Bad dirty debts – The clean-up continues

(First Published in the Banks & Banking Survey 2016 Magazine)

History has many documented case studies where the pursuit of patriotism and heroism has always brought suffering, regret, and in other cases, triumph. And that analogy can revealingly be used to assess the risk-reward trade-off in the local banking industry. 

After a decade of economic meltdown, dollarisation brought so much optimism and the bankers, holding the keys to credit, became once again the protagonists on whose hands the fate of companies got decided. Considering that only $475 million existed in the whole banking sector at the time of dollarisation and with that having to be shared amongst all the banks, the resultant aggressive lending for survival was inevitable. 

Resultantly, almost every dollar that got deposited was loaned out in its entirety, with the situation being made worse by the absence of reserve ratio as policy makers opted to allow the market to provide as much credit as possible to kick start the economy.  

This excessive risk-taking behavior by the bankers over the years, in part motivated by the desire to ramp up profits to shore up capitalization levels that had been set at staggering levels, explains how the loan-to-deposit ratio has hovered precariously above 90% for the majority of the smaller banks, with the sector average rising to a peak of 84% in 2011. 

And today, even as it stands at 69%, the load to deposit ratio remains quite high when compared to regional peers such as Zambia where it stood at 57% as at 30 June 2016.   In response to the high loan-to-deposit ratio and the excessively exorbitant cost of credit that hovered above 50% annualized during the first three years of dollarisation, monetary aggregates in Zimbabwe  ballooned phenomenally, from a modest $475 million in 2009 to around $5.6 billion at the moment.

A quick glance at Ecuador, which dollarized in 2000, reveals how monetary aggregates increased only 3-fold to $15 billion by 2007, exactly 7 years after its dollarisation. Zimbabwe’s have increased a whopping 11 fold over 7 years!

This huge appetite to lend, in part explained by bankers as being patriotic and being responsive to the calls by policy makers to generously liquefy the credit markets, was not overly misplaced after all. Zimbabwe, having no formal arrangements with the big international lenders and multilateral development financial institutions at the point of dollarisation, had to look to itself to make it work. 

The bankers, with haste, responded to the call and proceeded to provide credit, albeit with reckless abandon. And indeed the majority of the progress that this economy has achieved to this day is attributed to the courage and relentless patriotism of the bankers that, in the absence of lender of last resort functionality at the RBZ, took massive gamble with deposits on their balance sheets and sacrificed liquidity for loans. And indeed the economy responded. GDP growth peaked to around 11% in 2012, thanks to the bankers that traded prudence for patriotism.

Unfortunately this patriotism or excessive risk-taking behavior, whichever descriptions suits best the gesture, has plunged the banking sector and the economy at large into a crisis that may take very long to unwind and amortise. The massive expansion in monetary aggregates in Zimbabwe unfortunately contrasted against prices that started to correct sharply for the domestic economy that had suddenly opened to the world on account of dollarization and near-abolishment of exchange controls. 

The resultant competitive challenges for the domestic market meant that most companies could not compete largely with cheaper imports from SA, spurred in part by the Rand whose depreciation has been a boon for exports into Zimbabwe that has been using the stronger US$. And as expected, a significant portion of these loans issued began to turn bad, itself very bad news for the bankers that had driven loan-to-deposit ratios to the ceiling. 

As the belly of the economy continues to throw up dead companies at a remarkable rate, the mess has, unfortunately but rightfully so, been piling up in bank balance sheets. And cleaning up that mess has not been easy, the very reason why the banking sector has good statistics to its credit of banks that collapsed under the burden of bad dirty debts culminating from a lending binge that has its roots dating back to 2009. 

Interfin, AfrAsia, Royal, Trust and Renaissance and Allied Bank, among others, became the statistics in a very short space of time. And with that, as expected, came the suffering of depositors who lost their wealth and savings. An estimated $200 million from over 54,000 depositors went up in smoke! And many continue to count their losses to this day.

Although natural selection has weeded out the bad boys for now, the sector remains burdened by non-performing loans. Inasmuch as official statistics on non-performing loans report them at around 10.8% as of December 2015, the fact on the ground points otherwise, more so when history of collapsed banks such as Interfin, AfrAsia and Renaissance, among others, revealed shocking levels of non-performing loans that could not be easily reconciled with reported levels of non-performing loans in the market just before their collapse.

At a time where capitalization levels are tight for shareholders that literally had to start afresh in 2009, restructuring problematic loans becomes the next best strategy to manage provisioning levels and write-downs that, in effect, would require more injection of capital to comply with the prudential capital adequacy requirements. 

In light of the deflationary environment that has impacted heavily on the ability of borrowers to service their loans as revenues and margins have been coming down steeply, the bankers are left with little choice but to re-negotiate with their struggling borrowers and restructure loan covenants. And this restructuring of loans in an economy facing declining consumer demand and low confidence can only but post-pone the inevitable.  

Bad debts shall keep piling! Although ZAMCO, a company set up to buy bad debts from banks, has licked part of the mess to the tune of $357 million worth of bad debts to this date, it should not be seen as the ultimate antibiotic to cure the disease. Its funding model, that largely from TBs, cannot be pursued sustainably, moreso at a time there is growing chorus for government to halt spending beyond its means to protect the market from collapsing on itself. 

In any case, sooner there shall be consensus that the big corporates that are failing should indeed be left to die as the economy renews itself in creative destruction mode. And foreclosure will spike.

The banking sector is therefore in for a long and pernicious cleaning process as the economy continues to throw more mess on their balance sheets! And as if that is not been enough trouble, the incoming cash crisis has created new headaches for the bankers, save that this particular problem is one they look up to the regulator to print bond notes for salvation. 

Bond Notes - The Debate Goes On

(Article published in the Sunday Mail of 15 May 2016)

The bond notes debate of went into overdrive the past week, culminating into a ZNCC breakfast meeting that later got massively oversubscribed and eventually turned into a half-day session. The session was indeed an honest engagement between policy makers and business. Among other important aspects, the RBZ made a fundamental clarification in that the bond notes are primarily an import incentive and never a cash shortage antidote. That clarification was important in the first place and as the RBZ public relations skills go into overdrive, it becomes important that the clarification becomes more clearer, more so to their fellows in government who have not yet gotten it to now. Why is this clarification important?

Rebutting a cash shortage with issuance of bond notes implies, to some extent, that the supply of bond notes would be dictated by cash withdrawals from the banking sector and that would mean that the market would be awash with bond notes in a very short space of time. With government wage bill estimated around $230 million per month, that would imply that one month payroll would wipe out the 200 million bond notes if one considers the massive cash withdrawals that usually come with civil servants pay-dates, more so when there is a general uneasiness with regards bond notes in the market. The fears therefore that the market would be awash with bond notes in a very short space of time would be genuine from that perspective.

And it becomes important that the clarification concerning bond notes being an export incentive be well communicated and understood. When bond notes are being issued as an export incentive, and of course with the RBZ sticking to its promise to issue them as such, the story then becomes a totally different ball game. Total exports, which peaked in 2012 at $3,9 billion, have been coming off year on year since then to $2.7 billion in 2015 and that is bad for this economy and the incentive could have come at the right time. Considering that exports are generally spread across the whole year, the injection of bond notes, as long as they remain an export incentive, will be equally spread. Making the assumption that the exports will stagnate around the same levels as last year, the next one year will see an injection of about $135 million worth of bond notes into the economy, with the injection being spread over a year in line with export receipts. The question that becomes important then is responding to fears that the $135 million worth of bond notes will destabilize the pricing structure in the market, in particular the goods market pricing (inflation) and currency prices via the exchange rate route. For Zimbabwe that has GDP of $12 billion and monetary aggregates around $5 billion, the $135 million injected over a period of 1 year is surely not at all an amount to worry about it causing pricing distortions, more so considering that it would be incentivizing production and replenishment of the nostro accounts.

Dollarisation has had the negative impact of dis-incentivizing exports of largely manufactured goods for obvious reasons that the incentive to generate foreign currency would be zero, more so at a time capacity utilization in industry is so low that all output can be easily absorbed in the domestic market. The incentive should therefore be a non-inflationary stimulus package to incentivize exports. Although itself a good idea to incentive exports across the board, the RBZ may need, in future, to carefully re-categorise exporters and reward more those that are taking extra efforts to export. Mineral exports should not be incentivized at the same rate as exports of manufactured goods on account for the obvious reason that the latter are going an extra mile to export products that may equally be sold in Zimbabwe without all the hassles associated with exports.  On the same note of incentives, the issues relating to policy equity come to the fore, especially for manufacturers that are in key import substitution sectors who would correctly argue that by substituting imports, they are equally as important as those exporting and should therefore get rebates in one form or another to remain competitive, failure of which their exit from the market can easily be filled by imports, thereby worsening the balance of payment position.

Whatever various arguments will come up, output incentives are very key in a country desperately in need of jobs and growth. The fact that the USD environment brings about economic stability is not debatable, but it is very important to equally understand that its ability to deliver jobs and growth at sustainable levels is very limited. Upon dollarization in 2009, policy fixation was on stabilization considering the ravaging impact of hyperinflation and the thinking was not wrong. Hyperinflation was traumatic and Zimbabweans needed a break, a well-deserved one for that matter. And indeed for 7 years, we have stabilized but unfortunately, that stability has not been able to deliver growth to impact positively on job retention and creation and that, unfortunately, is a disaster.

A lot many big companies have gone burst during the dollarization, whilst quite a number of those that are still standing are limping towards their death. In any case the major challenge of the current deflationary environment relates to real debts that continue rising, trapping corporate balance sheets in septic and corrosive pools of unsustainable debt. The worst bit is that Zimbabwe is in a deflationary environment yet interest rates have remained very high, more so for borrowers in default who attract penalty rates above 20% per annum. When that is juxtaposed to the falling revenues and operating costs that are so stubbornly high, industry is in big trouble. The carnage that has happened on the ZSE since dollarization bear testimony to this. It is no surprise therefore that even the Zimbabwe Revenue Authority is battling to recover tax debt which has ballooned by 31% to $2.5 billion for Q1 2016 from the December 2015 levels. This increase of 31% in just three months is frightening, itself a clear sign that indeed the economy is in serious trouble. Equally, the fact that tax collections have been coming down at a time Zimra is intensifying tax collection efforts paint a picture that shows that there is a serious competitiveness challenge underlying the economy. Tax revenue dipped 10% in Q1 2016. There is no doubt therefore that the economy needs policy interventions to ease the market and not just incentivize exports.

And its not only the broad macro-economic indicators that are pointing southwards. The worsening fundamentals have impacted on societal moral balance. Annual murder rates have increased more than 100% from 638 cases in the year 2010 to 1,387  in 2015. As would be expected, fraud cases have more than quadrupled from 2,624 cases in 2010 to 11,207 cases in 2015 according to Zimstats. These are indicators of serious challenges that, to some large extent, reflect the challenging economic environment that is very stable, yet so difficult. Household debt as a percentage of disposable income is now hovering around 63% and indeed it explains why emotions leading to higher rates of murder are running high, whilst the absence of jobs in the market could surely be pushing testosterone levels beyond the normal. And that probably explains why rape cases have increased by over 80% since 2010 to 7,752 rape cases recorded last year. What a pity! 

Dollarisation has created a very tough environment where, without proper work, generating income for the ordinary person is becoming very difficult by the day, the very reason why policy makers should focus on creating jobs to cushion the majority of the unemployed. Therefore the argument for quantitative easing in the economy should never be taken lightly. Statistics don’t lie, and more importantly, rarely mislead. However when they seem to do, it is usually on account of misinterpretation or abuse. Zimbabwe, with domestic financing as a percentage of GDP around 31%, is stuck in a quagmire and at that level, remains one of the lowest in the world for countries that are not over-reliant on natural resources for growth. It is clear therefore that Zimbabwe needs around $4 billion to $5 billion of new fresh funding to allow the banking sector to allocate credit and push domestic financing as a percentage of our GDP to around desirable levels of 80%, which levels will allow the economy to engage in massive infrastructure projects, create jobs and set the foundation for industrialization. There is never a country that has industrialised without a solid base of infrastructure and Zimbabwe has limited ability to cheat this statistic. How surely will this ever be achieved in a dollarized environment?

It is therefore becoming increasing clear that the economy needs creative but non-inflationary ways to stimulate growth, create jobs and bolster incomes. And the bond notes, as long as they remain import incentives for now, may provide part of the relief. Zimbabwe has a good history under its belt of rejecting currencies that are not stable or the worthless (mazuda). The rejection of the Zimdollar then and that of the South African Rand recently should be sufficient comfort for the market that indeed the use of currency in the economy is dictated more by the people and never by the policy makers. Luckily, the RBZ seems to be aware of it, the reason it has gone out in full force to engage the market and giving assurances that the bond notes issuance are a genuine export incentive, knowing fully well their excessive printing will, without doubt, make them suffer the same fate as that of the Rand and Zimdollar.

Bond Notes in Zimbabwe - A Technical Perspective

(Article published in the Sunday Mail of the 8th of May 2016)

The beginning of winter usually heralds innovation and reincarnation, and worse for trees, they shed leaves to adapt to harsh conditions. This winter the ongoing cash crunch, which has been fermenting for some time, emerged much stronger, eliciting responses from the monetary policy authorities. The crunch has been rebutted with the additional liquidity injection in the form of bond notes, in effect the visible and clearest indication of an increase in the local currency in circulation. To date, the visible local currency has largely been the bond coins.

Yes, It’s Currency!

As expected, there is ongoing debate on whether the bond notes constitute full scale issuance of local currency. It however requires little elaboration that whenever a medium of exchange is issued by a monetary authority, more so with the same authority having the ability to benefit from seignorage revenue, that constitutes currency. It therefore explains, without doubt, that the bond notes, irrespective of the name given to them, are a legal tender issued legitimately by monetary authorities and as such are a legitimate local currency. The expectation by the same issuing authority that the bond notes will be accepted and shall be used in the market as legal tender, unit of account and store of value rebuts any thinking to the contrary. It remains true however that the bond notes, for their name, are not Zim dollars as the latter carries unpleasant memories that can easily traumatize the markets and destroy confidence that has been built over the years by the adoption of the multiple currency system. Therefore no one should fault the policy makers for purposefully avoiding using the term “Zim-dollar”, for its memories alone are strong enough to traumatize an otherwise healthy someone and get them admitted in hospital.

Why now?

Exactly 7 years after the introduction of the multiple currency environment, the introduction of the bond notes has reincarnated fierce debate on whether the timing is right. Not so long ago, thus on 22 December 2015, the Monetary Authorities, for the umpteenth time, distanced themselves from the reintroduction of local currency.  The rational has always been clear, and so appropriately valid. By confirming the possibility of reintroduction of the local currency, the authorities have been wary not to bring back the dark memories, knock confidence out of the market, instigate bank runs and in no time, create serious liquidity gridlocks and reverse the gains made over the years. Yes, it was within their right minds to rebut any such unwarranted speculation especially after an expensive and unnecessary exercise to demonetize the Zim dollar had been conducted between 15 June and 30 September 2015.  That process legally extinguished the Zim dollar out of existence.

On the same thinking, the Minister of Finance, Hon Chinamasa had issued a statement in July 2014 in full support of the multiple currency regime after rumors of reintroduction of local currency surfaced. Unfortunately, and very much so, he strongly rebutted the possibility of reintroducing local currency and spelt some pre-conditions that would need to be met before considering the same. He cited restoration of industry competitiveness, sustainable current account position, sustainable economic growth and restoration of confidence in the banking system, among others. Two years down the line after his statement, nothing has improved on these parameters. In fact, all of them have become worse and yet, in the face of such, the wisdom to reintroduce local currency in the name of bond notes has prevailed. Economic growth prospects have worsened since 2014, from 3.8% then to current forecasts of negative 1.2% in 2016. The current account position is no better, whilst the banking sector, much stronger in 2014, has now been buffeted by winds of cash challenges last seen during the dark ages of hyperinflation.  What it is that could have changed between then and now to convince the same authorities to think otherwise remains a mystery, save to say that this has been surely a very difficult decision for the same policy makers who had stood firm in their beliefs.  

Why cash crunch now after 7 years?

The question that begs the answer and continues to, in some extent, remain unanswered relates to how and why the cash crunch has surfaced now, 7 years after dollarization. Why did it not start in the formative days when money was literally scarce? A few rational explanations provide some, but of course not all of the reasons. Monetary aggregates have ballooned over years, from as little as $475 million in total banking deposits during dollarization 7 years ago, to around 5.6 billion in December 2015. This monetary expansion, itself a sign of increasing confidence and growing economic activities compared to the preceding hyperinflation era, ballooned much faster on account of break-neck lending that saw loan- to-deposit ratios skyrocketing and peaking at 85% in December 2011. Considering the absence of the reserve ratio in the market and the cocaine-like induced high rates of interest that have long obtained in the market since 2009, there is little reason to doubt that the excessive monetary expansion, for a country without formal arrangement on dollarization with the US Fed, would one way or the other, run into some challenges regarding funding cash imports.

In simple terms, money has, since 2009 to date, been manufactured quite fast at the signing of loan agreements in the domestic banking sector. Considering the persistent yawning deficits on the current account, it subsequently became difficult to replenish the nostros at fast enough rates in order to meet the resultant growing demand for cash imports especially after the banks’ retention levels were whittled down.

On the other hand, the bilateral lines of credit, although a much desired source of financing big projects in the 

absence of better alternatives, have equally exerted pressure on liquidity outflows.  The bilateral ‘buyers credit’ lines of credit from China and India, among others, have a significant short-to-medium term negative impact on liquidity. For example, accessing a $200 million bilateral line of credit under an engineering and procurement contract would see equipment and services worth $200 million being shipped to Zimbabwe. However even well before the project is complete, which projects take years in many such cases, the country would already be paying both interest and principal towards servicing the facility to the overseas originator of the facility. And that is serious liquidity going out of the country that would need strong compensation from exports on the current account, without which the country experiences serous nostro funding challenges. Unfortunately our current account has been in tatters since time immemorial and running around $3 billion deficit a year since 2011, its financing has largely been from debt creating inflows from the capital account that unfortunately doesn’t assist in liquidity management in the long run.

The central government, on the other hand, which that has been finding it very difficult to institute expenditure-related reforms to enable it to live within its means in the face of declining fiscal revenue, has equally exerted funding pressure in the market. These factors, among many others, have exerted significant pressure on the ability of the banking system to fund cash requirements.

Lessons from the past

The lessons from the bond coins should be the learning yardsticks for policy makers. At their introduction in December 2014, there was a lot of skepticism and resistance that saw a significant quarter of society rejecting and deriding them. Eventually they became acceptable and today they are preferred ahead of the South African Rand. What lessons can be drawn from this? The most important aspect is that the bond coins were not being forced on anyone, neither were there outright threats against anyone rejecting them. The acceptability came out of confidence in that indeed the policy makers had genuine concern to resolve the issue of change that was affecting pricing of good and services. And more importantly, the stock of bond coins remained more or less static and considering the exorbitant costs of printing coins, new supply was put at check and that stabilized the perceived exchange rate and to this day, bond coins are still acceptable at par to the US$. Gaining market confidence is very important and monetary policy history in this country has clear tombstones depicting how excessive control measures never worked and got buried with time. The foreign exchange controls, the cash withdrawal limits, import restrictions and a plethora of other control measures instituted during the 2000-2008 era never worked and eventually led to the abandonment of the Zim dollar in 2009. The tombstones are clear and indeed the cremation of the Zim dollar during demonetization on 30 September 2015 bear testimony to this.

Confidence is earned

Inasmuch as there may be challenges in the current environment, the policy makers need to exercise restraint in the issuance of the new notes to allow the currency to find traction in a market that is full of negativity. Equally important is for the policy makers to avoid exhibiting panic modes by coming up with a plethora of controls, restrictions and prescriptions especially at a time they are attempting to gain market confidence. Confidence is like a currency. It is earned and requires prudence and hard work to earn it, more so in a market as ours where previously the now defunct Zim dollar destroyed every known measure of confidence.

Prescribing the type and form of currency that people should hold and use in a multiple-currency environment may defeat the whole flexibility that is assumed to come with multiple currency regime. The bond notes, if issued with prudence and restraint, should be allowed to compete for space and relevance like any other form of currency currently in use and that way they gain credibility and open acceptance. As long as its issuance is going to be well managed, it will eventually find traction and widespread preference against some of the other currencies in the basket. The same goes for the South African Rand. The Rand has been depreciating over the last year on account of domestic challenges in South Africa relating to its poor management of domestic finances and global commodity slumps. And indeed everyone has been alive to the drama surrounding the hasty hiring and firing of Finance Ministers by President Zuma. Therefore efforts to prescribe Zimbabweans to hold the Rand against their wishes may be inappropriate and the policy makers should strongly consider the negative consequences and just abandon it. 

Yes, South Africa is our biggest trading partner and using the Rand may help in resolving the cash crisis but surely attempting to impose the use of the Rand in the market may not work. It is an experiment not worth taking. South Africans, more than Zimbabweans, should work hard they currency be acceptable beyond their borders. The policy makers need a serious rethink on this and any other such prescriptions and controls being proposed that end up creating more problems than we intend to solve especially at a time we are introducing our own bond notes. Controls are a road so familiar to us. We have walked down this road quite often and it takes us to the same destination and it is high time we introspect and consider more market friendly options. The reintroduction of local currency was never going to be easy in this generation, and the policy makers are very alive to it.  Equally, the continued use of the US$ was never going to deliver prosperity, but just stability. And that is fact. Now that our currency is here, the policy makers, more than the market, should strive to employ all known tactics to build confidence around the new notes and prove that indeed this current generation has capacity to learn from its mistakes and correct them. With odds at 5000-1, Leicester City won the English league.  

IN CASE OF EMERGENCY, KNOCK OUT LABOUR!

IN CASE OF EMERGENCY, KNOCK OUT PANEL! This inscription, usually in red and unambiguously bold and visible on windows, is a very common sight in almost all commuter omnibuses in Zimbabwe. The 17 July Supreme Court judgment that upheld the earlier Labour Court that ruling that allows employers, at law, to terminate employment contracts on notice can be likened to these emergency exit windows. Struggling employers, with this precedent in hand, have not hesitated to put it to good use. The past week has seen massive lay-offs and painful contract renegotiations for employees as employers took advantage of this very rare window of opportunity that, considering its consequences and contradiction with Zim-Asset targets on employment creation, may be forcibly shut by government without notice. The situation has been compounded by the earlier announcement in April that the Retrenchment Board was tightening retrenchment regulations to make it more difficult for companies to retrench.  

The Retrenchment Board, with that announcement, had surely dampened the spirit of survival and these statements were read by many as prescriptive death sentences on struggling companies gasping for breath and choking under the burden of excessive and unproductive labour. Therefore this emergency exit window could not have come at any better time, and indeed the rate and haste at which companies are jettisoning excess labour reflects the excessive pressures that had build up in industry over the years.

Rightly so, the government and policy makers have a very good reason to be very worried about the massive lay-offs. Official unemployment, which already is very high, is bound to get worse. At a time the nation has been battling with the proliferation of vendors and informal traders, the current wave of private sector mass retrenchments is not going to make the situation any better.  The government, although being the single largest employer employing around 550,000 people, has no capacity to create direct employment opportunities that will absorb the many thousands of workers that will be on the streets in a few weeks.

In any case, the government has its own challenges in sustaining its huge wage bill and related recurrent expenditure that gobbles 92% of its revenue. If anything, the government should be very worried with its wage bill to the extent that it should be considering a significant civil service reform to downsize its numbers and create breathing fiscal space for capital projects that have higher multiplier effects on private sector job creation. With no social safely nets available to cushion the jobless, it is indeed genuine worry for the government seeing an upsurge in unemployment numbers.  And therefore the crisis meetings by the Minister of Labour and Social Welfare to try and find a soft landing approach to avoid the unraveling catastrophe are understandable.  

Unfortunately most of the employers jettisoning excess labour via the emergency exit window do not share the same concerns as government. And indeed they are justified! Most of the companies that have seized this opportunity to wield the axe swiftly have done so not because they loathe paying retrenchment packages. The fact remains that they have no capacity to do so and would not be having, in any foreseeable future, the capacity to do so as fortunes do not change easy during these deflationary times. If anything, the operating environment has been getting more difficult for these companies that are finding themselves on the wrong side of competitiveness. In some of the unfortunate instances, the employees would have gone for months without salaries and to therefore posit that they would get meaningful retrenchment packages without taking the route of forced liquidation of the company would be nothing more than expecting miracles.  

The onerous retrenchment procedures and awards that have been part of terminating employment in Zimbabwe have largely been viewed as punitive, insensitive and designed to serve the interests of the labour at the expense of employers. Indeed history has too many case studies on how companies assets have been stripped, attached and value destroyed on account of petty procedural missteps in handling disciplinary labour issues. Objectively, entrepreneurship and labour are all factors of production that cannot exits in isolation of each other and therefore they should be more or less equal and at best, complementary. Equally, it is very important to note that it is entrepreneurship that ignites first and only after that does it then attract labour. Therefore common sense will dictate that creating an environment that protects and allows entrepreneurship to flourish will inadvertently attract more labour and reward it competitively, more so with the help of the government that would be responsibly intervening in setting minimum wages and other conditions of service. 

Considering the mobility of labour in highly competitive environments, the employees become much better off and with that reflecting in the economy; more capital will flock in, igniting more entrepreneurship fires and creating more jobs.   

Although the policy makers and the general public may be having false comfort in people being employed, the fact that most employees are not getting salaries for months unending or are being underpaid is good enough a policy worry and reflects structural challenges in the economy. Continuing to go to work and accruing wages that would never be paid even after a company is liquidated is, from a progressive perspective, a worse evil than allowing the companies to terminate excess labour flexibly and carry labour burdens they can afford to pay. The emergency exit route that allows companies to give flexible and affordable notice to terminate contracts may therefore be the answer to nurturing an environment that will eventually create more jobs and up productivity for the economy. Surely this is better and more progressive than the rigid and arduous processes that, in pursuit of imaginary justice to please a select group, may eventually leave the whole country with corporate tombstones and a frustrated mass without jobs. 

The sad stories at Zisco, NRZ and CSC, among many other parastatals that are carrying huge unproductive labour burdens, have been among the major contributing factors that have seen parastatals making losses, as reported recently in some sections of the media, in excess of $470 million since 2012. And surely that is not a small leakage for a country that rakes in around $3.8 billion in government revenue annually.

Positive attitudes towards work and strong self-motivation are some of the major drivers of productivity in highly competitive labour markets around the world and there is very little doubt that these traits are in huge deficit among most Zimbabweans. The shambolic state of large sections of the private sector, municipalities, parastatals and government departments leaves very little room for one to argue otherwise. And it is no doubt that the committee set by the Ministry of Industry and Trade to interrogate factors negatively affecting the ease of doing business in Zimbabwe will look at ways to try and influence attitudes at the workplace to be more positive and hence productive.  With that background, it is therefore clear how the  emergency exit window that can terminate employment contract on notice will usher in a new wave of responsibility that will not only keep everyone on their toes, but will also ensure that the attitudes at the work place will become more centred towards productivity than anything else. 

Whilst the public outcry on the mass lay-off has largely been sympathising with and only singling out shop-floor workers and low level employees as the vulnerable casualties under the new dispensation, the silver lining in all this rests in the ability of shareholders and boards to crack whip on incompetent directors and CEOs. The corporate sector in Zimbabwe is replete with arrogant and largely incompetent private and public sector executives that, to a large extent, have been largely responsible for the mess that most of the struggling companies are in today. It is very amazing that at a time inflation is now in sub-zero ranges and foreign currency “abundant”, most companies are now going bankrupt when, ironically, the same companies survived hyperinflation for 7 years to December 2008.  It is therefore clear that the hyperinflationary environment insulated companies against costs and inadvertently, companies were on auto-pilot. 

The time is now to manage costs, innovate continuously and borrow responsibly. Those companies that have lost this balance are in big trouble and without blaming everything on the environment, the time has come to hold executives accountable and surely the ability and flexibility to sack on notice should completely change the leadership culture in this country and create better run institutions. The differences in management styles explain for example why other banks have collapsed and disadvantaged depositors and yet the same banking sector has other banks such as POSB that have weathered the storm and recently declared a divided to the Government, its shareholder. Blue Ribbon, on the other hand, collapsed whilst National Foods, in the same industry, has survived and is doing much better!

Yes, the deflationary environment is tough, treacherous and competitive but it always boggles the mind why, in this “stable” environment, there are more tombstones littered across the corporate cemetery than those got buried during hyperinflation. And therefore to blame executives and their boards for failing to steer their ships in such clear weather is not to err. On account of their poor judgment, incompetency and recklessness, it would surely not be asking too much to request executives to leave on notice empty handed, no matter the number of years they would have served and running it down the company.  Rewarding failure has never been a good practice the world over and for Zimbabwe to pay a blind eye to such precedents would be unfortunate. Even if, as a nation Zimbabwe decides to break rank and continue to create safeguards that allow for rewarding failure and mediocrity at the workplace, the world will still watch, turn its back on us and we will never have followers and admirers.  

It is instructive therefore that he Minister of Finance has been labouring the point on the urgent need for labour law reforms, whilst recently the Hon Kasukuwere, the Minister of Local Government and National Housing, was reported in the media lauding the emergency exit route in jettisoning non-performing local authorities bosses caught napping on the wheel. And for who he is, it is not surprising that Hon Kasukuwere can actually be among the first in government to exercise the option in setting the point straight. And that is not bad for the government.

The ruling, although creating anxiety for the government as job losses spike, will in fact give the government enough teeth and courage to implement structural reforms on salary and benefits for executives in public institutions in line with productivity. This is more true, whether right or wrong, for those that have been vehemently resisting slashing their salaries in line with the Cabinet directive to have salaries for public servants and parastatals bosses pegged around $6,000 per month. 

In summary, whilst unfortunate to the workers in the short term, the recent mergency exit option, on the basis of objective assessment, will, in the medium –to – long term, stabilise the economy and create an environment that will nurture more decent and stable jobs whilst providing a more sustainable economy and capital friendly environment that will attract more capital. The government should therefore be able to carefully consider not only the immediate benefits or losses, but to be more circumspect and make rational choices that will make Zimbabwe not only attractive to international capital, but as well promote local investment and protect the fabric of domestic investors. At a time the government is making efforts to court international investors, it should put more efforts to safeguard that which has been sustaining employment at a time international investors have shunned Zimbabwe on account of the sanctions. The current investors operating in Zimbabwe and struggling to stay afloat have sustained government with tax revenue whilst providing jobs for the masses over the years and therefore protecting this domestic industry and giving them breathing space should be of paramount importance. Although this has rendered trade unions less powerful, with labour law experts, arbitrators and HR practitioners that have been surviving on the lucrative disciplinary cases and disputes having to ply new trade, life has to go on. It’s the new age of dynamism.  And in its wisdom, the market carefully awaits government next steps that will signal whether it is ready to embrace reform the business environment in Zimbabwe.

Liquidity crunch in Zimbabwe - the convenient scapegoat

The issue of the liquidity crunch in Zimbabwe has now taken a toll on the economy. And in many quarters, the liquidity crunch has become the convenient scapegoat for any form of poor performance and indeed the policy makers need be wary of the likely changes in demographics that will rob the economy of the future workforce as couples, on account of the liquidity crunch, might be postponing bearing children.

Recently the market has been awash with information on the performance of the economy as the financial results of listed companies and banks have been coming hard and fast for the year ended December 2013. A perusal of that section that reads “Chairman’s Statement” on almost all results published has revealed that indeed the liquidity crunch has taken a toll on most of the companies’ performances. Just before dollarisation in 2009, industry complained bitterly about the state of the economy that made it difficult produce and remain in business. And indeed it was justified. Every other company explained its poor performance on account high inflation, shortages of foreign currency and of course the government administered price controls. There was consensus among industry back then that if these could be addressed, then industry would be able to retool, employ, produce, sell at a profit and be happy forever thereafter.

Unfortunately or otherwise, dollarisation in Zimbabwe cured all these challenges in one big swoop. Now that inflation is hovering worryingly below 1%, with that much needed foreign currency now being the local currency in a liberalised pricing and import regime, surely the conditions should be the most ideal for industry to be progressive. But alas, another unforeseen challenge has cropped up and that relates to the liquidity crunch. All of a sudden, every company that is failing to deliver values is heaping the blame on the liquidity crunch. And the results of listed companies that have been recently published bear testimony to this. From the like of Meikles, Hwange, Zeco, Border Timbers to almost every other company that published results, it has become impossible to miss the word ‘liquidity’ in the preamble or explanation on why the company would not have done the best under the current circumstances.

Indeed the thinking that the liquidity crunch has created many problems for companies in Zimbabwe is not a faulty one. The liquidity crunch has seriously dented aggregate demand and the cost and access to credit has been pushed beyond the reach of many. In fact, with the bankers having burnt their fingers on non-performing loans at a time their shareholders expect them to safeguard capital, more selective approaches are being applied in the credit granting process. The annual decline in private sector credit growth from 28.77% in February 2013 to only 1.5% in February 2014 bears testimony to banks responding to the attendant risks presented by the prevailing liquidity crunch.

Elsewhere, able governments have been making frantic efforts to ensure that the banks continue to provide credit so as to sustain production and preserve jobs. The term quantitative easing (QE) has become very popular since 2008. Basically QE entails the central banks printing loads of money and stuffing it on bank balance sheets to ensure that credit continues to flow in the economy. The now popularised quantitative easing programmes that have been adopted by most of the developed countries from 2008 to date have been a direct and persistent response to ensure that the credit markets don’t cease up. The US has been pumping $85 billion monthly onto banks balance sheets by buying toxic securities and bonds from banks since the onset of the financial crisis. This massive programme has since injected a whooping $4 trillion dollars into the American economy since 2007 and this has all been in an effort to save its economy from recession. 

In Japan, after 20 years of uncomfortable deflation, prices are finally rising thanks to relentless quantitative easing efforts. Although QE received applause in the early days, opinion is now growing that the programmes have extended much longer than anticipated. The hoards of cash being pumped into these economies may soon create structural challenges relating to inflation and may even promote the same reckless behaviour among bankers that triggered the sub-prime mortgage crisis in the first place.  The IMF, seemingly undecided on the how to advise economies on the way forward with regard QE programmes, recently issued a middle of the road opinion on the US QE program in its Global Financial Stability Report.

The situation is however different for Zimbabwe. Unfortunately because of the dollarisation, the policy makers have little room, if at all, to inject liquidity into the economy to give the banks more confidence and ability to lend. Although efforts have been made and continue to be made by government to arrange bilateral and multi-lateral lines of credit for the economy, the reality remains that lines of credit are more often very specific and have stringent conditions. Resultantly, most of the lines of credit from multi-lateral institutions that have been availed to Zimbabwe banks have remain largely unutilised.

To therefore expect that this country will access significant lines of credit that will have a marked impact on the liquidity position of the economy is probably expecting too much.  Equally important is to understand that lines of credit are just loans and therefore will eventually need to be repaid at some point. However considering the state of Zimbabwe industry and the fact that most of the companies are troubled, it remains highly unlikely that these lines of credit will, like QE, ease the cost and access to credit for the needy corporates. It is therefore no surprise that most of the bilateral lines of credit that may be dangled to Zimbabwe are “Buyers Credit Schemes” as correctly captured by the ENS Economic Bureau of India on the 30^th of March 2013 in reference to the proposed $400 million line of credit from India. These bilateral credit lines will mostly benefit the offerers as they will only consider lending to Zimbabwean companies that would be buying products or services from their country.

In essence, Zimbabwe’s capital account will remain unchanged and as fragile, whilst the current account will be deteriorate further. Zimbabwe will, in such instances, therefore be a net recipient of finished goods from these offerers of lines of credit, implying therefore that the attendant liquidity challenges affecting this economy will compound further even after accessing some of these lines of credit. During this era where every country is looking at ways of preserving jobs and building up foreign exchange reserves, it would be expecting the very unusual to get significant bilateral lines of credit that would, in essence, create significant jobs in Zimbabwe and assist in the production of final goods. 

It is not surprising therefore that the likes of SA and Botswana, whose economies have benefited immensely from the economic downturn in Zimbabwe, would be the last to organise lines of credit for Zimbabwe. These countries would rather create more jobs at home, grow their incomes and export goods and services to Zimbabwe than assist the revival of Zimbabwe industries that would compete with their export-oriented companies. At the worst case, they would rather import jobs from Zimbabwe to fill up their deficit areas than help Zimbabwe industries come back onto their feet. And indeed it should not come as a surprise that the $70 million line of credit from Botswana never materialised since the signing of the MOUs in 2010, whilst the inclusive government chase for a promised R1.5 billion line of credit from SA draw blanks. And surely one cannot blame SA or Botswana. Zimbabwe would have done the same if it were in either of their positions. 

All economies are driven by the selfish desire to create and protect their citizens’ jobs whilst at the same time doing everything necessary to grow their incomes. It is for this reason that bilateral and multilateral trade negotiations have always been burning issues, the reason why up to this day there is hardly any convergence in regional and global trade protocols. It therefore doesn’t come as a surprise that Russia joined the World Trade Organisation on 22 August 2012. Considering the foregoing analysis on the motivations around bilateral lines of credit, the thinking and expectation among Zimbabweans that significant lines of credit will, at one point, be secured to address the liquidity challenges is therefore erroneous.

And with this full information that the liquidity situation is less likely to improve anytime soon, to see companies continue mourning about the liquidity challenges is really sad. What is important is to understand that the liquidity crunch is a culmination of the sum actions of mostly the big corporates that borrowed money from the banks and failed to repay. A cursory look at most of these same corporates that are blaming the liquidity crunch for their misfortunes reveals that indeed they are sitting on huge bank loans they are struggling to repay in one way or another. A number of the failed institutions have so far gone down the drain with bank loans, in the process taking liquidity with them to the grave. The recently collapsed banks, on the other hand, have met their fate on account of non-performing loans, be they to insiders or otherwise. It is inconceivable how this economy, without the reserve requirement to restrain broad money supply growth in the face of high loan-to-deposit ratio and high interest rates, would experience a liquidity crunch of the magnitude being felt. Its is therefore clear that the private sector in Zimbabwe, on account of it having sucked $3,7 billion in loans from the banking sector and generally struggling to repay a significant proportions of these loans after having gambled in funding unsustainable business models, has been the major culprit in creating the liquidity challenges in this country.

Not only have some of the reckless big corporates sunk with banks money,  they have equally sunk with other creditors’ monies and the ripple effect on the economy-wide liquidity situation has been much wider than previously estimated. The likes of the big guns of yester-year such as Star Africa Corporation, PG, CAPS, Gulliver and so on have not only drained liquidity out of the banking sector, but have equally created serious challenges for their creditors and dragged them into the mud. It is reported that PG owed creditors about $16.3 million on 30 September 2013 and surely with such reckless abandon among the big corporates, the country’s liquidity position cannot be expected to remain favourable. Equally, the likes of Border Timbers, which ramped up its borrowings from $4.7 million in 2010 to $16.97 million in June 2013 at a time when its debt service coverage ratio was only 33%, depicts a worrying trend of how big corporates have been plunging into more unsustainable debt and in the processes compounding the economy-wide liquidity crunch. Whilst indeed it is very true that the liquidity crunch has been affecting the performance of the economy and in particular industry, it is important to understand that unless industry changes its mentality, the few inflows of fresh liquidity coming into the economy will continue to go to waste and the position will not improve anytime soon, creating a vicious cycle centred on convenient scapegoats.

NO QUICK FIX, THE ZIMBABWE ECONOMY IS IN BAD SHAPE!!

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. 

ZIMBABWE UNDERGROUND ECONOMY - THE INVISIBLE DRIVER OF THE ECONOMY

A glimpse at the dashboard of policy makers usually reveals a full host of tools and instruments they can employ to manage and guide the economy. It is so good and proper when the monetary and fiscal policy tools and/or instruments can detect the drivers of the economy and moderate them to avoid stagnation or overheating whilst balancing the broad objectives of maintaining price stability, promoting sustainable income growth and creating employment that narrows income inequalities. The Zimbabwe Revenue Authority year end report detailing the tax revenue heads contribution to the total tax revenue for 2012 reveals the shadowy underlying drivers of the economy that are beyond the control of most of the policy makers tools and instruments. And that creates a difficult economic management challenge for policy makers as the economy operates on more or less a self-determined auto-pilot mode. That probably explains some of the policy challenges we have been facing like, for example, the under performance of economy vis-à-vis most of the Medium Term Plan targets of economic growth, employment levels, saving and investment rates, among other targets.  

The Zimbabwe Revenue Authority reported that of the total gross revenue of $3.45 billion for 2012, Value Added Tax contributed the most at 33%, followed by Individual Tax at 21%, Corporate Tax 14%, Excise 12% and Customs 11% and mining royalties at 4%, among others. An analysis of these revenue heads' contribution to total government revenue reveals a worrying policy phenomenon. The fact that the individual tax is much lower than VAT contributions reveals a lot of structural deficiencies, mis-alignments and the existence of a strong and vibrant shadowy or underground economy that is pulling the strings, more or less like the Zambian economic management model where trade taxes targets for 2012 were 37.5% of total expected revenue –thus about 6.5 trillion Kwacha. Generally, aggregate VAT collections should be less than the individual tax collections because of the basic reasoning that VAT is charged on expenditures propelled by income that would have been taxed already. 

Considering that in Zimbabwe most basic food stuffs, exported goods and agricultural inputs and implements being zero rated, it should even make much more sense that individual taxes should be significantly higher than VAT. More often than not in normally functional economies, governments collect more of individual taxes than VAT. In South Africa for example, Individual taxes contributed 33.7% of the total tax revenue of R742 billion for 2012, compared to 25.7% for the VAT revenue head. In more developed countries like the UK for example, VAT contributed 15% of total revenue in 2009 compared to the direct individual tax at 29%. The fact that VAT and customs duty (trade taxes) contributes $750 million more that individual taxes points to the existence of a combination of significant external funding and a strong underground economy that is able to generate foreign exchange but going under the radar of the taxman, and indeed the latter can easily be explained by smuggling of minerals exports and commodities. 

The existence of external funding sources is always good to have for any country, and certainly the external loans from the likes of PTA Bank, Afrexim and so on have been handy in providing a window of finance for various corporates in Zimbabwe during this very important revival and recapitalisation stage in their business life-cycle. Equally and in addition to the cross-border loans, the remittances from the Diaspora, estimated above $250 million a year, have been forming a very important pillar is bolstering domestic demand and financing the current account. Although external loans and Diaspora remittances can explain part of this huge worrying disparity between individual taxes and VAT, the fact remains clear that these two sources of external funding are quite small and cannot even explain even a fifth of this wide variance. 

It leaves little doubt that smuggling of minerals and other commodities out the country could be one of the major sources of domestic wealth that is contributing to there being an amusing revenue structure for the government. Unfortunately this has been creating a host of challenges for the policy makers as the economy sets itself on some self-determined auto-pilot mode, rendering most of the policy tools and instruments less effective in determining the desirable economic course. 

What could even be more puzzling is the country’s balance of payment position. Zimbabwe has been running massive negative balance of payment positions since the early 1990’s. Combined with the large budget deficits that were being financed largely via seigniorage revenue, exchange rate management became a big headache for policy makers and a host of foreign exchange controls were instituted to manage the ever depreciating exchange rate. The dollarisation of the economy in 2009 resolved these exchange rate management challenges but the extent of the balance of payment position since then has been posing more questions than answers on  exactly what is it that could be financing it. The negative balance of payment position has cumulatively exceeded $7 billion since 2009. 

Although there could be merit in believing that the local banking sector has been financing this negative BOP position, the fact that only $4 billion deposits exists in the banking sector means that this claim is grossly over-exaggerated and cannot explain how this country continue to import more than it is generating from exports at a time the government is not in a capacity to print money. On the hand, there is not much in capital investments by foreign mining and manufacturing companies that could be explain how this country continues to afford importing more goods than it is exporting without the help of the government money printing press. Upon evaluating the foregoing and after netting off the potential influence of Diaspora remittances, a careful conclusion could be drawn that Zimbabwe is generating a lot of unrecorded exports that are financing the imports.

This foregoing analysis about the puzzling source of financing for BOP position mirrors equally the amusing government revenue structure where VAT contributes more than individual taxes. Of course there are other valid arguments that arise in attempting to explain why the individual taxes would generally be low in Zimbabwe. One such is the deep-seated high unemployment level estimated above 80% that has been a major policy challenge for a long time. This high unemployment level seriously undermines the ability of the taxman to raise more of the individual tax head. Although the unemployment rates have been historically high for the past decade, the dollarisation of the economy in 2009 ushered in new challenges for the many corporates that had survived hyper-inflation under the shield of implicit subsidies that emanated from the excessive seigniorage revenue accruing to the central government. 

The dollarisation and subsequent de-monetisation that wiped savings eroded these subsidies and with the corporates having to survive on their own in face of global competition, hard times began to bite. Today most big companies, save for a few in food and beverage industries, have had to downsize their employment levels. A sizeable number had to close and that has thrown a lot of workers onto the streets. Even the mining sector that looks glittery, all is not rosy.  Although mining sector raked in $1.86 billion in exports last year and is the biggest foreign currency earner for Zimbabwe, some big mining and mineral processing companies have not been spared the post-dollarisation challenges that have been affecting the rest of the economy. The likes of Bindura Nickel, Rio Zim and Zimasco, Monacrome and  Zim Alloys, among others, are having operational challenges that have definitely affected their ability to employ more or retain employees. 

This high unemployment level, in the absence of a comfortable social safety net where there are unemployment benefits, has created a vibrant category of self employment in many forms, from vegetable vending to small informal cottage industries. Although these activities generate income that sustains the livelihoods of many, the incomes are not taxable and even if they would register to pay taxes, it is most likely the majority of these would fall within the tax-free thresholds.  Whatever arguments can be put across to explain why the VAT collections are much more than the individual taxes cannot exactly be backed by known facts, save to make informed assumptions that the underground economy in Zimbabwe that is below the taxman’s radar is very big and vibrant and indeed has been the driving force behind the financing of the BOP position and all other trades as evidenced by the huge VAT collections. Considering that the economy is dollarised and that this shadowy economy generates foreign currency, it wouldn’t be further from the truth that the activities involve smuggling or under-invoicing of mineral and commodities exports. Until such time that such activities are exactly known to the policy makers and can be brought into the formal sphere, influencing key macro-economic variable would always remain a big challenge for policy makers.

A WASTEFUL ECONOMY - ZIMBABWE CASE

Those riding two-wheel bicycles know well that it is more stable and easy to manoeuvre when it is in good speeds of around 20 km/h. The moment the bicycle stops, only gymnasts will be able to remain on top of it without tipping over, at least for a very short while. The Minister of Finance, at a crucial moment in coming up with the national budget for 2013 and holding onto the controls of an economy that is losing stream after 3 years of strong growth momentum, has to be a gymnast to continue propelling it before it tips over. At such a crucial time where monetary policy cannot be employed to jump-start the economy because of the dollarisation, fiscal policy, through directing expenditure multipliers where they are needed the most, becomes the most important instrument to keep the growth momentum.

The signs that the economy is losing steam are glaring. Government revenue is growing at a worryingly decreasing pace since 2009, and so are other key indicators such as public and private sector consumption. Government revenue, which grew 141% in 2010, 25% in 2011 and expected at 16% for 2012, is likely to grow only 6% in 2013, if at all it grows. Both private and public sector wage growth have hit a plateau, dealing a worrying blow to domestic demand.

The weak and misdirected domestic demand is a huge cause for concern for the government that finds itself having a people with no capacity to drive growth from within. The options to boost domestic demand are few. Reducing interest rates, if it were at all possible, would not alter domestic demand that much because the majority of consumer demand and private sector investments are not bank financed as in most of the major economies around the world where tinkering with the interest rate levels impact on long-term aggregate demand. Reducing the taxation levels is not an easy option either considering that the central government finances are already in critical state and treasury cannot sacrifice present day priorities by gambling for long term benefits which no one knows if they will ever materialise.

It is very important to analyse domestic demand in Zimbabwe in the context of the balance of payment position. The huge trade imbalances are a huge cause of concern and impact on the effectiveness of domestic demand’s ability to drive internal growth. An analysis of the balance of payment position for manufactured goods for the six months to June shows that for every $1 worth of exports, Zimbabwe imports about $5.5 dollars worth of goods. A casual conclusion would therefore be that Zimbabwe’s consumption of manufactured foreign goods is sustaining more jobs in SA and elsewhere than at home. 

However, a more detailed analysis would show that this huge appetite for imported goods is killing more jobs at home that it is creating abroad! The poor productivity of Zimbabwe’s manufacturing industry employees arising out of inefficient production processes could be seeing Zimbabwe losing at least 10 jobs locally for every one job created abroad. The inverse relationship should be easier to comprehend. Zimbabwe has not been investing in technology and infrastructure upgrades for over a decade and that makes Zimbabwe employee productivity very poor compared to its well-off neighbours such as SA and many other global trade powerhouses such as China. 

Zimbabwe therefore needs more people to produce a similar unit of output than the Chinese and South Africans.  And for any one job that is created in an automated factory in SA due to our demand for imports, Zimbabwe could be creating 10, if not 15 at home to produce the same units of goods due of our outdated production processes. In China for example, the Asia Productivity Organisation estimates that industrial output that needed about 100 employees in 1990 now needs less than 20 employees to produce due to increasing productivity arising out of huge investments in technology and infrastructure. It is not Zimbabwe alone that is suffering serious job losses from the effects of trade. The Americans, according to the Economic Policy Institute, have lost 2.1 million manufacturing jobs between 2001 and 2011 due to the growing trade deficit with China.

Considering that Zimbabwe imports manufactured consumer goods of about $1.3 billion per annum, which is about 36% of government expenditure, the ability of domestic demand to therefore influence internal growth is very limited. Rather, the jobs are created in such countries as SA and so are the income multipliers. This therefore creates a challenge for the policy makers to attempt to anchor gdp growth on  fiscal expenditure multipliers, among other strategies. 

But is there real everyday evidence in the lives of ordinary Zimbabweans of this excessive dependence on imports? Tracing the day’s journey of a working Zimbabwean urbanite reveals a very sad picture of the true income leakages and jobs losses through imports. One’s day starts with a bath where the soap, towel, perfumes, toothpaste and toothbrush are all imported products from SA, including as well the water treatment chemicals for the water being used. The breakfast cannot be any better. Save for the locally made Dairibord milk and eggs from local suppliers, the imported sugar, teabags, cornflakes or bread made from imported flour are all signs of income leakages through imports. And of course 80% of all cooking utensils and accessories making breakfast in Zimbabwe are imported, from the light Chinese spoons to SA stoves! 

One’s journey to work is by means that is all imported, from the fuel in the vehicle to the tyres. The only thing Zimbabwean in any car on Zimbabwean roads is the person behind the wheel, and probably an exide battery and water in the radiator! Although Zimbabweans’ evenings are usually anointed with the staple sadza made largely out of maize grown locally, the last poor cropping season means most urbanites don’t even realise they are eating sadza made out of largely Zambian maize. The relish’s cooking oil, salt, spices and more ludicrous, the toothpicks, are mainly imported goods from SA. The foregoing analysis clearly shows how the everyday expenditures of Zimbabweans are sustaining foreign jobs than they are creating and sustaining at home. Save for the fresh air, sex and beautiful weather, Zimbabweans are surely spoilt for foreign goods and indeed the domestic manufacturing industry has failed to provide competitive alternatives. This explains the reason why the unemployment rate, income inequalities and poverty levels have remained high in Zimbabwe notwithstanding the economy having been registering impressive gdp growth since 2009.

Policy makers would need to be decisive at such times to ensure that the economy changes its course of direction. The government, with such as structure of domestic demand that sustains jobs abroad and having no capacity print money to directly influence growth in key areas, can only use its expenditure targeting as one very important driver of growth. But when faced with the current scenario where more than 70% of government expenditure goes towards recurrent expenditure, the expenditure will continue to be directed towards imports and indeed the economy will continue losing steam. Therefore what policy alternatives exist in ensuring that the government fiscal multipliers drive growth from within? The ongoing budget consultations should strive to provide answers to such.