By Omen Nyevero Muza

The economy faces significant headwinds in 2019 and this article identifies five key issues, all of them interlinked, which if not addressed could at best slow down growth prospects in the outlook period and at worst see the country sliding into a recession. If no policy changes are made timeously, 2019 will be the same as 2018 – an uphill struggle – with the possibility of a regression to the mayhem of 2008.

  1. The Currency Reform Conundrum

“On the currency front, I think the market is doing all the work for me, I don’t have to announce…it’s very clear that the economy is in essence self-dollarising. If you look at the RTGS exchange rate and bond note exchange rate, the market has said these are not at par and I am not about to argue with the market… The market is doing all the valuations for us, and of course, at some point we will have to see how to handle that. It’s clear that at some point bond notes will have to be demonetised,” – Minister of Finance and Economic Development, Professor Mthuli Ncube during a dialogue at Chatham House in London.

The maintenance of artificial parity between the bond note and the USD has heightened the sense of uncertainty in the economy. This contradiction in the foreign currency framework continues to undermine market confidence and engender price instability. Inadequate foreign currency allocation by the formal banking system has driven individuals and companies to the parallel market where the bond notes trade at a discount of over 300% against the greenback. While government insists that it must first tackle the current account and fiscal deficits in order to lay a firm foundation for currency reforms, time is definitely not on its side.

“We will confront the currency issue at a point when we feel our fundamentals are strong enough to sustain currency reform,” says finance minister Professor Mthuli Ncube. However, even if the good Professor does not do anything, the economy will do most of the work, a fact he readily accepts.

While salaries have remained tethered to the bond note–USD parity mirage, prices are now largely determined by the black market rate and this has ratcheted up pressure for either salary increases or payment of salaries in USD. The fictitious exchange rate is also taking real value away from the foreign currency earnings of exporters such as mining houses, which still have to surrender a portion of their export proceeds to the Reserve Bank of Zimbabwe.

Given the tendency of providers of goods and services to increasingly charge USD prices to cushion themselves against rampaging inflation, sooner or later, a decision will have to be made on the currency question. Government cannot continue to have its cake and eat it and will have to admit that it’s not sustainable to seek to subsidize key aspects of the economy against the backdrop of acute foreign currency shortages. My sense is that currency reform is the biggest elephant in the room because it has a bearing on salaries, inflation and availability of essential imports such as fuel, raw materials and medicines. The currency conundrum must therefore be solved timeously, lest it mutates into Government’s Waterloo. The currency reform can cannot continue to be kicked down the road and it will be a disappointment if the forthcoming monetary policy statement does not at least attempt to tackle the issue.

It is widely expected that eventually common sense will prevail over political expediency, forcing government to abandon the 1:1 policy, but there are fears that if the authorities do not move fast, irreversible damage will have been done by the time they are ready to make a move.  Economist Steve Hanke contends that if the authorities don’t address the currency crisis, it will plunge the country into a “monetary death spiral.”

Many believe that the foremost solution to the currency problem is creating a liberalised interbank foreign exchange market in which exporters and other holders can freely sell their foreign currency to importers.  Finance Minister Mthuli Ncube has spoken about reintroduction of a local currency in 12 months but he faces an uphill struggle to build foreign currency reserves (currently covering  barely two weeks of imports) to back this new currency and one wonders if the timing is right given the distressing macro-economic environment in the outlook period. Other key preconditions for introduction of a local currency include restoration of the collateral value of land, dealing decisively with the debt overhang and attracting meaningful foreign direct investment.

  1. Inflationary Pressures

“Domestic inflationary pressures are building up and are likely to erode some of the consumer gains made in the past year. Unless appropriate policies are implemented that resolve the underlying economic problems, it is possible that in the year ahead there may be a contraction of the economy, which could impact on manufacturing output.” – Nampak.

Among Finance Minister Mthuli Ncube’s first set of fiscal policies was the unpopular 2% tax on all electronic money transfers over $10, also known as the Intermediated Money Transfer Tax (IMTT), which came into effect on 13th of October 2018. Zimbabweans’ reaction to this fiscal manouevre and the separation of RTGS FCAs from Nostro FCAs was to dump the bond note in favour of the USD, a process that saw the exchange rate falling to 1US$: 6 Bond Notes. Retailers of goods and services increased their prices by as much as 600% to match the prevailing black market rate as they attempted to preserve or regain value lost as a result of the exchange rate differential between the RTGS dollar and the US dollar. Resultantly, inflation rose sharply from 5% to 20.85% within a month. Practically overnight, everybody’s wages and salaries were devalued by between 400 and 500% since there were no wage increases to account for the black market rate now being used by retailers to determine prices of goods and services.

Stung by the erosion of incomes, workers have been agitating for this gap to be closed by an increase in salaries, a demand which heightens inflationary pressures. Additionally, these wage demands put to test Government’s ability to maintain fiscal discipline at a time it is preaching the gospel of austerity. The deepening shortage of foreign currency, which will in turn put pressure on parallel market exchange rates, will also have a significant inflationary impact. In a nutshell, resurgent inflationary pressures will negatively affect consumer disposable incomes and confidence in the absence of appropriate interventions. The recent fuel price increase is expected to stoke inflationary fires and the proposed rebate system will not offer much respite given the highly informalised nature of the economy. Government expects inflation to average 22.4% in 2019 and end the year at 5% but this is looking increasingly unlikely given that inflation ended 2018 at 42.09%, against a target of 25.9%.

  1. Foreign Currency Shortages

“The biggest challenge is to do with foreign currency; as you recall by the end of 2018 there were policies that were put in (place) to separate the electronic money and the USD nostros, but there is no mechanism between the two… We believe it’s a situation that can quickly be unlocked if the law that was put in place to criminalise the trade between bond note and the US dollar is removed.” – Confederation of Zimbabwe Industries (CZI) President Sifelani Jabangwe.

Foreign currency shortages will be one of the key challenges of 2019, as demand for hard currency to fund various essential imports continues to outstrip supply. Demand will also come from outstanding dividend payments and proceeds of shares sold on the stock exchange. Unmet demand for foreign currency will impact negatively on availability of imported raw materials and consequently on local productivity, dealing a veritable blow to import substitution and export promotion measures. Additionally, companies face potential interest penalties on their foreign trade facilities due to delays in servicing them.

On the 10th of January 2019, the Confederation of Zimbabwe Industries (CZI) warned that if Government did not urgently resolve the foreign currency shortages, many manufacturing companies risked shutting down within 30 days. The credit facility availed by Government to  cater for importation of raw materials against letters of credit  will offer some  temporary respite but a long term solution is imperative.

The tobacco selling season, which is expected to commence in March and may be delayed due to the late onset of the rainy season, holds some promise to increase the inflow of foreign currency into the country and mitigate the situation. However, one school of thought believes that we shouldn’t hold our breath as most of the export liquidity from tobacco has already been mortgaged and will probably be going towards debt servicing for running nostro stabilisation facilities with the likes Afreximbank.

Zimbabwe generates more foreign currency from exports, foreign direct investment and remittances than several regional countries that currently do not experience foreign currency shortages. Accordingly, the solution to the shortages must include efforts to ensure more efficient and sustainable use of foreign currency in order to stabilise the economy.

  1. Debt Overhang and External Arrears Clearance

“We are pursuing a debt relief strategy or restructuring which can allow us to catch up with our arrears and unlock the flow of capital from the rest of the world. Debt relief would  see the country risk profile going down and in turn, attract foreign direct  investment into the economy, putting  it in a  better place to service its obligations,” Finance and Economic Development Minister Professor  Mthuli Ncube.

President Emmerson Mnangagwa’s administration has anchored its foreign policy thrust on accelerated international re-engagement, a critical component of which is a programme to deal with US$5.6 billion in arrears owed to multilateral creditors, the Paris Club and Non-Paris Club creditors. In order to regain access to international capital markets Zimbabwe must repay its debt arrears to major foreign lenders. The rationale is that resolution of the debt overhang will improve the country’s risk profile and unlock external sources of funding for budgetary support in the form of lines of credit and grant finance. Given that this process has stalled in the past, it will be critical to see how much progress government will make this time. A critical measure of success will be whether Government will be able to deal with the debt in a sustainable manner.

The Minister of Finance seems to have a high level understanding of what needs to be done and is supposedly familiar with the international terrain on which this must play out so there are high hopes on this one. According to the Ministry of Finance, the arrears clearance programme comprises of a three-stage process:

  • The first stage was to produce and present a credible reform programme, which was achieved through the Transitional Stabilisation Programme (TSP).
  • The second phase is making an offer to pay the African Development Bank (AfDB). The pari passu rule says that Zimbabwe should pay AfDB and the World Bank at the same time, but there has been an agreement to allow for some flexibility in that regard.
  • Stage three is the Paris Club bilateral negotiation, which will be kick-started once an offer has been made to clear off the AfDB arrears.

Government plans to repay debt arrears by late 2019, and whether they can execute these three stages within the envisaged timeline will also be a critical measure of success.

  1. Zimbabwe Democracy and Economic Recovery Act (ZIDERA)

“ZIDERA covers lending by international organisations to Zimbabwe and forgiveness of the debt that Zimbabwe has to those organisations, and countries in the Paris Club. The sanctions that exist are executive branch sanctions on 154 individuals and entities and it prevents people from the United States economic system from providing economic benefits to those people, or it can prevent them from travelling to the United States,”  United States Ambassador to Zimbabwe Brian Nichols.

Debt resolution is expected to improve the Zimbabwe’s risk profile and unlock new external sources of funding but Government will still have to contend with ZIDERA. To put this challenge in perspective, it is important to turn to a recent development. In early December  last year, the United States State Department submitted a damning report for adoption by the country’s Senate, urging a cautious approach to relations with Harare over its reform agenda, which it said was moving at a snail’s pace and had failed to inspire confidence. Presenting his report before the US Senate foreign sub-committee on African affairs, the US Deputy Assistant Secretary of State for Africa, Matthew Harrington, warned the White House against offering economic support to the country until Zimbabwe effected tangible reforms. “It is clear that Zimbabwe has a long way to go and requires profound political and economic reforms to sustainably change the path on which it has been for nearly four decades. Since taking power last year and since his election, President Mnangagwa has regularly stated his commitment to pursuing political and economic reforms, as well as a better relationship with us…So far, however, the pace and scale of reforms has been too gradual and not nearly ambitious enough. A Zimbabwe that is more capable of providing for the needs of its own citizens and respecting human rights and fundamental freedoms will be a more responsible member of the international community. To reach the end, Zimbabwe will require implementation of fundamental reforms, not merely a commitment to do so,’’ said the report.

Clearly, the Government of Zimbabwe has a lot to do in order to convince the U.S. government to repeal ZIDERA. Meanwhile, with the Act in place, Zimbabwe cannot access loans or guarantees from international financial institutions without the approval of the U.S. government. The recently renewed piece of legislation also requires that U.S. representatives at multilateral organizations not support any efforts to address Zimbabwe’s debt situation.

Send feedback on this  article to info@soundgarden.co.zw. Omen Nyevero Muza writes the fortnightly blog Financial Sector Spotlight (FSS) at https://www.soundgarden.co.zw/blog/