In September 2017, foreigners had bought R70 billion of SA government bonds providing more than 35% funding for the fiscal deficit. Therefore, the planned R180 billion South African 2018/19 fiscal deficit can be readily funded from a plethora of local and international funding sources sustainably.
Back to Zimbabwe, what are the sources of funding for the planned $675m fiscal deficit? The biggest pension fund manager, National Social Security Authority’s total asset base is worth $1,2 billion and these are mostly illiquid assets. Other stand-alone pension funds have total asset values of around $1,5 billion.
Total banking deposits are around
$8 billion and total net banking capital of about $1,2 billion. The available small funding pool in Zimbabwe cannot fund the planned budget deficit sustainably without causing havoc in domestic financial markets.
The symptoms have manifested themselves via the severe cash and liquidity challenges currently experienced in the market, the very high cost of borrowing and the absence of long term borrowing facilities. Funding the budget deficit from the meagre national funding pool has virtually crowded out the private sector from accessing critical funding for investment and economic growth.
Zimbabwe must at least maintain a balanced-budget fiscal regime in the short term while the country builds up its funding balance sheet through improved national savings and growth of the total banking capital, and as international confidence gradually improve, to bring back international capital and funding instruments. Maintaining a simple balanced cash budgeting regime brought about macro-economic stability, improved liquidity and rapid economic growth during the four years of the government of national unity (GNU) from 2009 to 2013.
Running a budget surplus regime for a period of between three to five years, could allow the country to re-introduce its own national currency, a highly necessary ingredient for sustainable economic growth and development. The 2018 National Budget envisages total revenue from tax and non-tax sources of about $4,5 billion.
If for example, the budget for 2018 had planned total expenditure of $3,5 billion and a planned surplus of $1 billion, and the country maintains the same budget policy framework over a three-year period, the country would have accumulated foreign currency reserves of more than $3 billion after three years.
Reserves of this magnitude will provide six months cover on the average annual imports bill of about $6 billion. This will provide sufficient forex reserves cover to launch a stable currency, the International Monetary Fund and the World Bank recommend at least three months forex reserves cover to maintain a stable currency. South Africa has total annual imports of about $90 billion and total international reserves of about $45 billion, this provides sufficient cover for stable currency exchange rates for the South African rand.
Some may dismiss this proposition as too theoretical, but these are the critical and painful sacrifices Zimbabwe needs to make in the short term if the country is to return to sustainable economic prosperity after decades of economic implosion.
Zimbabwe cannot borrow itself out of this, as it is precisely irresponsible borrowing and uncontrollable spending that put us in this deep hole that we find ourselves stuck in, nor can we count on unreliable donor funds, which at most, come with unbearable conditions. A new culture of saving and building capital reserves from our own resources is the only way the country will achieve sustainable economic growth and prosperity.
2. The central bank must be a financial and monetary regulator and not a player in the market
The major role for central banks in developed economies is primarily to manage monetary policy and regulate the financial system to ensure overall macro-economic stability for sustainable economic growth. The central banks achieve the central objective of macro-economic stability through the following policy tools:
i. Controlling general price stability (inflation) through the pricing of money (interest rates) and the control of money supply.
ii. Regulation of the financial system to ensure that all financial institutions are well managed, operating within the parameters of their licences and are not taking excessive risks in the financial markets.
iii. Ensuring that all risk-taking institutions are well capitalised to be able to absorb trading losses and avoid the systemic collapse of the entire financial system from contagion effects of unstable institutions.
iv. Regulating the national payment and clearing systems to ensure they operate efficiently.
v. Induce confidence into the financial system by applying monetary policy consistently and transparently in line with market expectations. Banker to the government
The Reserve Bank of Zimbabwe (RBZ) must cease being the banker of the Zimbabwean government. By being a banker to the government, the RBZ then becomes the main player in the Zimbabwean financial system.
A player in a system cannot regulate itself, a player in a field of play cannot be the referee or umpire of one’s own actions. Because the Reserve Bank is a key player in the banking sector, Zimbabwe currently does not have a neutral financial regulator whose only role is to regulate the financial system to ensure macro-economic stability. The country witnessed a very stable economic environment during the GNU period because the RBZ had ceased being a banker to the government. The government had bank accounts with commercial banks and borrowed directly from them. This then allowed the RBZ to play the role of a neutral and honest regulator to the financial system without being conflicted by the its own need to raise and lend money to the government. The South African Reserve Bank (SARB) is a neutral regulator to the South African financial and monetary system and does not provide any direct funding to the government or any government entities.
In the same vein, the RBZ must not be involved with the operational management of the real time gross settlement (RTGS) national payments system. Rather, the RBZ must only regulate and monitor the system for compliance with all national payment regulations. A player in a system cannot be an independent regulator. The SARB is not a player in Bankserv, which provides interbank switching, clearing and settlement services to the South African banking sector, rather it regulates the national payment system to ensure efficiency of payments and liquidity in the South African economy.
Zimbabwe started suffering serious liquidity challenges when allegations surfaced that the RBZ had tempered with the RTGS payment system to push through payments from the government that were not backed by real cash. This could have been averted if the role of the RBZ was only to police and regulate the national payments system to ensure the liquidity and efficiency of national payments.
The lack of an independent regulator in the Zimbabwean financial system does not create confidence for the domestic financial system. This may explain why so many individuals and corporates chose to externalise cash instead of depositing it in the local banking system as reflected by the published presidential list of externalised funds.
An independent central bank will restore confidence in the banking system
The confederation of Zimbabwe Industries (CZI) recently stated that companies are now sourcing about 60% of their forex needs on the parallel market. This is a clear reflection that the current liquidity crisis in the country is not a result of forex shortages, but a result of a lack of confidence in the financial system. Restoring the RBZ to a truly independent regulator of the financial system will restore confidence and solve the current liquidity challenges. People will start depositing their cash in banks again knowing they will be able to withdraw it anytime they want. The GNU period is an excellent testament to this.
In the short history of independent Zimbabwe, our macro-economic conditions have worsened the more the Reserve Bank intervenes directly by funding the government, and the economy has performed much better in periods the Reserve Bank has less interference. This was the case in the first decade of independence, the country recorded massive growth rates with no Reserve Bank funding and again during the GNU period. Direct Reserve Bank involvement in the financial system, destroys confidence in the domestic national banking system leading to the externalisation of deposits in perceived more secure international banking markets.
3. Allocation of scarce foreign currency
From 2009, up until the end of 2014, Zimbabwe successfully operated an open foreign currency trading system with market players bringing in and taking as much forex as they wanted with no exchange control restrictions. This produced the most rapid economic growth rates ever recorded in recent times, averaging about 8% per annum over the period, albeit from a low base. There were no liquidity challenges, with people withdrawing up to $10 000 from automated teller machines, importers could make payments in forex of any amounts provided they had positive bank balances. Every US dollar electronic bank balance was supported by real cash holdings by the banks. The market played an efficient allocation role, the importers, who provided goods and services, required by those who generated forex, would receive the forex in the open market to facilitate the imports. The system was self-regulating, an increase in the demand for foreign currency more than the inflows from exports and capital inflows, would reduce domestic demand for goods and services via reduced domestic liquidity, which in turn reduced the demand for forex for imports. This ensured an equilibrium in the system always.
Fast forward to 2014, the new government after the end of the GNU reverted to using the RBZ as the banker to the government. When liquidity challenges ensued because of imbalances in the RTGS payment system that led to domestic cash shortages and the depletion of international nostro balances, the RBZ reverted to the old system of foreign currency rationing that had been operated with disastrous consequences during the era of governor Gideon Gono.
Currency rationing fuels and subsidies inefficient consumption patterns
As reflected during the Gono era, human intervention in the forex markets only worsened the forex shortages over time. Humans no matter how well informed, can never do better than the market when it comes to allocating scarce forex towards key and critical payments. Priority allocations by the RBZ to the so-called critical imports such as electricity, fuel, cooking oil seed, foreign studies, etc, subsidises and fuels the over consumption of these imported products to the detriment of the development of local substitutes such as solar power, coal bed methane gas, producing local oil seeds, improving standards at our own universities and using more fuel-efficient vehicles. Exporters are being forced to subsidise inefficient producers and inefficient consumption patterns.
Is it fair to pay tobacco producers only $300 cash and then take the rest of the forex they have generated to subsidise cooking oil producers, owners of big fuel guzzling sport utility vehicles, big domestic electricity consumers and those that opt to send their children to study at fancy overseas universities? Gold producers are not being allocated enough forex to buy machinery and chemicals to expand production, while the forex they have generated is used to subsidise inefficient consumption patterns. Under the allocative efficiency of the market, tobacco and gold producers would receive all their hard-earned forex in cash, they would sell their forex to the most efficient producers of local products and services at given market rates, and then keep the forex they require to buy machinery, spare parts and fuel needed to maintain and grow their production. Only efficient domestic producers would afford to purchase the forex at the going market rate, cutting out all the inefficient consumers benefitting from lower controlled forex prices.
Last year, before the change of government took place, certain powerful political figures were allocated cash to buy expensive properties outside the country and luxurious vehicles when key producers where desperately in need of forex to pay for raw materials, machinery and spare parts. Human allocation of scarce forex perpetuates inefficient consumption patterns to the detriment of the growth of efficient domestic industrial producers. Efficient producers, who are not allocated forex, have only two options, to scale down production or acquire forex illegally from the parallel market.
Creation of arbitrage opportunities
Allocation of foreign currency through RBZ creates opportunities for arbitrage, which worsens the currency shortages in the long term. I will provide an example of an arbitrage opportunity. A Zimbabwean parent, who works in Johannesburg and has sent his child to study at a United States university, could opt to buy $10 000 in a South African bank and take the cash to Zimbabwe, where on the parallel market, cash has a premium of 50%. He gets $15 000 deposited into his Zimbabwean bank account. He then applies for $15 000 to pay fees for his child in the US. If the central bank allocates him the $15 000 as a critical payment, then the parent would have made $5 000, a 50% profit from doing nothing. The RBZ is in actual fact subsidising this father to the tune of 50% of his son’s foreign studies. This simple arbitrage opportunity could be used for a lot of the so-called critical payments by the apex bank, worsening foreign currency shortages going forward and depriving productive sectors of needed forex for raw materials and machinery.
Only the market can allocate scarce forex reserves efficiently
The allocative efficiency of the market ensures that most of the scarce foreign currency is allocated to efficient producers who will grow the economy while discouraging wasteful spending patterns for imported products by subjecting the demand for such products to real market prices and not artificial forex prices induced via forex rationing.
4. Indigenisation Act be completely repealed
Former President Robert Mugabe’s indigenisation policy was the biggest contributor to the dearth of domestic and foreign investment in Zimbabwe relative to all our neighbours. The policy was not well-researched for soundness and practical implementation. As a result, there are no known real tangible benefits that ever accrued to any indigenous people because of that policy. Instead, the policy fell victim to the law of the unintended consequences, it severely impoverished and economically disempowered millions of citizens when investment into the country dried up and industrial capacity utilisation dwindled leading to economic stagnation. Unemployment skyrocketed and millions of citizens trooped into the diaspora in search of real economic empowerment opportunities.
There is no need to maintain a policy associated with such negative connotations in our statutory books, it creates unnecessary uncertainties to the environment, even if the policy is now only applicable to the diamond and platinum sectors. The government is the ultimate licensing authority in the mining industry, and they could still enforce local majority shareholding in the two strategic minerals as a condition for granting mining licences even without the Indigenisation Act. The other option is for the new government to craft a new policy, modelled along South Africa’s Black Economic Empowerment (BEE) policy, which has been widely embraced by both local and international investors in that country. We do not need to re-invent the wheel, we can benefit from emulating policies that have worked elsewhere and adopting them to suit our unique circumstances.
The continued existence of the Indigenisation Act in our statutory books, increases the country’s risk profile against other emerging market economies competing for international direct foreign investment. This explains why our neighbours Mozambique, Zambia, South Africa and Botswana continue to attract multi-billion-dollar foreign direct investment inflows, while we attract paltry sums. To restore local and international business confidence, Zimbabwe needs to unequivocally demonstrate that in the post-Mugabe era and the new dispensation, all policies that threatened property rights, have been decisively dispensed with and removed from all our statutes. For the country to be seen to be truly open for business in the eyes of investors, Zimbabwe cannot afford to be perceived to still embrace badly crafted policies of the past. Our new dispensation will not be taken seriously, if we are seen to be still embracing some of the worst policies and excesses of our past. 5. Zinara must hand back vehicle licensing revenues to the municipalities
Cities are the engine for development for any country. Efficiently run cities provide the investment climate that attracts investors to set up shop and move in qualified employees to manage and grow the investments. Well run cities with good infrastructure, services (clean water and electricity), good schools, decent health facilities and good quality accommodation act as magnets that draw international conglomerates to set up regional head-offices and business hubs. African cities like Nairobi, Johannesburg, Cape Town, Durban and Abidjan have managed to attract a host of international conglomerates to set up regional head offices. These in turn help the cities attract more local and international businesses transforming the cities into regional trading and business hubs.
All major Zimbabwean cities were crippled by the political decision made by the previous government to shift all major revenue sources from their control. Vehicle licencing, which is a major source of revenue for road infrastructure maintenance and development for all major global cities, was shifted to the control of the inept Zimbabwe National Roads Administration. It now collects millions in traffic licensing fees from motorists domiciled in the major cities, but only repatriates a fraction of the collected revenue to the cities for road maintenance and infrastructure development. This explains the deplorable state of roads in Harare, Bulawayo, Gweru, Mutare and all other major towns ever since this policy was promulgated. How can Harare and Bulawayo compete for investment and regional head office location by major global conglomerates with such deplorable state of road networks and public transportation?
The other main source of revenue for a city is the rates and taxes levied to residents based on the value of their properties. Enforcement and collection of this key revenue source is incumbent on the ability of the city to deny other essential services such as water and lights to defaulting residents. That is the most effective way for cities to enforce the payment of rates and taxes and refuse collection levies.
However, many cities in Zimbabwe were disempowered from collecting water and electricity charges, Zimbabwe National Water Authority and Zesa Holdings directly collect the charges from city residents. This leaves the cities with no instruments available to enforce the collection and payments of rates and taxes and refuse collection levies. Residents simply default on these key revenue sources and cities have no payment enforcement mechanisms via the denial of key services. This explains the deplorable state of refuse collection, lighting and any other services provided by major cities in Zimbabwe.
The national government needs well-resourced and efficiently run municipalities to realise economic growth and development. The local and national governments complement each other when it comes to the implementation of real economic development projects, with the municipalities being the real implementation agents for any projects that benefit the people. Trying to weaken municipalities for whatever political objectives, is akin to the body cutting off the nose to spite the face. Our cities must be fully capacitated to fulfil their global mandated role as engines of national development. Collection of vehicle licence fees must be immediately handed back to the city authorities, Zinara must focus on developing and maintaining national roads and, hence, collect revenue from tolls dotted along national roads. The road infrastructure will improve in no time if the cities utilise all revenue collected from vehicle licences to repair and maintain the local roads. Cities must also be given the mandate to collect all service revenues from the residents, and paying Zesa and Zinara for wholesale electricity and water charges, respectively. This helps the cities to collect rates and taxes, a key source of revenue for a city to develop infrastructure in line with other global cities and transform our cities to world class levels.
These five key policy matters do not cost anything, they are free to implement. They do not depend on outsiders, but are simple home-grown policies dependant only on us to implement. What is required is the political will and the full commitment to make temporary sacrifices. The best time to implement these five key policy matters is when the new government is elected in August 2018 and use the new national mandate obtained to push through these critical policy measures. Our country will quickly recover and sail to greater heights in a very short period.
Martin Majaji is a member of the Institute of Chartered Accountants in England &Wales and is reading for an MSc in Finance from the University of London, he is a financial and economic consultant based in Johannesburg, South Africa.