TARGETING WAGES IS POOR STABILISATION POLICY FOR ZIMBABWE

The IMF press release of June 2010 concluded the following on Zimbabawe: “Upside risks to the short-term growth outlook are materializing as the economy is benefitting from a significant increase in export prices and a good agricultural season……The authorities are advised to complete the on-going government payroll audit and start eliminating ghost workers, while attaching greater priority to social and development programs. It is also important to step up efforts in containing risks in the banking system, and to improve the business climate, in particular with respect to property rights. Against the background of a recent pickup in inflation and rising concerns about competitiveness, wage restraint is needed in both the private and public sectors….”

This general statement could be considered acceptable, but specifically the IMF doesn’t, unfortunately, seem to comprehend the dynamics of this country especially on the current challenges and what needs to be done specifically on the wages levels and civil service reform. Worrisome inflation is now a ghost that has been exorcised by the dollarisation in the literal sense. The subsequent deregulation of the goods and foreign exchange markets, abolishment of price controls etc have all converged to erode the distortions that usually favor demand-pull inflation. With the year-on-year at 6.1% in May, the IMF advice on wage restraint in both the private and public sectors is inappropriate.

True, there is a strong link between the wages and cost-push inflation in general, but to emphasize that point when considering the current state of the Zimbabwean economy is totally missing the point. Considering the broader dynamics of US$ pricing and deregulation of the goods market in Zimbabwe, this link has weakened significantly and may remain so for some time, and indeed that statement from the IMF could have only arisen out of ignorance. The imported inflation dynamics from balance of payment position need careful consideration especially if one considers that South Africa is Zimbabwe’s largest trading partner exporting $563 million worth of merchandise to Zimbabwe during the first quarter of this year. Therefore ignoring the US$/Rand exchange rate dynamics of the past quarter in understanding the inflation trajectory in Zimbabwe could create false perception on link between wage rates and inflation. Instead, working around the competitiveness of the industry and the economy as a whole should be the most important policy consideration ahead of wage restraint when targeting inflation going forward.

The major competitive hurdle industry is facing today emanates from shortage of working capital. Credit is not flowing in the economy as evidenced by the very low loan-to-deposit ratio below 50% within the banking sector, and more importantly, the little available credit is very expensive considering the long-term nature of capital that industry is seeking to revitalize weak balance sheets. The IMF has correctly noted that risk containment is very vital within the banking sector, but falls short to understand that every important link between high cost of capital and inflation ahead of wage levels.

Productive capacity within the manufacturing sector, for example, is still below 50%, and the excess capacity, itself a huge dent on competitiveness and efficiency, has more important effects on the industry’s critical fixed cost function ahead of the variable labour costs. Interesting as well is the fact that financial sector deepening and risk moderation will remain acute for the banking sector as long as domestic demand is still very weak, compounding further the ease with which credit can flow in the economy. Hence the wage levels play an important role not only in creating a sustainable pool of domestic demand to provide the market for the local producers, but equally to improve the overall financial sector risk perception that will result in credit doing its miracles.

The wages are still very low in nominal terms, averaging below $400 per month, and therefore making the financial markets more efficient could be more important in fighting inflation than having a blind policy of targeting wages. Internal growth models are very important in today’s well globalised environment, and without vibrant and sustainable domestic demand, Zimbabwe will take a more prolonged road towards solid recovery. The issue of brain drain has seriously affected this country, and the current low wage rates, if to be kept much lower for long, will not only perpetuate the status of Zimbabwe as a country of poor workers, but will equally hinder the infusion of superior skills at a time global labour mobility has become very fluid.

Equally, eliminating ghost workers cannot be more important than the broader rationalization of the entire civil service, whose core should be chopping excess baggage. GDP started declining in 1999, and almost 50% of it was wiped out by 2008. This of course translated to more energy having to be expended on state-related social programs to alleviate poverty, but considering equally that the central government’s solvency was compromised invalidates the justification in keeping about the same numbers of civil servants as in 1999. Wages take up about 70% of domestic revenues today, and trimming the government workforce will create fiscal breathing space and allow the government to embark on important capital projects. The secondary effects through private sector job creation will eventually offset the immediate employment losses and propel the economy into a more sustainable mode than the current hand-to-mouth fiscal position.

Therefore eliminating ghost workers should be part of the broader policy that should be moving towards containing the government wage bill within very specific targets than being part of a general policy of rationalization. Equally, the government has not been so clear on its targets, and a lot needs to be done towards setting and indeed moving towards the targets. What is the desirable level that wages should be capped as a percentage of domestic revenues? What is the target date by which government should be within the set limits? All these things need to be clear to steer the economy out of the mediocrity and work towards a vibrant second world economy.

Banking sector stable but troubled

Times are changing fast for the broader banking sector, and indeed the massive retrenchments that are happening in the sector send a strong message that all is not well and indeed, the rationalization is long overdue. Not so long ago the flurry of the Zim-dollar transactions associated with excessive liquidity saw banks going on a massive recruitment drive to fill-up their various divisions whose fortunes had ballooned. The ASPEF facilities created huge agri-business divisions; whist the high velocity of currency circulation saw the settlements departments getting bigger at more or less the same rate of inflation, jokingly. The RTGS transactions associated with the parallel market transactions, popularly known as ‘burning’, made this division one of the busiest in every bank. On the other hand, the Treasury functions, whose fortunes blossomed well during the ‘asset-management’ hay-days of between 2000 -2004 when ‘dealers’ were golden, remained very relevant and vibrant as the liquidity swings in the market during the hyper-inflation era pinned the daily survival of banks on the ability of their treasury teams to close deals in the market and balance their central clearing positions.

All these are excesses of the past that are now haunting the banking sector’s operational efficiency models. The Agri-business divisions are now haunted departments where lending to agriculture has been made very difficult not only by the current high cost of credit, but equally by the very short-term nature of loans that cannot afford the broader agricultural sectors to service interest due to the cyclicality of the cash flows. The death of the Zim-dollar has equally brought a near-death to the once hectic settlements departments as the volumes of transactions have drastically come down as households in the economy have lost the ‘burning’ magic of generating wealth, nominal or otherwise, out of thin air. The low loan to deposit ratio of less than 50% says a lot about reduced activities in the corporate banking departments, whilst, on sad note, the death of the Zim-dollar equally pronounced hardship sentences on many banks’ rural branches around the country whose depositors were left clutching only to their account numbers but with zero balances.

The massive retrenchments and branch closures happening in the sector are part of the broader rationalization programme, but more would be needed to preserve profitability considering that the cost to income ratio averaging above 120% is unsustainable. Zimbabwe has had a reasonable, but equally irrational staff retention policy of offering company cars, cell-phones etc to employees over the past decade – a practice that doesn’t make sense on corporate balance sheets as long as there are no economy-wide implicit subsidies out of generally high inflation. Considering the need to contain costs, this unfortunate policy should be heading towards extinction within the banking sector by year-end, and indeed some banks have already started off-loading the mountainous fleets of vehicles to employees. The use of US$ in the economy requires some measure of sanity in the broader decision making framework, and those corporates that continue to ride on the exuberant mentality of an inflationary environment may not live longer to correct their mistakes. Cleaning bank balance sheets would entail equally closing some non-profitable branches opened at the height of hyper-inflation, whilst keeping a very close eye on the quality of the loan book should be the most important risk consideration on any bank balance sheet going forward.

The net interest margins prevailing in the banking sector, generally above 71% for the top 10 commercial banks, are very healthy, but considering the very low loan-to-deposit ratios averaging 49%, and indeed the quantum of total deposits, it wouldn’t surprise why banks such as Barclays would generate $15 more from non-funded income for every $1 generated from net interest income. The message is clear: survival is still difficult in the broader banking circles, and by year end, many more drastic decisions would have been taken by various banks to clean balance sheets of excesses and realign with the stable, but very precarious trading environment. Unlike the ZW$ era where losses were never real, the US$ environment has real losses that would dent banks’ capital positions, and as such more consideration need to be paid to the bottom line than never before.

What does the future hold for the banking sector? The sector, as the rest of the economy, has huge potential, especially considering that the existing asset classes in the banking sector are so narrow and there is huge scope for market deepening. The existing low loan-to-deposit ratio says a lot about excess savings that exist in the economy and having huge potential to create value for the banking sector when perception and risk profiles improve later on. For lack of information and exposure, many would attribute the current liquidity crunch in the market to ‘insufficient’ deposits. With deposits now around $1.7 billion from as little as $400 million in April of 2009, that argument should be falling away, and indeed the current credit crunch has everything to do with market perception and risk profiles and very little to do with insufficient deposits except for the very small banks. Hence from a broader perspective, the banks have capacity to lend, but the issue of risk is holding back the flow of credit. Therefore once the market risk profile eases, more credit will be flowing and indeed more revenue will be generated on bank balance sheets. Looking across at Zambia and Tanzania with deposits to GDP ratios of around 15% and 28% respectively puts Zimbabwe’s 46% at an enviable position, but the pronounced economy-wide risk issues are holding back the flow of credit, creating the current crunch.

The commercial banking model remains the better of all the available models due to its ability to levy charges on the many transactions and accounts every bank would be having. Although the commercial banks with wide networks have better revenue models from ledger fees and commission income, the fact that about 50% of the global deposits are concentrated in three bank, i.e CBZ, Stanbic and Standard Chartered means equally that the bulk of the remaining banks are fighting for a smaller piece of the cake, and therefore more leaner and efficient operating structures will be driving force in the banks going forward. Equally, when faced with survival challenges, it is expected that innovation will quickly come to the fore, meaning that products such as consumer loans, asset finance scheme, etc will be coming back into the market quickly to broaden the income base of the banks. However the pace of economic recovery will have the final say on the products the banking sector will be able to create and sell efficiently.