Murmurings of disquiet in policy corridors

Murmurings of disquiet in policy corridors

That the current exchange rate regime in the market is not sustainable is beyond doubt even for the policy makers in their private meditations. Just before he was sworn-in, the new Minister of Finance boldly stated his intentions to phase out the bond notes by December 2018. Just coming in from the private sector, he had not carefully thought of the consequences of his emotional utterances, neither had he mastered the art of differentiating policy statements from personal opinion. And ever since those utterances, including his recent statements during the USA trip that he would rather see the bond notes off sooner rather than later, the bond note has taken a huge beating. It has nosedived 20% in two weeks.

The chasm widens

At a time when banking deposits of about $6.5 billion were being thinly supported by official nostro and cash balances below $300 million, the RBZ introduced bond notes in November 2016. The motive was to physically monetise the chasm between electronic balances and the real US$ in cash and nostro balances. The size, extent and reach of the informal sector in Zimbabwe, compounded by the reality that the majority of Zimbabweans live in rural areas with few electronic payment platforms, created the urgent need to find physical money to support the $6.5 billion deposits then floating in the market without nostro or cash back-up. And the bond note was born!  

Unfortunately that chasm between the electronic monetary balances and the real nostro or US$ dollars supporting the same has continued to widen. With banking deposits now sitting at about $9,5 billion and being supported by virtually nothing meaningful in the nostros, the chasm is huge for a country whose current account deficit has averaged $1.8 billion per annum since 2010. Although officially the RTGS balances and bond notes are 1:1 with the US$, the market realities have created huge premiums on the US$.

There is abundant evidence that broad money supply is growing at an unsustainable rate. Driven largely by fiscal excesses and equally culpable, a banking sector that has been on lending overdrive, at its peak clocking loan-deposit ratios of 87% in 2011, the stock of money is increasing much faster than GDP growth.  For the past four years, cumulative GDP growth has been only 7.8%, yet in just one year, broad money supply grew by 40.8% June 2018. This confirms that there is a significant amount of unproductive money being generated in the economy which is not linked to productivity and that is a source of instability on the asset and goods prices in the economy. In fact, the continued depreciation of the exchange rate reflects this, probably the reason why Prof Mthuli Ncube intended to announce his arrival with a fiscal shock.

The sources of broad money supply are, predictably, the usual suspects. Government debt assumption alone for poorly run parastatals has injected over $2.3 billion into the economy through issuance of TBs to creditors of RBZ, NRZ, ZISCO and CAAZ, among others. On the other hand, significant treasury bills issuances to fund the high budget deficits and the imprudent use of direct government overdraft facility at the RBZ have all combined to create a liquidity swamp in the economy.

Evidence is everywhere that there are excessive amounts of unproductive money being generated in the economy, and the performance of the banking industry provides some insights. On the back of stagnating economy, declining loan to deposit ratios and RBZ capped lending interest rates, the banking industry has surprisingly been reporting amazing record profits! More than anything else, it’s a sign that broad money supply is increasing unsustainably, and in real terms, the bankers know very well their profits count for nothing and they will lose most of it to inflation. History has taught us before, and Venezuelan banks can confirm it now, that lenders lose value the most when inflation spikes. And the banking sector in Zimbabwe knows it is now a moment of when, not how.

Bond notes are currency

The continued growth of bond notes has created policy challenge, and options of phasing out bond notes have been dominating policy utterances. The policy admission is that the current exchange rate of 1:1 is not sustainable and is creating huge distortions in the market, resulting in the RBZ assuming a pivotal role in the allocation of foreign currency. These RBZ gymnastics have, undoubtedly, kept inflation at bay. Inflation rate for August at 4.83% indeed confers a worthy gymnastic medal to the RBZ in the face of such challenges. However, in its private lamentations, the RBZ knows very well that this is not sustainable and a solution to the fiscal excesses has to be found urgently. 

Unfortunately phasing out the bond notes by end of December, though possible, is not an option, neither is it necessary.  The fact that virtually all bank deposits are only convertible for local purchases means, by observation and deed, that the RTGS balances are already a local currency in the electronic form, with the bond notes and coins being its physical manifestation.  No single depositors can withdraw US$ from the bank at will or make international payments from their bank balance unless they get allocated foreign currency under a special arrangement from their bank. 

This confirms, unambiguously, that the $9.5 billion deposits in the banking sector, though technically considered US$, are practically electronic bond notes. To phase out bond notes therefore means phasing out all the monetary balances in the economy and replacing them with some other currency.

From the strict sense and definition of currency, the bond notes are already another currency within the current multiple-currency basket. There would, therefore, be no logical reason to scrap it and replacing it with ‘own currency’ because it is already our own currency!  

The current illusion that we have US$ as the anchor currency is confounding even the very policy makers that are trying hard to believe it. One thing is certain though, and its that sooner or later, the government will need to allow market forces to determine the exchange rate. And that point will mark the confirmation or crystallization of the loss of value for the RTGS balances that have, over the years, been thought to be US$.

Rand adoption – Catch me if can

The other option to deal with bond notes as proposed would be the adoption of the Rand. Granted, there are a lot of technicalities and conditionalities, but at the end of the day, something has to happen to the $9.5 billion in banking deposits today to be convertible to Rands. One certain outcome is that the $9.5 billion deposits cannot be all convertible to Rands at the US$ market exchange rate because our deposits they are not US$ in the practical sense. Therefore, only that which is freely convertible, thus the nostro balances and US$ cash, will only be able to be converted to Rands without loss of value.  The rest of the monetary balances, thus about $9.2 billion, can be convertible, but at a huge loss.

The previous demonetization from the Zimbabwe dollar to the US$ in 2009 can give us a good perspective into what can possibly happen when adopting the Rand. At the time that demonetization was conducted in 2015, only US$$20million was set aside to compensate all banking sector deposits as at 31 December 2008! The loss of value was catastrophic to say the least. To imagine that the whole country, including government, individuals, corporates and pension funds had money only to the equivalent of US$20million as at 31 December 2008 is not an amusing joke. Yet, when evaluated in the right context, it reflected the basic fact that the government has no financial resources, in USD terms, to compensate the depositors and therefore had to do with what was possibly available at the time.

Adopting the Rand will suffer the same fate. The basic fact remains that the central government has no foreign exchange reserves of its own to use in demonetizing the $9.2 billion deposits in a way that will result in depositors preserving the value of their money.

Therefore, without any doubt, the adoption of the Rand will see massive value erosion on the current stock of money in the economy. Of course options exist whereby government can auction, to the highest bidder, its valuable assets such as Netone, POSB, Agribank and so on to raise foreign currency to subsidise the demonetization exercise to reduce the conversion losses. That said, one thing that is definite is that such wholesale privatization will not be able to raise $9.2 billion, even a tenth of it.

There are other options such as securing external loans to fund the demonetization exercise. Still, the fact remains that no financier would be willing to fork out $9.2 billion to finance a demonetization process that, on its own, does not guarantee that the adoption of the Rand will result in Zimbabwe generating surplus on the current account in order to service this debt. In any case, the country already has about $11 billion in outstanding external debt that has been long overdue. Therefore. it is possible to adopt the Rand, but with consequences on loss of value to depositors. Of course the deposits already do not have the value they purport to have, but the wholesale conversion will precipitate and crystallise a steep loss of value.

Loss of value – A fact of life

Whatever currency regime the policy makers will opt to pursue, one fact remains still that there is going to be loss of value on the stock of money in the economy for others, whilst others will create immense wealth and savings.

The government, which is the biggest borrower in the market with TBs of about $8 billion floating in the market, will be the biggest beneficiary of the currency changeover or whatever will happen to the bond note. As the exchange rate continues to depreciate, the real value of debt and indeed government indebtedness will continue to fall. It would therefore be is in the best interest of the government to see a real exchange rate that reflects the true value of our local currency. This, inadvertently, whittles down the real value of domestic debt.

Prof Mthuli Ncube and his counterpart, George Guvamatanga, know pretty well that the government has no capacity whatsoever to pursue a currency regime that will obligate it to settle, in real USD value, its current domestic debt obligations. Therefore, whatever currency regime the policy makers will settle for, it will be one that recognizes that the current stock of money is not US$ and with that, loss of value will be crystallized for those with bank balances whilst the borrowers will heave a huge sigh of relief.

Back to you, Mr President!

The President has tackled many issues boldly since he assumed office, including the prosecution of high profile corruption cases and appointment of newer blood in ministerial positions. One issue sticking out as a sore thumb is the currency issue. Bold decisions outside the politburo and central committee will need to be made to tackle the currency issue. It will make him unpopular in the party circles for a year or two, but in the fullness of time, he will be remembered as having departed from the Mugabe rhetoric that put politics ahead of the economy. In Mthuli Ncube and George Guvamatanga in the Finance Ministry, he has a good pair of honest and pragmatic hands that can deliver the economic stabilization program that eluded the previous administration for almost three decades. And if he has to act, he has to do it now whilst still fresh with a 5 –year mandate before it too late. 

Article first appeared in the Zimbabwe Independent on 28 September 2018

New leadership, new national budget expectations

AS we await the 2018 budget statement, a window of opportunity avails itself, once again, for policy makers to allocate the precious resources wisely in order to stimulate growth and revive the flagging economy.

Zimbabwe public finances have, for many years, neglected the developmental and infrastructural needs of the economy in pursuit of a consumptive expenditure. Resultantly, the broad desire to industrialise the country and hence uplift the livelihoods of its people by ushering decent jobs and opportunities for private capital to flourish has not materialised.

That Zimbabwe does not learn, even from its neighbours and progressive peers, is a hard and bitter pill to swallow. For many years, the government has run unsustainable budget deficits, themselves a source of unproductive money supply that eventually led to the abandonment of local currency in early 2009. Even after dollarisation and a few years of circumstance-induced cash-budgeting fiscal regime, that prudence has since eluded the policy makers.

The budget deficit has sadly been creeping up and is expected to close the year at around 11 percent of GDP. Just across the Zambezi, the Zambians, with the same fiscal resource envelope as Zimbabwe at around K39,4 billion ($3,9 billion), equally struggles with its finances but are commendably disciplined enough to run a budget deficit at 6,1 percent of GDP. Tanzania is even more frugal with its budget deficit target at 4.5 percent of GDP for 2017.

The civil service wage bill has been a black hole for many years, and so have been their bonuses that are not linked to performance. And as long as the policy makers do not adopt the private-sector approach in running the affairs of the Government, the much desired developmental state that all Zimbabweans aspire to see and experience will elude this generation, indeed a painful but living reality.

In 2017, the public sector wage bill will most likely gobble 91 percent of revenues in Zimbabwe. Comparatively, Zambia, whose population is about 16,5 million, around the same levels as Zimbabwe, will spend around K19 billion ($1,9 billion) this year on civil service wages.

This is about only 47 percent of its revenue. The Zambian figures surely cast our own expenditures in very bad light as those of the biblical sinner who hasn’t seen the light. This year, Tanzania will spend about 22 percent of their SHS29.5 trillion government revenue on wages and salaries.

In fact, their total recurrent expenditure is targeted at 60 percent of revenue! A reading of these figures says a lot of about the desire of our neighbours to uplift the lives of their people and focus expenditure on areas that have higher multiplier effects on infrastructure development and job creation.

Indeed, the progress these countries have been making, although slow, is visible to the naked eye and confirms to us Zimbabweans that it is possible to do the right things and get the right results.

A look at Mandahill, East Park, Cosmopolitan and Levi Junction shopping malls, among the more than 10 busy shopping malls that have mushroomed in Lusaka alone, bears testimony to the rising middle class and strengthening domestic demand in Zambia. Compared to our own ghost cemeteries at Westgate, High Glen and Chitungwiza shopping malls that struggle even to sustain pharmacies and fast food outlets, the signs are clear that indeed Zimbabwe has lost its place and respect in Southern Africa and our policy makers need to think and act in ways that show that indeed we are ready to transform the economy.

Although endowed with more natural resources than these peers, Zimbabwe has struggled with its balance of payment, itself a sign of poor competitiveness culminating from years of inability to attract capital and long-term investment. Although within modest ranges, Tanzania and Zambia all managed to have surpluses on their overall balance of payment positions in 2016 at $305 million and $187 million respectively.

On the contrary, our foreign exchange reserves resemble the famous mushikashika cars’ fuel gauges that are always on empty, thus angogara akatsvuka and getting about $3 on every refill, ichingoramba yakatsvuka. Tanzania and Zambia, although not in the most enviable position, have the comfort of around four months import cover whilst Zimbabwe’s is barely two-week’s cover. At the end of 2016, Tanzania had $4,235 billion in foreign exchange reserves. Botswana is even more impressive with about 18 months of import cover.

The poor productivity and competitiveness on the back of increasing budget deficit and hence broad money supply growth has not come without other costs for Zimbabwe. The upheavals on the monetary sphere, in particular the cash and foreign exchange shortages, are a new headache that needs urgent pain-killers.

For a country that dollarised in 2009 to have far less US$ than its neighbours that use their own currencies is a myth that many students in economics will grapple to comprehend for many years to come. Although with deposits of around $7 billion, Zimbabwe’s real cash position in nostro balances supporting these deposits has dwindled to below $300 million, triggering a biting cash crunch that even the bond notes have failed to extinguish.

Although significant progress has been made in the adoption of plastic money and mobile money transactions, with these now accounting for about 26 percent and 73 percent of the volumes in the national payments ecosystem, the fact that the informal sector remains a significant component of our economy means that cash still plays a huge role in the lives of our people. And indeed the dignity of our people should be upheld.

Across the borders in our neighbouring countries, cash shortages are stories and a phenomenon so distant that they are associated with bad social media jokes about Zimbabwe. Zambia, a country that uses its own currency in the Kwacha, had foreign currency deposits the equivalent to $1,3 billion in its banking sector on 30 September 2017.

These US$ represent about 26 percent of its total banking sector deposits that stood at about K50 billion. That Zambia, which is not dollarised, has about 7 times more US$ than Zimbabwe that is dollarised should be a rude wake-up call for our policy makers.

As at 31 December 2016, Tanzania had TZS6.803 trillion (approx. $3 billion) in foreign currency deposits, thereby representing about 34 percent of its total deposits. In fact, Tanzania has, since 2012, maintained foreign currency deposits at around 30 percent of total banking sector deposits, itself a sign of confidence that investors and depositors have in the economy and its banking sector.

Granted, Zambia and Tanzania have their own problems relating to inadequate investment in infrastructure, poor social security schemes, high unemployment levels and so on, in fact the same challenges that Zimbabwe has. More importantly, they are equally victims of massive externalisation and related illicit outflows.

Tanzania’s president, John Pombe Magufuli, has declared war on mining companies and in June 2017, hit Barrick Gold with a whopping $190 billion fine for under-declared earnings.

Notwithstanding these common problems, our peers have exhibited maturing and progressive economic management regimes, the very strides that have been slowly transforming these economies and with consistency, will continue to deliver dividend. And indeed a child born today in Zambia or Tanzania has better prospects in life than one born in Zimbabwe as long as we continue to follow the same unyielding economic management policies.

The analogy of Ghana and South Korea that, in 1957, were poor countries with the same GDP per capita at $490 but whose fortunes today are worlds apart on account of the different economic management policies they pursued should continuously remind us of our obligations to future generations.

Today, Ghana’s per capita GDP at $1,530 is a pale distant shadow to South Korea’s $25,538. Without doubt therefore, the upcoming budget, more than anything else, will provide the clearest indication on how the new leadership intends to change the fortunes of this country.

And Minister Chinamasa, once again, has the opportunity to instil confidence by breaking with the tradition of pursuing the largely populist consumptive expenditure models that have been the source of stagnation and recession for many years.

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.