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. 

LIQUIDITY, LIQUIDITY – WHAT A CRUNCH!

The happenings on the economic front in Zimbabwe are reminiscent of horror movie scenes. Every other policy or public official announcement on key aspects, save for inflation figures, points towards more disaster. The government revenue collection figures are very disappointing and having been missing its revenue targets by about $30 million every month this year, the government is fast running broke. On the back of unemployable expenditure reduction and switching alternatives to manage our huge appetite for imports, the trade figures show that the negative balance of payment position is shooting through the roof and unless the figures are incorrect, and indeed they could be, managing liquidity and creating jobs will remain problematic for a long time.  

Statistics from the banks are revealing household indebtedness that is rising at alarming pace! And worse, even nature doesn’t seem to sympathise as below average rainfall is forecast for the 2-012/2013 agricultural season. The biggest of all, the liquidity crunch, does not seem to be ameliorating and has reached worrying levels. It is now being blamed for everything wrong in the economy, just like the shortage of foreign currency, price controls and high inflation were the scapegoats for everything wrong prior to dollarisation in 2009. If Zimbabweans were like the Greek that have taken full time jobs in street strikes and demonstration against austerity measures being undertaken by its government, by now we would have been fed up of demonstrations against the liquidity crunch. 

Save for a few giants in mining such as the diamond, platinum and gold mines, and a handful of companies focusing on fast moving consumer goods and services such as Delta, Innscor and Econet and a few isolated others, the liquidity crunch has had its fair share in battering the economy into bad shape and signs of worse things to come are there for everyone to see. The mid-year results from the banking sector, which are generally the barometer to gauge the healthy state of the economy, are far less impressive and reveal a troubled economy underneath that needs more collective efforts from policy makers and politicians than before to steer it into the right direction.

But sustaining the argument that the liquidity crunch is the cause of most the challenges facing the economy is very flawed, at least from a fundamental perspective. Rather, it is important to note that the liquidity crunch is a product of largely bad decisions by economic agents that have been draining away the massive liquidity flowing into the economy since dollarisation.  There is abundant evidence to prove that the overall nominal liquidity position in the economy has been improving significantly since dollarisation and the structural economy-wide rigidities that make the liquidity untenable needs more of policy coherence and meeting of minds among the policy makers and politicians than focusing solely on liquidity as if it’s the most important economic variable.

The growth in broad monetary aggregates, a good proxy in measuring the general liquidity position, has been impressive since dollarisation in 2009. Banking deposits, which stood at $475 million in April 2009, leapt to a billion dollars six month later in October of the same year. By December of 2010, deposits stood at $2.5 billion and presently there are estimated around $4 billion. An informed conclusion would therefore concede that broad money supply, and indeed private sector credit expansion,  have been skyrocketing at a break-neck speed.  

Another indicator that can shed more light on the directional aspect of the economy-wide liquidity position is the cost and structure of credit in our market. In line with the massive growth in the quantum of liquidity in Zimbabwe since 2009 and rising loan-to deposit ratios, the cost of credit has been coming down sharply, from the highs of over 100% per annum just after dollarisation to the current rates of around 25% per annum. Equally, from a structure perspective, the tenors of credit facilities being offered in the mainstream financial services sector has improved markedly from just 3 months, which was the norm in 2000-2010, to around 1 year in best case scenarios presently, and indeed much better for mortgages finance. All these aspects clearly buttress the notion that the liquidity position in the economy, by and large, has been improving markedly.

On the other hand, evaluating the behavioural aspects of the lenders and borrowers can equally give a good picture on the status and transition of the economy’s overall liquidity position. An economy that is enjoying considerable amounts of fair and easy flowing liquidity is usually characterised of banks lending expansively, whilst borrowers, because of the existence of easy credit, pile up loans quickly and unreasonably. The US sub-prime mortgage market crisis of 2008 has its root problems from this phenomenon. It is much easier to draw a casual link of similar nature in Zimbabwe.

The increasing monetary aggregates since 2009 tempted and indeed misled both lenders and borrowers that the ‘good times would roll forever’. The resultant increasing bank loan-to-deposit ratios, which leapt from 33% in April 2009 to a peak of 87% in December 2011, provide evidence of the lending over-drive by lenders and on the other side, the speedy gearing or indebtedness on part of the borrowers. This reason behind this is quite easy to comprehend though. The abrupt dollarisation of the economy in February of 2009 wiped all the working capital of domestic companies and the need to borrow became so urgent and the only way to survive was through borrowing not only to produce, but equally to pay wages and salaries as the companies had lost everything to inflation, save for physical capital. Yes, the massive gearing of balance sheets by companies was for a noble cause since the dollarisation, without international support, created havoc and indeed the banks need to be applauded for having been lending generously. But, still, not sufficient restraint was employed by the borrowers and lenders.

Therefore the liquidity crunch which has been building up in the economy is in actual fact, emanating from the reality that the many borrowers have lost money on their balance sheets and cannot repay the banks to enable continuos flow of credit in the economy. The problem, as has been explained before, is easily traced to the avalanche of liquidity flowing through the economy since 2009 which, unfortunately, intoxicated weak business models via loans they accessed from banks. The swelling liquidity rivers of life that borrowers jostled to drink from have unfortunately turned to become the same rivers that devour most of those that recklessly drank from them. And the messengers of court and deputy sheriff, who are the undertakers and executors of estates of those that get intoxicated by drinking from these assumed rivers of life, have been very busy. Indeed if these were a business to be listed, the share prices and certainly the dividend payouts would not disappoint for the next three years or so!

Policy makers have attempted to intervene in the crisis. There has been talk of ZETREF and DIMAF funds to improve liquidity and revive financially distressed companies. Inasmuch as it is a good policy to ease pressure off the balance sheets of these distressed companies by pumping cheap and long term money into these weak balance sheets, the fact that the funds are targeting financially distressed companies means that the money is most likely to be lost. One of the most plausible consequences of this intervention is that the companies that will access these loans will simply re-finance their existing loans and at the best case, remain in their current situation awaiting bankruptcy. And for a broke government that is battling to balance key emotive day-to-day survival priorities with such economic interventions, the execution of such decisions will be slow and very painful, if at all they live to be executed.

The foregoing analysis clearly points out that the fundamentals of our economy are quite bad and it is difficult to ascertain the amounts of liquidity that would need to be pumped into this economy until it starts to tick sustainably. Most of the business models that companies are running on are beyond their sale-by date and no matter how much money is pumped into their balance sheets, they will continue to struggle. Given these many liquidity-sapping corporate dinosaurs that litter the economic landscape and the fact that Zimbabwe is dollarised and has no capacity to quantitatively ease the markets, the liquidity crunch is definitely going to stay for another long, long season.

Elsewhere, quantitative easing seems to be the only consensus in stimulating growth that has become very elusive. US Fed announced on Thursday last week that, in the name, letter and spirit of quantitative easing, would start pumping $40 billion monthly in the economy buying mortgage backed securities for an indefinite period until it starts witnessing improvements in the labour market. And interest rates would be kept low until mid 2015! 

SETTING UP OF SMEs STOCK EXCHANGE CRITICAL

The establishment of an SME Stock Exchange has been a subject of debate for a very long time. The policy makers, as usual, have paid little attention to it, rather preferring not to be seized by ‘small issues’.

Evaluating the path the economy has taken since 2009 provides a fresh understanding of why the Ministry for Small to Medium Enterprises and SME business associations such as ZNCC need to devote much attention towards creating market-based funding solutions for SMEs. And equally important would be the need for policy makers to understand that SMEs are not only the market stalls at Mupedzanhamo, Siyaso, grinding mills or other small groceries,  clothing and cellphone shops operating across the country. Yes, this segment is important as it captures the “S” part of the SMEs and provides employment and convenient service to the economy which the big corporates can never match. But the “M” segment equally needs an enabling platform to raise capital as this sector has capacity to generate exports and sustain vibrant labour force.

A closer look at the happenings on the Zimbabwe Stock Exchange, the capital raising market for the big guns in town, shows that indeed much more needs to be done for the SMEs in a market where even the big corporates are struggling. Raising fresh equity has been a nightmare for the ZSE listed companies. About 15% of the ZSE listed companies embarked on rights issues since dollarisation, and save for OK Zimbabwe’s and one or two others, most of them were not successful as anticipated. Some planned right issues for CFI and Steelnet for example, could not even take off as shareholders understood, albeit lately after having shown intention to do so, that they had no money to follow their rights. A poorly subscribed African Sun’s $10 million right issue left some underwriting bank in serious trouble as it found itself with a commitment it could not fund.

The answer behind the poor subscription of the rights issues is found in our history. Current local shareholders of companies in Zimbabwe had their savings and part of capital wiped out when the economy dollarised in 2009. One can surely not fault them for failing to inject fresh equity into most struggling companies. Amid the hyperinflation, it was almost impossible for corporates to have savings in foreign currency. The many exchange control regulations that existed then made it almost a criminal office to have savings in foreign currency. One’s holding of foreign currency could not escape criminal charges relating to externalisation, illegal possession, failure to acquit export earnings or simply accusations of economic sabotage. Hence all honest Zimbabwe businesses and shareholders lost significant portions of their capital to inflation. The need to recapitalise came immediately after dollarisation and expecting existing local shareholders to inject fresh capital into their struggling businesses is a very tough call. They simply do not have the money because the operating environment and dollarisation made it mathematically impossible to defend not only capital positions, but more importantly, cashflows.

The debt route became the most obvious way towards funding businesses and indeed today we see most companies struggling with debt acquired post dollarisation. At least the listed companies have distinct advantages over the unlisted ones in accessing credit. To some extent lenders accept the shares of listed companies as collateral and until lately, the basic belief, among lenders was that listed companies are blue chip and could even be lent money without collateral. Most of the credit in the market was therefore flowing towards listed companies at the expense of SMEs. Most SMEs therefore find themselves on the peripheries of the credit markets where high cost of debt, stringent collateral demands and very short tenors are the rules of the game that have been affecting their ability to grow businesses beyond hand-to-mouth.

Belatedly, the deteriorating balance sheets of listed companies that have resultantly exposed most lenders in the market has changed market perception about the bankability of the SME sector. Most lenders have burnt their fingers on lending to listed companies, more so when they held the shares as collateral.  CAPs, Steelnet, Rio Zim among others, are clear examples of listed companies that have taught lenders the basics of lending. These lessons have opened up opportunities for SMEs as most banks are now focusing on SMEs as a more attractive and manageable asset segment.

Notwithstanding the shift in focus from the lenders to target more of SMEs, the debt route is not the most optimal funding solution for SMEs. Equally important to note is that the stringent collateral requirements imposed by the lenders means that some SMEs with good business models will fail to take off as they fail to access credit. For example, raising $100,000 is extremely difficult for a small or medium sized company in Zimbabwe. With lenders on average requiring collateral twice as much as the value of the loan, this level of borrowing requires immovable assets in excess of $200,000. This figure is not small for what would be called SMEs in Zimbabwe and therefore most of the SMEs, no matter how good their business models are, still fail to access credit in the market. For the few lucky ones having the collateral, the loan tenor is usually shorter than desirable as most credit facilities are at best 6 months.

The working capital cycles therefore become seriously compromised and most SMEs in manufacturing and sourcing inputs from as far as China will find it almost impossible to repay their loans on time. It is therefore not surprising that, notwithstanding the lenders seeking stable asset classes in lending to SMEs, foreclosures rates on SMEs are increasing at an disturbing rate. Almost every other day one reads from the local newspapers sizeable numbers of properties going under the hammer as the Deputy Sheriff auctions properties for those who would have failed to repay their loans with lenders.

The SME model is therefore under threat. A platform in the form of an SME Stock Exchange has to be created where strong SME models can tap into the market and raise capital. From a logical perspective, investors with surplus cash would most likely create value when investing in smaller and efficiently run companies than most of the ZSE listed companies that have big inefficient and rigid operational structures that are no longer relevant in this environment. The market has sufficient capacity and depth to support an SME Stock Exchange, with the big pension funds such as NSSA needing rather to focus on supporting IPOs of small efficient companies than keep sinking money in right issues of dead listed companies that will not resurrect.  Some few honest listed companies have been honourable enough to say the truth about how difficult the operating environment has become and discontinuing operations. 

Chemco, notwithstanding the parent company having reasonable access to funding, is closing some of its manufacturing business units because they cannot produce at competitive prices. It will instead start ‘trading’, buying from low cost producers abroad and selling locally. Apex has shed some of its foundries amid viability concerns. Other stubborn listed companies unwilling to face reality and cut losses short much earlier struggle on until the day they will most likely collapse, but in spectacular fashion. When listed companies with relatively easy access to debt are finding it tough, the writing is therefore clearer on the wall that the SMEs are likely to struggle much more.

The policy makers, for being what they are, will never champion the formation of the SME stock Exchange. Such associations as the ZNCC have to seize call and lobby aggressively with the relevant ministries to ensure that the setting up of a secondary bourse comes to being a reality. Of course it remains fact that merely raising fresh capital from the stock market is not what will make SMEs vibrant. A host of all other challenges such as poor public infrastructure, weak domestic market, power challenges and inefficient supply chains, among others, will continue to pose challenges on the competitiveness of the SME models. But nevertheless, an efficient platform has to be in place for SMEs with viable models to tap in to the capital markets and expand their businesses. And it is the creation of a secondary bourse will achieve that for a sector that feels neglected. 

Soft Infrastructure Critical For Success of Small Scale Miners

Harare Shamva road is largely a quiet road when compared to other busy inter-town highway. Those that drive down the road will, with no doubt, enjoy the pothole free highway. Driving with a relaxed mind, one has good chances to marvel at some beautiful hills and pollution-free man-made small dams that adorn the snaking road.  

About 80km from Harare towards Shamva, there is some activity to the right side of the road where Shamva gold mine has been operating for many years.  Just across Shamva gold mine, about 4 km away in a very bad dusty road, lies the famous Tafuna Hills. From the main road, Tafuna Hills looks serene and just like other ordinary hills in the area.  The very steep slopes and ordinary looks would, under normal circumstances, not entice a person driving down the highway to cast a second glance. Rather, the collapsed Shamva gold mine shaft that is visible from a distance may be a more intriguing attraction.

Tafuna Hills however offers much more than what meets the eye from a distance. A snaky and gullied dust road from the highway takes one to the foot of these hills and, all of a sudden, there are signs of concentrated human settlements, including shacks.  A further drive up the hills would herald the start of small scale gold mining activities. The many small scale miners that form part of the envied Tafuna Hills mining community have one thing in common – good ore yields around 8 grams per tonne and lack of mining equipment. The latter is a big problem.

The small scale miners, working in groups popularly known as syndicates, use hammer and chisel to dig into earth in pursuit of lucrative gold reefs, largely known as ‘bandi’. Very few have capacity to hire or buy compressors to drill and blast the very hard blue stones that characterise the area. Equally, an even fewer number has slurry pumps to pump out water from the shafts as they encounter more underground water the deeper they go. With this very manual and painful way of extracting gold ore from underground, many of these small scale miners end up hauling out, at best 4 tonnes of gold ore per week. The average weekly earnings therefore converge around $180 per week for most of the syndicate partners. Considering the very low alternative returns from other rural activities such as farming, this reward for labour is very high and addictive that it keeps attracting the small scale miners to shed sweat in the unsafe underground work environments. This tale is common for most small scale gold miners across the country. 

Small scale gold miners, whose definition expands to capture as well these non-mechanised producers, contribute about 50% of the total gold production in Zimbabwe. Zimbabwe gold exports rose to $627 million in 2011 and may surpass the $900 million mark in 2012. The sector is therefore very crucial after diamond and platinum mining and the government needs to do much more for the small scale gold mining sector to transform its image and improve output. A number of small scale gold mining associations have been regularly calling on the government to come up with schemes that provide funding and equipment to the small scale miners. 

The government has a history of bailing out big corporates and farmers by giving concessionary credit facilities and equipment. The small scale miners believe they deserve the same treatment because of their unquestionable contribution to GDP and exports.  These calls are genuine and seek to address the inconsistencies on part of the government market interventionist policies. But a more objective assessment of the small scale mining industry reveals that they do not need active government assistance in terms of cash hand-outs and equipment. Rather, the small scale miners need to lobby the government, through the Ministry of Mines and Mining Development, to establish efficient soft infrastructure that allows the private sector financiers to find reason to finance the rather lucrative sector. 

The mining registers at the Ministry of mines are not easily verifiable and involve huge hassles in ascertaining ownership. It takes a lot of time to establish who owns what claims, and equally, the claims are not easily transferable. The Ministry of Mines and Mining Development needs a very efficient mining register system that allows easy cross-referencing,  traceability and transferability of ownership. The absence of this soft infrastructure at the Ministry of Mines has been a major source of conflict in many mining transactions and leaves the system subject to manipulation. The Zisco-Essar deal is one such deal that has been subjected to controversy and the root cause can be easily linked to absence of efficient soft infrastructure that allows easy verification. The recent Kwekwe gold rush that grabbed headlines got more exciting not only because of the easy find, but because a number of people had ‘genuine’ certificates proving legitimate ownership of the said gold claims. 

The Zimbabwe Government and ACR disputes over diamond claims in Chiyadzwa can as well be easily linked to inadequate information systems at the Ministry of Mines. And there are many other disputes revolving around ownership of claims that emanate from the inefficient soft infrastructure that exists at the Ministry of Mines and Mining Development. 

Private sector financing mechanism thrives mainly when the underlying collateral is marketable and not easily susceptible to disputes over ownership. The inability of the small scale miners to attract private sector funding is, to a large extent, a result of their inability to prove undisputed ownership of their claims. Zimbabwe has a thriving small scale mining sector and there is no reason why the mainstream lenders should shun this for other sectors of the economy whose prospects may not be even as bright as those of the small scale mining industry. 

The government recently hiked the mining registration and renewal fees to deter speculative holding of claims by individuals and corporates who, according to the government, are disrupting the intertemporal distribution of natural resources wealth. The overall objective is right, but the government has to equally consider sanitising the soft infrastructure aspects relating to ownership verification and transferability of mining claims so that the private sector finance mechanism can easily find small scale miners a good market for lending. 

The local banking sector, sitting just around $3.3 billion deposits and riding on a precarious loan to deposit ratio of around 81%, has no meaningful capacity to finance big mining transactions off the domestic balance sheets. The big mining projects have always been and will, for some time, continue to rely on offshore financing arrangements to fund their requirements. The small scale miners are very much localised in nature and have not capacity to attract off-shore funding and therefore would need to rely on the local banking institution for funding. Expectations by some of the small scale miners associations that the government should provide sustainable funding and equipment purchase schemes for their members are justified, but far fetched. 

Yes, the government has done that before but the scale, reach and success remains very limited relative to the demands of the small scale mining industry. Working towards attracting domestic financiers to finance small scale miners should be the utmost priority for the government and small scale miners associations in search for a sustainable funding solution. And invariably the issue of soft infrastructure becomes the most important aspect that needs to be addressed by the government, without which the small scale miners will remain largely without access to finance.

Small is beautiful after all!

Zimbabwe’s big corporates have hit hard times. Profits are hard to come by, a clear sign that the high gearing levels will persist much longer than desirable. About 36 percent of the listed companies made losses last year, and this year there is no evidence that the situation is going to be much better. In any case, the outlook for this year is much worse than was much anticipated. Cumulative corporate losses have surpassed $710 million since 2009, a frightening figure considering the very low GDP of about $7 billion and the fact that these losses came from companies that contribute less than 10 % to GDP. This revelation should be a clear sign to policy makers that the growth path of this country cannot be pinned on the big corporates alone.  The German and Chinese growth models are now an envy of most countries the world over, and the Zimbabwe government, coming from hyper-inflation, needs to consider the Ministry of Small to Medium Scale Enterprises as the pivot from which sustainable long term growth of economy will emanate from.

A recent report from China reveals that 90% of the private sector businesses that contribute 70% of employment are family owned enterprises. They further contribute 60% to GDP growth and about 50% to tax revenues. The German Mittelstand industrial model, based on small SMES, have provided anchor to the German economic model and today German is one of the strongest economies in the troubled Eurozone. The case for the small companies to champion growth is easy to follow. The SMEs are more efficient in terms of operational structures and can produce, with minimal equipment, goods at lower per unit costs than the big behemoths. 

This past week I visited over 10 SMEs in Chinese light and heavy duty equipment manufacturing companies in the Shanghai and Haining industrial areas in China. I have come to understand the most important dynamic that is at the centre of successful SMEs – thus the ability and flexibility to operate efficiently with minimal multi-skilled labour force and of course optimal investment in equipment. Eight of these companies, with sales averaging around $60,000 per month each, are all export oriented and have never supplied their domestic market notwithstanding operating in very humble premises and committed multi-skilled labour force.

Because of the fierce competition that exists within China itself, most companies thrive to provide goods and services at the most competitive price in order to remain in business. China, which exported good worth $365 billion to the USA in 2010, attributes its success, to a large extent, on the resilient small companies that have not only managed to have an influential depressive role on the national wage rate, but have equally provided the most competition to the big established companies in China. This is the competition that has seen Chinese companies reaching out to the global market for survival and China has since surpassed Germany as the world largest exporter. For the first quarter of 2012, Chinese exports of goods stood at $430 billion.  

Coming back to our domestic investment markets, it is the end of the first quarter and about 46 out of the 76 companies listed on the Zimbabwe stock exchange are trading below their 01 January 2012 prices. Considering that about 36% of the companies listed on the Zimbabwe stock exchange made losses as of 31 December 2011, it therefore becomes comprehensible why the market sentiment is very negative about the prospects of the Zimbabwe Stock Exchange in generating value for investors. There are, of-course, pockets of optimism in the economy but generally when more than a third of listed companies fail to generate positive earnings in an economy that is bullish about recovery, then it is a good cause for concern for investors. 

Notwithstanding that most of the companies are trading below their historical P/E ratios and at about a third of the average P/E ratios of their regional counterparts, the bearish trends are expected to characterise the Zimbabwe Stock Market for the greater part of 2012. The current government of national unity in Zimbabwe has differed over a number of key policy aspects, with the discord growing louder as the talk of elections this year gets momentum. The stock market is the most timid of all investment markets. Its fortunes swing on the extremes of the information continuum. It has the most efficient and equally as well, the most irrational way of transmitting information into pricing of stocks. 

The bickering policy makers in the government of national unity have been sending conflicting signals over the management of the economy. With the talk of elections gathering momentum, the differences are going to be getting sharper and to some extent, will be deliberately over-exaggerated as policy makers wear their political hats and toe party lines religiously in order to retain their ministerial and more importantly, party positions. The Zimbabwe stock market performance for 2012 becomes more sentiment driven under such circumstances and will therefore most likely remain bearish.

The money market average yields during the first quarter of the year, around 15% per annum, are most likely to remain attractive for the greater part of the year. From the market data coming through, banks are most likely to be more liquid this year than they were in 2011 considering that banks controlling about 34% of the loanable funds in the market have indicated that they are engaging in massive slowdown in lending. This move should, under normal circumstances, leave more liquid assets on bank balance sheets and may reduce the banks’ appetite to engage in aggressive funding of short positions that had been keeping the money market in Zimbabwe very lucrative for the past two years as banks competed for scarce liquidity. Notwithstanding the above that points to more liquidity likely to accumulate in the market, the money market is forecast to generally remain in deficit, which deficit, when compared to the aggregate demands of industry, will likely sustain yields of above 10% per annum for investors on the money market.