Tuesday, February 17, 2009

Promises of Change: Will they be kept,

What will they cost and who will supply the money?

Very nearly all the efforts to measure the importance of the long list of changes described or hinted at in with the budget statement, the monetary policy statement, the signing of the Unity Accord and the passage through Parliament of Constitutional Amendment No 19 suggest a broad consensus: Zimbabwe has arrived at a major turning point.
Some of the changes are so startling that most Zimbabweans are eagerly awaiting confirmation that follow-through action will really be allowed to take place. Other changes clearly hinge on whether the claimed political breakthroughs will actually happen; whether a start can be made on rebuilding of the country’s severely damaged economic foundations depends absolutely on an enabling political environment.
All of them, however, share the common denominator of money. All are affected by the glaring facts that Zimbabwe has far too little foreign exchange and the processes needed to acquire it have been severely disabled.
If one factors in the additional handicaps that violations of civil rights have disqualified the country from access to development support and that contempt for property rights has placed the country off-limits to most investors, the reason why the first hurdle is so high becomes apparent.
But because the economic base from which to jump that hurdle has become a soft quagmire of dishonoured debt repayment commitments, of totally eliminated domestic savings, of the useless remains of a dead domestic currency and a banking system that is close to its last gasp, Zimbabwe will not be able to clear that hurdle without help. But with one of the lowest credit ratings in the world, Zimbabwe will have to take many more steps in the right direction to become deserving of that help.
Hopes of operating an effective cash system now depend on the country finding ways to draw in an increasing flow of currency notes from other countries. However, very much more than a steady supply of cash notes will be needed to reconstruct a functional monetary and banking system. Among Zimbabwe’s many priorities is the replacement of all Zimbabwe dollar balances with a currency that actually works so that their clients can also get back to work.
Such inflows would also permit the banks to get back onto a firmer footing, but like most other companies, they too stand in great need of re-capitalisation inflows of equity funds. The banks have been crippled by the general business conditions, but commercial and merchant banks were further weakened by the Reserve Bank setting the Statutory Reserve Ratio at 50% of deposits.
A major change that is already effective is that this figure has been reduced to 15%, so the banks have just had returned to them 70% of the money extracted from them by this obscene misuse of authority. Unfortunately, as it is unlikely that anybody will have need of it, the return of the vast number of Zimbabwe dollars will serve only to emphasise how useless the money has become.
Acknowledging this in their oblique fashion, the Reserve Bank and the Ministry of Finance have concentrated most of their efforts on ways to restore foreign earnings. Many allusions to political policies can be taken as indirect admissions that past policies were wrong, but more than that will be necessary to restore confidence among existing and potential investors. Serious intent to stay on a policy reform course will have to be proved and reinforced, specially as investment funds from any sources will inevitably take time to impact on the challenging tasks or rebuilding lost capacity.
Foreign exchange will have to be found and spent on rebuilding the skills base, repairing or replacing capital equipment, re-stocking with materials and recapturing lost markets long before any foreign exchange can be earned.
Just how long? This is a question with many answers. Less time will be needed by some sectors than by others, but because all sectors will be held back by the poor state of the country’s infrastructure, all will benefit if Zimbabwe can re-qualify for long-term financial assistance that might become available from governments, international banks and development agencies, but only if Zimbabwe is seen to have become deserving of such help.
Many industrialists might not choose to – or might not be able to – commit funds to the development work needed before electricity and water supplies are dependable. Many will not succeed in attracting the needed skills before the people being sought have been persuaded that the education and health sectors are back on their feet and well on their way to a full recovery. People here already can do a great deal of the work, but they all urgently need funding.
At a practical level, external credits that permitted all bank deposits to be converted into balances expressed in a readily accepted currency would be of enormous help. Only when a sizable portion of bank deposits is held in currencies that are acceptable for payments will most Zimbabweans get back to work, and this is as true for people in local and central government departments as it is for people in business.
Official efforts to keep the still falling Zimbabwe dollar on some expensive life-support system are likely to prove futile, but will threaten the recovery prospects and will cause nothing but resentment among those who the authorities believe can be forced to accept payments in Zimbabwe dollars.
Unfortunately, the budget and monetary policy statements do not go this far. The shortage of locally available foreign exchange is acknowledged, but the population’s total rejection of the Zimbabwe dollar is not. For government, the major bind is that the quantity of foreign bank notes flowing into in the country is flowing out again just as quickly.
More is needed, and both the Ministry of Finance and the Reserve Bank appear to believe that the concessions made to exporters will result in an immediate surge of foreign earnings. Their hopes appear to be that the exporters’ obligation to surrender 7,5% of foreign revenues to the authorities and pay taxes in the same hard currencies, plus rising profits and P.A.Y.E. taxes will soon cover government’s commitments to all concerned.
Whatever government hopes, no quick responses will be forthcoming from any of Zimbabwe’s productive business sectors. They might carry on flowing from the service sectors, particularly retailing, but the current returns are not likely to improve before employers in all the other sectors are able to pay wages and salaries in foreign currency.
However, as very nearly all of them will have to spend foreign exchange before they can start making more of it, government’s most immediate challenge is clear: it will have to become extremely successful in its efforts to persuade those international institutions that can help that the right political changes are being made and that nothing will be allowed to derail them.
What the changes so far amount to can be described as promising, but not yet decisive. Price controls have been lifted, a reduced off-take from foreign revenues and turnovers of companies licensed to deal in foreign currency has been announced, the 92,5% balance may now be retained indefinitely in Foreign Currency Accounts and each importer’s bank is now empowered to decide on whether to its client should be permitted to place import orders.
Dividend remittances no longer need Exchange Control approval, restrictions on withdrawals from Foreign Currency Accounts have been virtually eliminated and from July this year exporters are to be given 180 days to repatriate export proceeds, twice as long as before.
A new exchange rate regime is intended to track market sentiment so accurately that the variety of other rates in use will disappear. This could be important, but it might be only temporarily so if the Zimbabwe dollar itself also disappears. The inter-bank rate was devalued from Z$12,3 billion to Z$20 trillion to one US dollar, a 99,94% devaluation, and then the dollar was assisted on its way to extinction by the removal of twelve more zeros. This brought the total to 25 in the space of 29 months. Not surprisingly, shares listed on the Zimbabwe Stock Exchange and for every other kind of financial or physical asset will soon be quoted only in hard currency.
For farmers, a competitive trading environment has been created for sales and purchases of maize and wheat, which means that the Grain Marketing Board’s monopoly has been broken and its market function is now buyer of last resort. Tobacco and cotton farmers are to be defined as exporters and paid in foreign currency, but as with other exporters will have to open Foreign Currency Accounts and relinquish 7,5% of their foreign currency proceeds to the Reserve Bank in exchange for Zimbabwe dollars at the inter-bank rate.
For miners, the gold producers among them will have more flexibility than at any time in the past 100 years – including the right to export physical gold, once it has been refined by the Reserve Bank’s gold refinery for a fee amounting to 7,5% of the refined metal. Despite this remarkable jump, the money owed to gold miners in terms of earlier commitments made but not honoured will remain unpaid for at least another year. Tradable Gold-Backed Foreign Exchange Bonds are to be issued to cover the debts and these will be redeemed 12 months after issue, plus 8% interest backdated to the date the amounts fell due,
Taken together, these measures plus reaffirmations of intentions to privatise more than a dozen loss-making parastatals, amount to very important changes in direction. Market forces will have a far greater bearing on the outcome of business decisions and contrived distortions will no longer threaten the majority or enrich a privileged minority.
For an economy that is supposed to fully respect market forces and is not supposed to be able to fall back on subsidies, some of the numbers in the fiscal and monetary proposals are of enormous concern. For example, all the 5% of turnover sums that must be handed over by all holders of foreign currency trading licenses will accumulate through the links in the transaction chain, all the way to the final consumer. This cascading effect is not countered by any recovery of amounts paid already, so it adds considerably to end prices.
The imposition of taxes on taxes is not only unjust, it is also counter-productive in that it causes inflation, it reduces the viability of business operations, it cuts the buying-power of the working population and limits the effective levels of demand from producers.
The VAT rebate system was adopted for the very reason that taxes on taxes were damaging to business interests, but no such provision has been offered to companies buying from companies that have included in their prices the 5% they have to pay on their turnover.
But at a more fundamental level, taxes or fees based on turnover are bad in principle. Operating costs can easily match or exceed gross revenue and in such cases there is little or no profit. The payment of a turnover tax in such cases would not be possible unless arrangements could be made to borrow the money. If the same company is trying to pay the US$12 000 annual licence fee as well, its prospects of survival would rely on its ability to charge much higher prices. Government policies are therefore ensuring that inflation will continue. Many features of its fee proposals need to be challenged.
The need to restore supplies from local sources is repeatedly stated, but the fiscal and monetary presentations both fall hopelessly short of identifying the changes needed to restore the volumes of product that used to come from Zimbabwe’s industrial sectors. The shortcomings are most starkly obvious for agriculture. Despite filling a separate booklet with a discussion on The Role of Property Rights in Investment Promotion, there is not a single line acknowledging that it was the destruction of property rights for large-scale industrialised farming operations that tipped the Zimbabwe economy over the edge.
The booklet’s concluding observations on land is that “the issuance of transferable 99-year leases should be expedited” and that various ministries and institutions should be “capacitated”. Unfortunately, the volumes of raw material supplies to most of Zimbabwe’s factories and the volumes of exportable goods will not return before large-scale capital intensive farming has been reinstated. Such an option is clearly off the map for the current planners and it has to be hoped that the changing political process will soon clear the decks for the needed return of modern farming technologies as well as the personalities who have the needed skills.
Contradictions are also evident in the comments on mining. While in one place the Reserve Bank states that “there is need to have clear and unambiguous legislation which gives investors a basis to plan and make concrete decisions…”, in another it states that, “all special dispensations allowing platinum and diamond mining companies to keep offshore Foreign Currency Accounts has been and is hereby revoked…”.
This statement places at risk the largest mining operation ever to start in Zimbabwe and it attempts to abrogate an international treaty. The uncertainty, if it is allowed to become a contest, will become a highly corrosive display of dishonest intentions and devious behaviour on the part of the Zimbabwe government. This is another area in which the actions of the Government of Unity Accord could make an early and crucial difference to Zimbabwe’s outlook.
Politically, it seems likely that Zimbabwe is heading towards a very different administrative environment. Zanu PF’s overwhelming majority over far too many years permitted it to adopt a leadership style based on patronage and fear. Its most ardent supporters were well looked-after and its detractors could easily be threatened with, or actually subjected to harsh treatment.
No need was felt for intellectually supportable policies because the preferred schemes and scams were usually easier to concoct and always far more attractive to those who could profit from distortions, whether contrived or accidental. The ruling party also had very little need of debating skills or even arguments that would strengthen their claims to be right. If they were wrong, it did not matter, as nobody wanted to challenge them for fear of retribution.
Now Parliament has a strong chance of becoming a much more challenging place. Rather more earnest debate might now be expected and any who want to demolish a Zanu PF position on almost any subject will have all the evidence they could wish for from years of blundering, insensitive and destructive behaviour that has come close to destroying a whole country.
With the decisions to start respecting market forces an important start has been made. Many in Zanu PF are going to see an immediate loss of privileges because almost all of these could be funded only because of the top-level support for behaviour that disregarded basic rules and laws. The policy changes evident in the fiscal and monetary statements suggest that this top level has awakened to a new reality, at least part of which has been brought home by distinct changes in the quality of the moral backing that has come from regional leaders.
Whatever it is that brought about the signing of the Unity Accord, it has happened. But it is still fragile and it needs support. The business sector must be seen to be ready to be supportive if the process stays on track, so it has to be hoped that the MDC will find it can readily get guidance as well as the backing it needs to remain focused on ideas that work.

John Robertson
February 8 2009

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