“It’s early days, we just introduced the new currency regime a little over a month ago, so it (the new currency) is trying to find its way, it is trying to find equilibrium; it will get there and close that gap between the parallel market and the official floating market.”
Finance minister Mthuli Ncube is approaching one year in office and looking back at his tenure as the Treasury boss, Zimbabwe is in a worse position than when he took office in September 2018.
BY TATIRA ZWINOIRA
Among the issues hurting the economy are unfulfilled promises Ncube has made since he took office last year, which has increased uncertainty in the market from a consumer, business and investor point of view.
It has also further widened the huge confidence deficit in the economy.
As such, this article will look at some of the inconsistent statements made by Ncube.
In an interview with the state media, Ncube said: “I have only been a minister for one month. We need patience, we know what we are doing. What I can say to Zimbabweans is that they should give me six months to see the full impact of the changes from the policies that we have pursued.
“We would have made very good progress in various fronts, both in terms of arrears clearance agenda and progress on the fiscal front, dealing with the revenue front which we have acted on and cutting government expenditure.”
Fact: In the recent Mid-Term 2019 Budget Review statement, Ncube reported that as at end of June 2019, external public and publicly guaranteed debt position is estimated at US$8 billion ($58,1 billion).
This figure is lower that Zimbabwe’s external debt position of US$8,5 billion, according to the 2019 National Budget statement released late last year.
Interestingly, Ncube has not mentioned specific external debt arrears payments this year.
While that was a reduction, in September 2018, the Parliament Budget Office estimated that the external debt by year end would reach US$11,5 billion, as this includes loans from Afreximbank as well.
In Ncube’s 2019 National Budget statement and recent Mid-Term Budget Review, these Afeximbank loans are not included in the external debt position.
On the domestic front, Ncube did, indeed, reduce the country’s debt from US$9,57 billion as at the end of December 2018 to ZWL$8,76 billion as at end of June.
This was done through the introduction of the ZWL dollar as the conversion from the US$ to the local currency effectively wiped out over US$7 billion in value of the domestic debt through the forex exchange rate.
At yesterday’s forex rates, the ZWL$8,76 billion domestic debt translates to US$856,4 million.
Revenue did, however, increase by 118,9 % to $5,06 billion in the first half of the year from $2,41 billion collected last year, driven mainly by the 2% intermediated tax on money transfers and excise duty on fuel.
Lastly, on cutting government expenditure, Ncube said in his Mid-Term 2019 Budget Review statement that since January 2019, the country had a cumulative surplus of ZWL$803,9 million up to June 2019.
But Ncube has not released a detailed report on how Treasury made the surplus.
As such, the surplus coincides more with the revenue increase, with many economists attesting to that fact.
Economists say that the 2% money transfer tax introduced last October and fuel taxes from increased pump prices are behind the surplus.
In an interview with Bloomberg TV, Ncube was asked by a Bloomberg reporter: “When are you expecting a fully-fledged currency to be introduced?”
Ncube responded “in the next 12 months”.
Of course, with the introduction of the Real Time Gross Settlement dollar in February, there was an assumption that this was the country’s long-rumoured currency.
As such, following Ncube’s interview, several articles were written by Bloomberg and local media about this new currency.
Fact: Ncube reintroduced Zimbabwe to a new currency on June 24, two months after he had initially said it would be 12 months.
Since then, Ncube, Finance permanent secretary George Guvamatanga and Reserve Bank of Zimbabwe governor John Mangudya have been making rounds to justify the reintroduction of the Zimbabwe dollar.
The justification was how the continued usage of multi-currencies, specifically the United States dollar, no longer made Zimbabwean exports competitive and that there was enough forex to back the ZWL dollar.
Now, the issue of using the multi-currencies was, indeed, making Zimbabwean exports uncompetitive, but there were several proposals made to use the South African rand, a weaker, but more stable currency.
However, authorities say that the only way to use the rand was to join the Common Monetary Area (which links South Africa, Namibia, Lesotho and Eswatini into a monetary union), which is not true.
Back in March 2017, South African ambassador to Zimbabwe Mphakama Mbete said: “I am not a financial expert, but being an important neighbour, we would come to any agreement or discussion, where there would be a win-win situation, where both countries would benefit. So any arrangement around our currency, where we would both win, is fine for us. This is not a relationship of exploitation”.
In March 2016 while visiting Zimbabwe, former South African Trade and Industry deputy minister Mzwandile Masina said: “We can only encourage the Zimbabwean people to consider using the rand as a trading currency between the two countries and the challenges that are facing us now will dissipate, I have no doubt about that.”
In terms of having enough forex, as at May, there was US$1,48 billion worth of forex in terms of physical notes and coins and US$4,49 billion in terms of bank balances with foreign banks, according to the central bank’s May economic review.
However, this money is not circulating as evidenced by the ZWL dollar losing 58,05% of its value since being reintroduced falling to US$1:ZWL$10,23 as of yesterday, from June 24’s US$1:6,47.
This has been blamed on a lack of confidence in Treasury.
Convergence between the official and parallel forex market rates:
In the same interview with Bloomberg, Ncube said that both the forex interbank and parallel markets would eventually meet.
“It’s early days, we just introduced the new currency regime a little over a month ago, so it (the new currency) is trying to find its way, it is trying to find equilibrium; it will get there and close that gap between the parallel market and the official floating market,” he told Bloomberg TV in Washington, the United States.
“The (black market) cannot carry on, you know why, because on the fiscal front things are very tight, because previously the fiscus was a source of money growth and therefore (creating) weaknesses on the currency and currency volatility.
“Currently things are very tight, we are running a surplus for the last four months in terms of primary deficit so we do not expect the currency to come under pressure, neither is money supply growing. On the contrary, expect month-to-month inflation to go negative in the next few months so the currency (rate) cannot run away too far.”
The idea was, since government had introduced an official interbank market, where foreign currency could be traded, holders of the money would come and sell on the market away from the parallel forex market.
As such, this was expected to lead to increased activity on the official forex market that would eventually see the rates on the forex interbank and parallel markets converging.
On May 9, the State-run publication The Chronicle published an article, wherein Mangudya said:
“In one or two months, we will reach equilibrium.
“At the moment, the parallel markets are at 4 or 5 and the bank rate is 3,3, so we are not very far from each other.”
Fact: According to experts, the official and parallel forex markets will never meet due to supply and demand, where the former has more demand while the latter has greater supply.
This is also buttressed with the lower forex rates on offer on the official forex market compared to the parallel one.
While the reintroduced ZWL dollar brought the official and unofficial rates close, they still did not meet. In fact, what happened was that the parallel market rates briefly traded below the official ones.
Currently, the official and parallel markets stand at US$1:ZWL$10,50 and US$1:ZWL$11,50, respectively.
In May, Guvamatanga told the Parliamentary Portfolio Committee on Budget, Finance and Economic Development that convergence would not happen.
“When we talk about convergence around an interbank market, we are mostly talking around alignment. A black market in any economy in the world will always exist and the only reason as government, as a ministry, we call for an efficient interbank market is because it is not our intention to chase after the black market. We will never catch it because it will always exist for other reasons,” he said.
A banker, who preferred anonymity, said: “We are not likely to see a convergence between the parallel market and the interbank simply because your parallel market is going to be a moving target as long as you have your demand being significantly higher than your supply”.
Labour and Economic Development Research Institute of Zimbabwe director Godfrey Kanyenze concurred with this assessment.
“If you introduced an interbank forex market when you do not have the foreign currency, you are constrained on the supply. It will just go one way and this is what we have seen,” he said.