Wednesday, June 17, 2009

Market Movements and Outlook - John Robertson - Zimbabwe

June 2009
The International Monetary Fund’s recent Executive Board decision to lift the suspension on technical assistance to Zimbabwe resulted in an eleven-day visit by IMF finance experts. Having gathered the needed information, the team has now returned to Washington to prepare their report, which will be mainly on payments systems, lender-of-last-resort operations, banking supervision and central banking governance and accounting.
As all of these Reserve Bank functions had been compromised by policies that impacted directly on production, employment, export earnings, savings, investment and government’s tax revenues, we have to hope that the IMF’s recommendations will go further than offers of advice on central banking procedures. The country needs desperately to get back to work, but essential as the administrative functions of the monetary authorities might be, they will serve little purpose if the country fails to re-engage its producers.
The IMF’s Executive Board will review the technical assistance decision when it next reviews Zimbabwe’s overdue financial obligations to the Poverty Reduction and Growth Facility-Exogenous Shock Facility (PRGF-ESF) Trust,
Meanwhile, in taking the decision to offer some help, the Executive Board appears to have been fairly generous in its assessments of progress made and it has repeated some of these sentiments in the Article IV Consultation Assessment, which has now been released.
In these comments, the IMF claims to have taken into account “a significant improvement in Zimbabwe’s cooperation on economic policies to address its arrears problems and severe capacity constraints” and it “welcomed the authorities’ commitment to refrain from quasi-fiscal activities”.
These can be considered generous because, as for the similarly welcomed adoption of hard currencies in place of the Zimbabwe dollar, Zimbabwe’s authorities had no option but to meet basic economic requirements once their conduct had made the Zimbabwe dollar useless. Congratulatory comments will be more appropriate when government announces the reversal of the policy decisions that did the damage, but this has yet to happen.
A new team of IMF officials has now arrived to continue with work already started in areas of banking supervision and payments procedures. Hopefully, it will insist upon the adoption of practical measures that will actually strengthen the country’s prospects of attracting productive investors and actually restore productive capacity.
Going further than recognising the existence of problems calls for the use of leverage to force into place policies that actually work. Government – even the new coalition government – continues to exhibit a belief that the policy mix now in place can be made to work if enough money can be found.
Regrettably, those who are being pressured to supply the money seem never to respond with a blunt rejection. Too many aid and development agencies seem content to offer funding as well as advice on how policies chosen for their political effects might be coaxed into delivering slightly better economic results, even though very much more suitable and successful policies could have been chosen.
The IMF is clearly in no doubt that Zimbabwe’s economy is severely crippled and that its debt burden is more than big enough to discourage all those who have the option to choose other places to invest. However, it appears to have decided that for the limited IMF support on offer, given Zimbabwe’s long-standing arrears, it will be enough if government keeps its promises about property rights and the rule of law in the future.
Questions about government’s abuse of these in the past and whether anything should be done to restore productive assets to those from whom they were confiscated appear to be off limits. This could prove to be the most severe weakness in the IMF’s approach.
What views might be exchanged in closed meetings with the Zimbabwean authorities can only be guessed at, but the message between the published lines appears to be that if government wants to break highly efficient, capital-intensive large farming enterprises into small, inefficient family allotments, no outside agency should presume the right to challenge that decision.
Many of the outside agencies go further to suggest that the rich countries should generously contribute aid to make up for the very poor results yielded by ineffective policies. Various campaigners for this aid have generated beliefs among the leaders in the poorer countries that aid is an entitlement.
Zimbabwe’s Deputy Prime Minister showed himself to one of these believers when, in his presentation at the launch of the 100-Day Plan, he expounded on the costs of meeting its targets. Waving his hands at the assembled diplomats, he shouted, “Pay up! Pay up!”
Zimbabwe has been in continuous arrears to the IMF since February 2001 and the amount outstanding is now about US$133 million. By failing to meet the repayment terms, Zimbabwe disqualified itself from receiving more financial assistance. This response has been described as “sanctions” by the Zimbabwe government. When this so-called “non-cooperation” had persisted for too long, even the technical assistance was suspended.
The technical assistance suspension has now been party lifted, but Zimbabwe is still not eligible for financial help from the IMF. The views now being expressed by many donor countries and other development agencies suggest that only when Zimbabwe re-qualifies for IMF assistance will the country be given serious consideration. Until then, the only aid that should be expected will be in the form of humanitarian or social services support.

Business environment
Zimbabwe’s business prospects remain under the severe constraints of limited liquidity as well as continuing political uncertainty. However, a slow build-up of bank deposits is being supported by highly conditional lines of credit that are being offered from banks abroad. A number of producers of consumer goods are beginning to offer consignments of goods to retailers, but the imported goods on the shelves are still thought to be occupying 80% of the space.
Inflows to meet health and education, funded partly by donor countries, are also making a difference to the quality of social services being delivered. As much of this money finds its way into pay packets, it has helped to stimulate demand and to support business activities in some productive sectors.
However, many of businesses concerned are working against severe competition from imported goods and are facing many challenges as they try to match prices and quality after being held back by years of price controls and shrinking supplies of local inputs.
The IMF commended the Zimbabwean authorities for removing price controls, but a more helpful response would have been more strenuous efforts to talk them out of the ideas when they were imposed. The efforts made by locals fell on deaf ears, but their warnings have all proved to be painfully accurate: the controlled prices soon became the prices at which the goods ceased to be available, the businesses were forced to cut back on investment because of their declining ability to service debt, maintenance programmes had to be abandoned and many produces were able to continue only by cannibalising their own equipment for needed spares.
Through this decline, many skilled people left the country in search of better career development prospects and in those external markets, new production methods were being developed and perfected. Now, Zimbabwe’s producers have to recover lost ground while having to contend with inadequate supplies of raw materials, particularly from the farming sector, shortages of skilled workers, low income flows with which to meet recurrent costs and shortages of the capital needed to re-equip and restock their businesses.
In the financial services sector, funding levels have not been sufficient to meet the needs of borrowers or to bring down the cost of borrowing. Overdraft rates, when the money can be found, are therefore likely to remain relatively high while banks have to continue competing for fixed deposits. Continuing uncertainties about the security of foreign exchange balances still appear to be discouraging investors from taking advantage of the very much higher interest rates available from Zimbabwean banks. Many of the banks are hoping that the right assurances will be offered to persuade fund managers and others to take advantage of the rates on offer, but another concern often expressed is about the size of Zimbabwe’s banking sector and which of the banks would be likely to survive if the sector restructures to a size more in keeping with the size of the economy.
To further confuse the issues, the instability and uncertainties that continue to affect the western world have generated pressures on the US dollar, which is the currency of choice in Zimbabwe. Although the rand was given more prominence in the early statements from Zimbabwe’s new Ministry of Finance, South Africa’s direct involvement seems not to have translated into the levels of funding expected. However, many Zimbabwean exporters are pleased not to have incurred debts in rands, considering the degree to which it has strengthened. The graph shows a comparison of the trends against the US dollar, which is represented by the horizontal line at 100.
The signs to watch for in the developed world under these conditions will be interest rates, metal prices and LME stocks. Some importers seem to be trying to build up stocks now while prices and interest rates are low, but decisions to slow or suspend mine output might have a bigger bearing on stocks than purchase orders. The Chinese are the ones to watch, but they face the possibility of more protracted demand declines after they saturate their own markets with the goods that cannot be so easily exported.
No matter how much the big economies argue against protectionism, it is likely to come back in various disguised forms. Zimbabwe’s chances of getting its own factories back to work are going to be affected by whether schemes, exhortations or private sector campaigns to “Buy Zimbabwean” are brought to bear on consumers and retailers to offer support to local suppliers, even if their prices are not yet competitive.
The May figures should be out by now, but have not yet been released. However, the April Consumer Price Index percentage change, shown in this table at minus 1,1%, together with the strengthening rand and the fact that more than half Zimbabwe consumer goods are presently being sourced from South Africa, suggests that the costs will start moving up again in June. Zimbabwe must expect the cost of sourcing things from South Africa to move up if the traders have only US dollars to spend.
Further upward price movements seem likely to be a continuing trend through the rest of the year, but the very rough forecasts shown will take the index to only about the same level as in December 2008. By that date we will have the first opportunity to calculate a reasonably accurate year-on-year inflation rate from the new index series and it will hopefully show that Zimbabwe has experienced a very modest increase over the year.

John Robertson
June 16 2009

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