Authorities in Zimbabwe are regularly in the news lately with one pronouncement or another altering current fiscal and monetary policy. Sometimes they will introduce a completely new one, only to reappear days later to rescind prior announcements. To the casual observer, and indeed to us keen analysts, the impression being emitted by leadership is of knee jerk reactive interventions. A fire fighting modus operandi.
In the past weeks we have been instructed of customs tariff changes where duties are suspended on some import goods, mainly grocery items. On the 9th of May 2022 President Emmerson Mnangagwa, flanked by the Minister of Finance Professor Mthuli Ncube and Reserve Bank of Zimbabwe governor Dr John Mangudya, announced the decision to suspend bank lending in bid to arrest the rapid devaluation of the local currency, the ZWL.
A decision which, as fate would have it, was rescinded only 10 days later.
Within the same fortnight we were advised it is lawful to transact in multiple currencies as legal tender. In all honesty, nothing really is wrong about authorities making announcements in quick succession and remedying economic ills. The proof will always be in the pudding as the economy responds.
The worry though is the country now has the second highest annual inflation rate in the world, as recorded in June 2022 at 191.6%, combined with the unending conveyer belt traipse of the Central Bank and Ministry of Finance economic interventions. This gives affected people sizeable consternation, reminiscent of the abysmal 2008 economic catastrophe. It is not unimaginable that some among us may be questioning if we are regressing back to that epoch. But are we..?
That is the golden question is it not? One that people usually answer more from a perspective of their prejudices and allegiances more than from economic fundamentals on the ground. Simply put, if one says “no” then immediately they are viewed as ruling party apologists and a “yes” response will have one tagged as an opposition supporter.
This article endeavours to trudge the factual line as much as pure macro economics analysis allows, regardless.
My considered view is we are NOT on the path to 2008. There is, however, a “but” hanging putrid in the air and we will explore that at the end of the article where I give “suggestions.”
First the fundamentals are tremendously better now than they were back in 2008. By “fundamentals” here we are looking at numbers that measure certain aspects of the economy and therefore assess its wellbeing as healthy ranges are known.
First, the foreign currency reserve cover is sizeable. In 2008 Zimbabwe had close to zero foreign currency in the country.So dry of foreign currency were the national coffers that after the Government of National Unity (GNU) was constituted, combining the two major political parties into a government in 2009, the incoming Finance Minister, Mr Tendai Biti, said the country only had USD217 left in its public accounts. I will not delve into the veracit of this claim here, but just use his averment to reinforce the fact that the country was tittering on the precipice.
Currently, Zimbabwe is seating on close to USD300 million in internally raised reserves, according to the permanent secretary in the Ministry Of Finance, Mr George Guvamatanga. Then from the USD 1 billion Special Drawing Rights (SDR) received from the International Monetary Fund (IMF), 280 million has been allocated to add to that Foreign Currency Reserves and a further 222 million was set aside for contingency or emergency, in consonance with the SDR Utilisation Plan presented to parliament on 29 November 2021.
Over and above this, Dr Mangudya reported to parliament on the 11 of July 2022 that the country has about USD 2.5 billion in private Foreign Currency Accounts (FCAs) and nostroaccounts in economy.
I will, however, exercise caution with this figure as up to 50% of it is in legacy debts treasury bills and credit deposits. After we factor in the RBZ 25% forced liquidations I will estimate this amount at equivalent to USD 600 million in hard currency. At any rate, these figures are light years away from the bone dry coffers of 2008.
Secondly, productivity is enormously higher now than in 2008. A survey of 440 manufacturing firms by the Confederation of Zimbabwe Industries (CZI) showed that capacity utilisation – actual output measured against potential production capacity – increased to 56.25% in 2021. Considering the survey was done post Covid-19 pandemic time we anticipate productivity to be higher for 2022. In comparison, in 2008 productivity had dropped to under 10%. Back then the economy imported everything and also at a time treasury had no foreign currency to speak of.
Under increased productivity, we may arguably include foreign currency remittances from the diaspora as thesecontribute significantly into the Zimbabwean economy. Inflows of USD 1.4 billion were recorded from Zimbabwean citizens abroad into the economy in 2021, far more the entire foreign currency receipts the country got from ALL exports combined in 2008.
(Arguing why the citizens are out of the country in such numbers in the first place and why they feel the need to contribute this extensively is certainly more a political question and therefore beyond the ambit of my expertise).
Mining output has increased by similar percentages as productivity. Gold, amid all reports of corruption and leakages, has recorded about 15 tonnes official deliveries by mid 2022 and is on course for 35 tonnes by end of the year(roughly USD 2.8 billion). This is a colossal tonnage which pales the 4 tonnes gold production of 2008 into insignificance.Gold prices this year also have double in USD value per ounce in 2022 compared to 2008 values.
The same increased extraction and firming global prices theme pervades all other extracted metals across the country’s mining industry.
Agriculture is not legging either. For instance, Zimbabwe is targeting self-sufficiency in wheat production for the first time since 2005 with 75,000 hectares planted this winter.Envisaged hectarage is expected to give the country at least 400,000 metric tonnes of wheat. The exact tonnage the country consumes in a year, meaning importations in 2022 will mainly be for reserves.
The upbeat productivity has shown in the positive national current account (BoP), which is simply a comparison of exports against imports. Throughout the year the country has imported less or roughly as much as it has exported. Although this is sufficiency, more room is need to aid savings.
2008 was just a calamitous time where BoP was severely negative.
Even the weather pattern in 2008 abandoned Zimbabwe with patchy unproductive rains. Who can forget villagers across the country trying to fend off hunger by trading their gaunt cows for South African bought mealie–meal packs traded by a few enterprising merchants? The country had run out of maize. One beast was being bartered for 10kgs of Zimbabwe’s staple meal!
Human conditions were so dire even a cholera pandemic broke out. According to the Human Rights and Health Journal (14 July 2017), the 2008–2009 cholera epidemic in Zimbabwe resulted in 98,585 reported cases and 4,287 reported deaths, making it the largest and deadliest in the history of Zimbabwe.
Third, on the fundamentals showing 2022 is far from being another 2008, is that now national debts are being given due consideration unlike in the time leading to 2008. Depending on who you ask, Zimbabwe’s external obligations to lenders vary from USD 15 billion to USD 20 Billion.
It is imperative at this juncture to advise that debt burden, for individuals or entities, is always a function of income. This means that debt burden can be eased by increasing income. Currently, thus, debts are about 75% to 85% of Gross Domestic Product (GDP). With an increase in GDP debt encumbrance reduces before a penny is paid. So, along with paying, increasing productivity should be the aim.
For legacy debts, the African Import and Export Bank (Afreximbank) agreed this July 2022 to assist Zimbabwe in raising money to refinance a $1.4 billion it owes the lender.The deal would allow Zimbabwe some breathing room in its debt to Afreximbank, which has grown to be one of Zimbabwe’s largest lenders after being excluded from international financial organisations two decades ago.
Anyone discussing debt forgiveness from our international lenders anymore? Or we will be flogging a dead horse?
Leastways, on new debts, especially infrastructure related, the government is inclined more to Build Operate and Transfer (BOT) and Build Own Operate and Transfer (BOOT) contracts. These are where the bid winners pledge to use their resources to construct and operationalise a project with government aiding in documentation, permits and ancillaries.
The winning bidders will then “run” the project for an agreed number of years, hopefully turn a profit, and then hand over the entity to the government unconditionally at the end of the tenure. Examples of such include Hwange Power Station (electricity) where a special purpose vehicle called Hesco was set up by the Chinese to refurbish the power units and sell energy for six years (hopefully procure USD 1.5 billion in those six years by selling electricity in USD to cover margin and mark up with max. 600MW peak production, sounds like a big ask) then hand over to the government after.
The same arrangements are obtaining for the Robert Mugabe International Airport extension/refurbishment and the Beitbridge Border Post reconstruction, various Solar Power Generation BOTs and dams.
Fourth, the money and capital markets are fairly robust now while 2008 is a PhD thesis topic on how the markets did not implode as every entity began ‘investing’ on the Zimbabwe Stock Exchange (ZSE) just to preserve the value of their quintillions.
With the Zimbabwe Stock Exchange white hot returns speculative tendencies entered the frey and the government had to step in and stopped all the shenanigans. They increased tax on shares held for less than 270 days. Making shares unsuitable as a liquid store of value.
At present the ZSE is up 77% from December 2021 but inflation has roared louder and when that is coupled with the higher taxes, selling shares within 9 months of purchase is a non event. What can one do to preserve value? Enter gold coins. But, we will discuss those shortly below.
Fifth, let us not underestimate the value of experience. All the catastrophic errors authorities made, and indeed enterprises and individuals alike, in that period leading to 2008 has left all parties the better to deal with current distress. Actually, in that 2008 epoch is wherein lies all the distrust we lesser souls have against every pronouncement made by our finance authorities. Who would begrudge us? We lost every saving then.
It is thus incumbent upon the authorities to thoroughly explain all interventions to the public to gain a semblance of acquiescence from us, lest we view every announcement with mistrust.
Meanwhile, according to a 7 Feb 2022 RBZ report, in 2021 Zimbabwe recorded its highest ever foreign currency receipts of USD 9.7 billion, up by 53.5 percent from a year. Indications are that in 2022 that number will be upstaged. Fundamentals are showing 2022 is significantly different in a positive way from 2008 where the country’s total value of exports (FoB) was a derisory USD 1 billion (1.166 to be precise).
The caveat to all these positive fundamentals is that inflation figures in 2022 have begun rising and are vexatious forbusiness and to the common man. The rise in inflation explains why the question querying if we are headed back to 2008 in being asked in the first place.
It is imperative here to heed, however, that many developing countries fund infrastructure using long-term funding from the likes of the World Bank and the African Development Bank (AfDB). The money is payable over many years and is charged at low interest rates. But Zimbabwe, with no access to this money, has had to do it on its own.
The downside is that this is feeding inflation. So to answer if we are indeed going back to the dire calamity of 2008, current numbers show we have some way to go before we are even on the path to that period. The fundamentals are very promising. This does not discount errors, mainly of omission, where monetary authorities allow economic players to act wantonly to the detriment of the whole economy for so long that when corrective action is eventually taken the whole economy is negatively impacted.
Errors of commission too have been observed. When onelooks at the national budget, 34.5% of that budget (which is about ZWL 334 billion) is going to capital expenditure. That is, construction work and all the much hyped “national projects”. We have 12% of the total budget (which is around ZWL 116 billion) going towards agriculture. So combined, ZWL 450 billion has gone towards just the two sectors.
This has been driving inflation upwards in that when government makes these payments to the suppliers, they take it to the parallel market to buy foreign currency, hence the skyrocketing exchange rate rate as demand for those USD is so elastic since the suppliers will want them over holding on to ZWL. As long as the government continues to release money of such magnitude with such rapidity taming the rate may prove complicated.
It is with this backdrop that the Zimbabwe Ministry of Finance on the 18th of July 2022 announced measures specifically aimed at government contractors who channel their funds to the parallel foreign exchange market. From then henceforth the Financial Intelligence Unit of the RBZ is following up suppliers and scrutinising how proceeds from government payments have been utilised. They will proceed to forfeit the funds and then prosecute those who fail to provide satisfactory explanations for how the disbursements were spent.
At this point I will quote someone I had an engagement with on twitter who summed up the situation this way, “…the exchange rate does not matter but, money should transfer value into the future. It is insurance. It smooths consumption .” In essence, the high exchange rate for the USD against the ZWL, be it a 1000:1 or more, is not so much a problem were it to stagnant and creep than gallop. Inflation rates are debilitating in so far as they prevent people and entities into using, saving and projecting the ZWL into future use.
The gold coins had to become reality, and their release is nigh upon us.
These coins have a liquid asset status, prescribed asset status, tradable and have collateral acceptability. Each coin will have a troy ounce weight, meaning it will not be in general circulation for normal everyday transactions with each coin valued at close to USD 1800. Thus they are perfect for high value transactions and with a purity of 22 carats, individual serial number and backed by a certificate they look poised to be custom fit as a store of value since they can be bought using ZWL (at Willing Buyer Willing Seller exchange rates).
A troy ounce weighs precisely 31.1034768 grammes. The RBZ is expressing the weight of the coin in troy ounces rather than metric grammes used in the country since that is a widely used unit of measurement in the gold industry and has been for more than 500 years. We can tell right away that they are following international standards since they want these coins to be exchanged abroad.
Let’s connect the dots here. Most infrastructure/projects contractors are international corporations, mainly or oriental persuasion. They are paid in ZWL but they can’t take our currency back to their motherland and so they do the sensible thing and exchange them for USD. Problem for them is doing so is illegal to do so on the parallel market. Could these gold coins outlet have been designed specifically for this segment?
That is neither here nor there.
The point is institutional players like insurers, pension funds, mutual funds are as much receiving hoards of ZWL in contributions or from their investments and thus will equally benefit from having gold coins as an option for store of value.
In that proverbial nutshell, 2008 is still far in the horizon. Be that as it may, there is yet more the Zimbabwean monetary authorities need to do to address economic ills in the country.
Suggested areas include:
➢ Forced foreign currency liquidations must be done away with. Doing away with both the 25% forced liquidation of foreign currency proceeds and amortisation of balanceto ZWL after 120 days. This policy forces exporters to first attempt to keep their receipts outside the country. Secondly, their proceeds that make it into the country have a “shelf life” of 120 days, so to speak, hence it is no surprise that affected enterprises are active on the parallel market and other speculative ventures securing their income before forced liquidations.
Finally, some of the same exporters are also importers (particularly of inputs, retooling and consumables) so they end up unnecessarily clogging up the foreign currency requirements list causing avoidable demand when they could just deep into their coffers were they not forced to liquidate. We have a willing buyer willing seller system in place anyway, so all must keep their money and sell officially as and when their cash-flow statements dictate, not when monetary authorities order.
Leastways, the government is in an improved foreign currency cover position as scarcity has been ameliorated by the IMF SDR funds as alluded to above. Further growth of those reserves will be realised with a growing internal economy over time.
➢ The RBZ Auction System should be disbanded and the Willing Buyer Willing Seller (WBWS) system allowed to prevail without price dictations from authorities, only monitoring for nefarious and egregious activities by the actors. Speaking of the Willing Buyer Willing Seller system introduced on the 4th of April 2022 by the RBZ: Apparently this arrangement has been a moderate success and the President announced revising the limit up to US$5,000 a day and US$10,000 a week. Although this sounds positive, a proper free market to outwit the parallel market needs higher limits.
Also, operating it alongside the RBZ run Foreign Currency Auction system is yet another arbitrage opportunity for an economy fraught with so many of them. I have discussed Zimbabwean arbitrage opportunities and how they are bleeding the economy in a previous article, suffice to say here that the two systems for officially selling foreign currency may harm the good intentions of liberalising the arena if allowed to coexist for long.
The auction system has failed to be a price discovery mechanism. Instead, it has become a foreign currency rationing and allocation mechanism. An inefficient one at that which at one point was owing close to USD 85 million allocated but not disbursed. Other winning bids waiting for up to 8 months to get their foreign currency.
The jeopardy of the auction system is more in that it is no longer recognised as an official rate platform (eg tax purposes and other formal transactions) hence it will not serve any purpose to anyone except being a loophole for arbitrage opportunities since there is a large disparity in its rates and the Willing Buyer Willing Seller system rates.
➢ There must be improvement in the authorities monitoring system than the reactive, and thus retrogressive, action they seem to have been taking thus far. We will discuss only three examples here.
First, On June 26, 2020 the Information ministry announced in a tweet that all mobile money transactions and the Zimbabwe Stock Exchange (ZSE) would stop transacting forthwith.
Mobile Money Transfer Agencies (MMT) were accused of creating fictitious mobile money and converting it to cash to facilitate purchasing foreign currency on the black market and taking the money out of Zimbabwe. By this point Ecocash, the largest of the agencies, had been in operation for 9 years and handling almost 90% of all individual transactions clocking ZWL 93 billion in lifetime transactions according to Cassava 2020 report.
Surely they had become “the” Zimbabwean economy and their shutting down and resumption after plugging in directly to RBZ for real time transaction monitoring plus to curb their “money printing” tendencies was long overdue. However, why wasn’t this monitoring and remedial action done sooner?
The same for the stock exchange shut-down. We all knew of the Old Mutual Implied Rate (OMIR) which was an unofficial exchange rate derived through mathematical juxtaposition of Old Mutual shares in London and Johannesburg against Zimbabwean counter. This gave a damaging black market rate as share price is driven by speculation and rent seeking which doesn’t reflect fundamentals on the ground hence this was a flawed rate bleeding the economy through an artificially determined exchange rate for the USD.
Also, Old Mutual Counter allowed share holders to buy securities in Zimbabwe in ZWL and sell them in London or Johannesburg for Pound Stirling or Randsrespectively. Therefore, this allowed unsanctioned and illegal externalisation of much needed capital away from the economy. It is not wrong that the authorities acted. It is their inclination to let a rot aggravate first before suddenly acting with abruptness that is almost as disruptive to the economy as the reprehensible action being corrected.
The third example is the recent ban on banks to lending, for pretty much the same reason MMTs were temporarily banned: “electronic printing of money and flooding money supply.” Banks were accused of doing this my giving out cheap loans unsupported by reserves and recipients went on to engage in speculation with the proceeds to turn out handsome proceeds.
Problem is such activity was not supporting the real economy yet had an effect of increasing liquidity unsupported by commensurate production which was inflationary. This had to stop. But where was the RBZ when commercial banks loan books “created” close to 85% of M1 (money supply that includes monies that are very liquid such as cash, demand deposits, and cheques) money supply growing from around 15% just 30 months earlier? Supervisory role of the monitory authorities should be unyielding and where lapses occur authorities should not act abruptly and unilaterally as ripple effects of such undertakings often prove just as detrimental, hence all bans anyway tended to be rescinded in a few days in all the examples given herein.
This is by no means an exhaustive list of lapses in monitoring from the finance authorities but it is noteworthy that we call upon them to improve regulation and tighten surveillance for the economy’s benefit.
➢ The country must curb all activities that are currently injecting more liquidity into the economy. A 100 times increase in money supply in 3 years will hurt any economy anywhere in the world, worse the fragile Zimbabwean one. There are many explanations for why there is excess liquidity in the Zimbabwean market but like many economic analysts, I concur that it is driving inflation through demand-pull inflation. This is the upward pressure on prices that follows a shortage in supply, or an increase in money supply, a condition that economists describe as “too many dollars chasing too few goods.”
The source of this liquidity is a subject of debate. Some point at government “command activity” necessitating printing and pouring money into the economy through agriculture input aid and funding infrastructure too fast. I have touched on this above as one of the sources. Government will finger banks and speculators as credible sources of this liquidity.
Facts are stubborn, as my professor back in college loved to boom across the lecture room. One such stubborn fact is that Zimbabwe’s money supply breached ZWL 1 trillion at time of writing only 3 years after its introduction and there was only ZWL 10 billion in circulation at the time. That is a 100 fold growth in amount of money in an economy whose economy shrunk by a combined -6.54% in the same period. Surely we cannot be surprised at inflation rates currently obtaining in the country given just this one fact!
The economics formulae MV=PT (where M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions) explains what is currently happening. With an increase in M, for the economy to come to equilibrium, either P or T has to increase as well. In the case of Zimbabwe it appears both P and T have increased ie. the Prices and the number of Transactions, hence the inflation we have at present.
The limitation here being that, granted, a significant part of that inflation (the Minister of Finance said 60% in an interview I had with him) is also imported as global markets have responded negatively to the conflagration in Ukraine. This has seen major agro products and input as well as energy imports prices skyrocket, necessarily forcing local prices to increase too in tandem.
When I had a seat down with the Minister, Professor Ncube, a week after the announcement of gold coins policy, I asked him why they did not go further and increase banks reserve rations as well from 10% after increasing bank policy rate to 200% as an intervention to mop up excess liquidity from the market?
For accusing the banks of “creating” money through excessive lending it is actually unfathomable that they then left the ratios untouched, creating a massive room for the banks to continue lending at self regulated tempo. Perchance they may even have gone so far as they did with MMTs to have them plugged in direct to RBZ for real-time monitoring.
The Minister’s response to me was that they “could have done a lot of other things” which he could not mention to me at the time as they are still in his “back pocket” for future deployment including increasing reserve rates in future. We wait with bated breath.
➢ My final suggestion for this week is on gold coins. First, and already discussed above, the RBZ should dispense with the Forex Auction System and let WBWS system reign supreme to prevent duality of rate quotes and to term the parallel market (with much higher transaction caps too).
With the parallel market rate now over two times the WBWS rate, the incentive is extremely high for a speculator to borrow ZWL from the bank and buy gold coins, sell them abroad for hard currency which they can liquidate at the parallel market to realise over 100% profit per transaction (determined by the gap between the WBWS and parallel market rates).
The recently announced 200% per annum interest rate is not a deterrent in this instance as that converts to a measly 17% per month. We can leave to imagination how many times the speculator can “spin” these transactions in a month to pay 17% interest to the bank while getting over 100% profit per transaction.
This is very inflationary in that RBZ will certainly have to print money to buy the gold in the first place or continue fudging transactions at the foreign currency auction to access “cheap” USD to pay gold producers, either of which we have determined here is detrimental to the country’s economic health.
The authorities have to announce how many gold coins they intend to put into circulation and continue informing on subsequent increases. This increases transparency and accountability, which are the cornerstones of trust in a money system. Perhaps I may wander into a world of Information Technology which I know so little about and suggest the central bank adopts block chain technology to track and account for each single coin.
Having said that, it is prudent to add that I am convinced Zimbabwe is experiencing some economic distresses, yes, but it is far from being in a situation reminiscent of 2008.
A perfect analogy to sum up the country’s economy currentlyis that it is composed of two buckets. One with ice cold water and another with scalding hot water. The biased among us will point to one of those buckets to confirm how “cool” or how “hot” the environment is, in support of their prejudices of course. Meanwhile, the common man with one leg in each of those buckets is being told the laws of averages dictate that he must be feeling very comfortable. Far from it...