The economy has been slowing down since last year from its peak GDP growth rate of around 9.3% in 2011. Generally when policy makers talk of economic growth and so on, the general public usually does not easily connect with the figures and it is as times difficult to relate them to their everyday lives. But this time around it is quite easy for the general public to identify with the state of the economy, just like in the days of hyper-inflation. The economic slowdown has been very visible to the public from the magnitude of company closures, redundancies and dwindling net household disposable incomes. As the workers get to work fewer days a month and usually with half or no pay, it has become very easy for the public to relate to the economic growth figures and indeed when the policy makers talk of slowdown in growth, it needs no further explanations.
The whole economy now feels the pain of the slowdown heavy on its shoulders. For the government in particular, the state of affairs is not at all reassuring. Its revenues are stagnating at a time the economy expects it to do more to provide the much needed stimulus. On a year-on-year basis, government revenue has been growing, but on a worryingly decreasing rate. Government revenue grew 141%, 25% and 18% for the full year to 2010, 2011 and 2012 respectively and this trend depicts an economy that has been fast losing steam. Considering that government revenues, just like performance of the banks, mirror activities in the real economy, this decreasing growth in revenues reflect the serious challenges that corporates are facing in the real economy.
On the real side, the economy is now characterised by unrestrained and free-fall closures of the companies that under normal circumstances should be the national pride in providing jobs for the citizens. The demise of Renaissance Bank, StarAfrica, Caps Pharmaceuticals, Steelnet, Afro Foods, Interfin Bank, Jaggers, Gulliver and the imminent demise of many other walking graves that are stumbling to their final resting places, summarise the troubles that industry faces today. Although some of the big companies remain standing, most of them remain just but equally troubled. It has now become common practice that employees go to work and get paid part of their earnings, if at all they are lucky. Although there is generally a shared global optimism on the commodity side, even the big mining and mining related companies such as Rio Zim, BNC, Zimasco, Zim Alloys and Monacrome, among others, have not seen the sunshine yet and continue to reel under immense viability challenges, with most of these big mining companies under the yoke of unsustainable debt.
With such a myriad of such challenges, it becomes clearly evident that there are a number of challenges in the economy that need to be addressed by the incoming team of ministers and parliamentarians so that the economy is able to provide a sustainable platform that will create stable jobs and guarantee growing incomes for the citizens. The policy challenge is however in identifying the exact interventionist mechanism that need to be implemented to counter the economic slowdown.
Of course there have been a lot of debates in the various forums about the current state of the economy and as usual, opinions tend to start converging on what is perceived to be the main source of the problem. One such point of convergence is the liquidity position. The current liquidity crunch has been blamed for most of these challenges that companies and the general economy face today. This sad connivance between the private sector and policy makers of course, to some extent, has its merits. It is fact that companies need easy access to credit to enable them to retool and finance their working capital requirements, more so when considering that the decade up to 2008 has been one of the most difficult one characterised by virtually no physical capital formation and corporate savings.
Unfortunately, considering that this economy sits on around $4 billion banking deposits vis-à-vis borrowing requirements in excess of $25 billion, most corporates have been failing to access sufficient credit from the banks to finance their activities. Equally associated with these tight credit conditions, the costs of borrowings have generally been much higher than the desirable levels, whilst the credit facility tenors have been just too short to allow sufficient breathing space for the corporates to re-organise themselves from the hyper-inflationary mentality of yester-year and generate excess cashflows to service the borrowings.
Yes indeed the liquidity challenge has been a major stumbling block, more so now that the government has no levers of quantitative easing that has all of a sudden become a fashionable tool in the developed world to jump-start their sluggish and slumbering economies. But putting emphasis on the prevailing liquidity condition is totally missing the point and the incoming cabinet and parliament, with a good five years ahead to put their minds to work, need to look at things differently.
The incoming crop of policy makers need to understand that the current liquidity crunch is a result of mainly bad decisions by the same corporates that cry foul about the state of the economy. The big corporates got the lion’s share of loans from the banking sector but unfortunately they have failed to repay. Although one cannot separate the bankers from having made bad decisions by extending credit to most of these trouble companies, the fact remains that had the borrowers been performing, the credit markets and therefore the liquidity situation would have been much better than what it is today. Switching to dollarisation without alternative funding models and significant external injection of funds was not easy for the economy. But nevertheless, the overall liquidity position has been increasing significantly, with banking deposits rising from as little as $475 million in April 2009 to around $4 billion currently. This massive expansion in broad monetary aggregates is surely commendable, more so at a time the generality of the banking sector has been keen to lend as evidenced by loan to deposit ratios that now sit precariously above 90%, thanks to the ballooning effect of non-performing loans.
This unusual relationship where massive expansion of monetary aggregates is accompanied by serious liquidity challenges depicts a private sector that is in serious trouble. It depicts a private sector that partied all night gulping down all available liquidity, but failed to turn around its fortunes in the morning. After the party, there is now nothing to show after the drinking binge except the cans of toxic debts sitting on its balance sheets.
Toxic debt levels have been the major factor driving companies into bankruptcy and gleaning on the financials of some of the seemingly strong ZSE listed companies shows that the debt burden is still the biggest challenge. For example, the debt-to-equity ratio of Intrefresh is one that would need nothing short of a miracle to extinguish it from its internal cash generating ability and indeed it is not surprising that it has recently concluded a rights issue, albeit a poorly subscribed one. Casting the eye wider to Meikles Africa reveals a more or similar scenario where wriggling out of debt is not going to be an easy task. Upon finding that the credit markets are no longer available to continue extending a lifeline, some of the troubled corporates have now engaged in excessive over-trading by piling creditors on the balance sheet. Therefore the contagion effect of the ongoing corporate bankruptcies has not been limited to affecting banks that extended credit, but rather it has cascaded to the wider supply chain and indeed it explains why the whole economy is catching a cold.
It is therefore clear that the private sector needs to accept the bigger blame of plunging this economy into the current liquidity crunch, and indeed the accompanying corporate bankruptcies are a testimony of business models that have outlived their usefulness. Although the government can intervene and try to rescue struggling companies and stop the de-industrialisation, the fact remains that government has no fiscal space to undertake such initiative. Even if the government were to pump in money into these struggling corporate dinosaurs, very few would resurrect from the dead since what they are lacking is not necessarily financial resources, but rather the astute business models and good leadership. Therefore the proposals to set up funds for distressed companies, although noble and progressive, should be shelved whilst the government redefines the new industrialisation framework that should see existing strong companies and new players take to the economic stage and take charge of creating output and providing employment.
What is quite clear from the happenings in the economy is that our old model of the manufacturing sector is no longer competitive in the global industry and it needs to rejuvenate itself on the axis of our comparative advantages so as to champion the new industrialisation phase. There is no more merit in fighting to produce goods that we no longer have apparent competitive advantages over our competitors in such countries as China , SA, Brazil , India and so on. Although there are a lot of things that need to be done right such as infrastructure upgrades, privatisation of parastatals, implementation of a robust PPP framework and the many other nice-to-have milestones that are recited religiously by almost all presenters during strategic workshops and dialogue sessions, the government has to admit that sometimes focusing on one thing and perfecting its implementation can be the best way to start a sustainable rejuvenation process.
What is quite clear is that of the many sectors that can spur and underpin sustainable growth for the rest of the economy, the mining sector is the closest one that gives us massive competitive advantages if properly and progressively structured to unlock its diverse value chains. But a lot of work and effort will need to be applied in ensuring that the diverse fiscal linkages, forward linkages, backward and spatial linkages of the mining sector are cleverly linked to the broad industrialisation model that will concurrently spur growth in the manufacturing and services industries, among others. We have examples of how the mining sector has discordant policies that may never achieve development of other sub-sectors of the economy and these aspects will need to be dealt with quickly.
One such example is the diamond industry. Zimbabwe now boasts of being a “game changer” in the global diamond industry due to the abundance of alluvial diamonds. However because of inadequate foresight, the potential of the domestic cutting and polishing industry has been condemned by the highly prohibitive fees at $100,000 per annum that have kept locals from participating in the value addition chain. Instead, the same policy that deters local from participating in the value chain does not seem to mind Israeli and Belgian polishers who face relaxed conditions in their countries, to benefit from adding value to our rough diamonds that are sold overseas. Even in SA and Botswana where the diamond industry is very mature, the licensing fees for the cutting and polishing industry are rational. In Botswana for instance, the licence fees are 100 pula on registration and annually thereafter as renewal fee. This is just but one example of how not to make progressive policies. In fact the potential that the diamond cutting and polishing industry has on many other downstream industries such as banking, construction, insurance, the goods market and so on are so immense and transformative.
That said, the economic challenge ahead is tough and what is important is for the key ministries such as Finance and Mining, among others, not to over-promise on unachievable deliverables. Rather, the focus should be on coming up with sustainable reforms that reassure the public and the investing community that the leadership is fully are aware of the current challenges but is pursuing sustainable policies that will set the foundation for steady state growth. Otherwise the current challenges have no quick fixes.
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