MONETARY POLICY STATEMENT, JULY 2009
A few comments are called for on the Governor’s choice of terminology. He describes the Multiple Currency System as a “noble” policy that was introduced by the Reserve Bank of Zimbabwe in the last quarter of 2008. More accurately, the rapidly collapsing Zimbabwe dollar forced the private sector to adopt and use other currencies, initially in defiance of RBZ directives, threats and prosecutions.
RBZ conduct led to the destruction of the integrity of the Zimbabwe dollar, which made the currency useless to everyone, the RBZ and government included. The officials had no option but to accept the use of other currencies for themselves and everyone else. The decision should therefore be seen, not as a noble achievement, but as an ignoble defeat for RBZ policies.
The Governor makes mention of unintended consequences affecting pensioners, those on fixed incomes and those unable to earn foreign currency. This appears to be an attempt to blame the dollarisation for these misfortunes, but government imposed deeply negative real rates of interest more than five years ago. Long before crippling hyperinflation was reached in 2008, these had already destroyed interest earnings as well as the capital held in savings accounts and pension funds.
Government’s earlier price freeze had also forced the shrinkage or closure of thousands of factories and shops, causing massive financial losses. When these are combined with the losses of jobs, earnings, foreign exchange revenues and tax revenues that followed the forced closure of more than 4 000 commercial farming companies, the major “unintended consequences” can be seen to have hit the population well before dollarisation became the only practical option.
The Governor offers some helpful thoughts on the possible return of the Zimbabwe dollar, stressing that the country does have need of its own currency so that it can recover autonomy in formulating its own fiscal and monetary policies. However, as “a country’s currency is defined and dictated by the barometer of real economic activity” and as “the loss of the value of the Zimbabwe dollar was a direct result of the near absolute stagnation in Zimbabwe’s entire productive systems”, the recovery and growth of productive activity has to be the foundation for the return of the Zimbabwe dollar.
Bank liquidity and the conditions in the banking sector receive some attention, but after pointing out that the country has 28 banking institutions, 17 asset management companies and a further 81 operating money lending and micro-finance institutions, the Governor manages to avoid any suggestion that these numbers are part of the problem. A new Framework for Financial Stability Assessment is being developed by the Reserve Bank, but this is mentioned only in relation to the current global banking crisis.
For Zimbabwe, the problems are identified as the capital erosion that came with hyperinflation, the shortages of liquidity, the operational risks and credit risks now faced because the sums owed are all in foreign currency, and the settlement risk now that the Reserve Bank can no longer function as lender of last resort.
To remain in business, banks will have to achieve phased capital adequacy targets in two steps. They must show that they have reached 50% of the prescribed equity capital by September 30 2009 and the balance has to be in place by March 31 2010.
After holding meetings with the banks, the Reserve Bank found that “most banking institutions will be recapitalised through fresh capital injections by the holding companies, private placements, rights issues, mergers and strategic partnerships with new investors”.
From the details supplied, the equity totals will have to amount to US$156 250 000 by the end of next month and to twice that figure by the end of March next year, if all the banks are to remain in business as separate entities. However, if the number of banks is not reduced, the limited amount of business activity seems certain to make the survival prospects questionable for some of them.
The Governor makes several references to bank charges, mainly to point out how much higher they are in Zimbabwe than in South Africa, but he does not explain that the problem stems from the banks’ claimed need to levy transactions charges because they are unable to earn enough from the difference between the interest they charge on loans and the interest they pay to depositors.
This is not because the gap between these rates is too narrow, but because the banks either do not have enough money to lend, or the terms that have to be met by borrowers are too tough in the current uncertain business climate. The damage done to the property market by the Land Reform Programme makes the situation even more uncertain because all title deeds have now become less acceptable as collateral.
Because this has dramatically changed the credit-worthiness of many businesses, the banks have been forced to demand very convincing evidence that borrowers will be able to meet repayment obligations in full and without fail. Few are able to assemble such evidence, partly because of the constraints on working capital, but also because of less dependable sources of supply of local inputs, the loss of skilled workers, the loss of markets, the need to replace capital equipment to recover needed efficiency levels and the frequent cuts in electricity, water and telecommunications services.
The Governor’s complaints that many banks are lending very small percentages of their deposits do not allow for these increased risks, or the exacting conditions that have to be met by local banks before they can draw on lines of credit extended by correspondent banks.
Those banks that have well secured borrowers, but not enough money to lend, face the additional problem that very few local bank-to-bank loans have been arranged, such is the level of uncertainty over which banks might become casualties of the expected eventual shake-out.
For those depositors who are presently keeping their money in cash, their willingness to bank it might best be restored by eliminating the costs of drawing on their deposits, but more particularly, by issuing a Reserve Bank guarantee that their balances will not be raided, either by the Reserve Bank itself, or in response to a Ministry of Finance directive.
In this latest Monetary Policy statement, the Governor describes the instructions the Reserve Bank received from the Ministry of Finance to incur foreign liabilities on behalf of government and states that al the money raised was used by government. He says: “It is pleasing to note that Government has committed itself to paying the debts through a debt takeover programme, as spelt out in the interim Budget Review Statement by the Minister of Finance and subsequently approved by Parliament.”
Reference to the interim Budget statement shows that this “commitment” amounts to the contracting of a debt expert, who will “support the Government in formulating the external debt and arrears clearance strategy, which will form the basis for debt relief”. With regret, I have to suggest that those whose foreign currency account balances disappeared might find that government places the emphasis on debt relief, or debt forgiveness, rather than on debt settlement.
Statistics showing which business sectors had secured loans and advances from commercial banks reveal that in June, the distribution sector, i.e. wholesalers and retailers, had received the largest proportion at 27,2% or US$83,11 million. The amounts lent to other service sector businesses – about 4% to transport, 1,74% to communications, 7% to finance, 2,5% to individuals, 0,8% to construction and 6,75% to other services – makes the balance of the country’s bank loans almost equal between production and consumption, with the amounts lent to agriculture, 24,1% manufacturing, 18,1% and mining, 7,8%, also coming to 50%.
Some progress is reported on the volumes of money being transferred through the Real Time Gross Settlement system, daily transactions rising from US$11 million a day in the last week of April to an average of US$32 million a day in the last week of June. Banks are urged to “consider the re-introduction of cheques at inter-bank level”, but no information is offered on any proposed new clearing arrangements, other than that the Reserve Bank is empowered “to recognise and oversee all payment, clearing and settlement systems”.
The use of cards to make point-of-sale payments within the country is still being finalised and more is still to be done to permit visitors to use their cards while in the country. No mention is made of Zimbabweans being offered cards they can use when abroad.
The willingness of authorised dealers to explore territory and products that were previously kept off-limits by very restrictive exchange controls has prompted the Governor to set new guidelines on the liberalisation of the foreign exchange market.
Accepting that it is now “imperative” that the use of derivatives instruments be allowed in Zimbabwe, he states that, with immediate effect, authorised dealers are permitted to enter into derivatives, but “only where there is an underlying asset”. Investing in derivatives for speculative reasons will not be allowed.
All financial derivatives that have a value or exposure of less than US$5 million, do not require prior Exchange Control approval, but as is the case for with external loans, all financial derivatives above US$5 million require prior approval.
In a description of inflation trends, the governor concentrates largely on fuel prices, pointing out that the economy is now markedly more sensitive to fuel price changes than it was when exchange rate arrangements offered “arbitrage opportunities and speculative sources of income to cover gaps arising from cost build up”, and observes that these opportunities no longer exist. Accordingly, “a significant proportion of fuel costs will be passed on with a quicker pass through as companies face diminished loss absorptive capacity.”
As a result, he expects month on month inflation to increase and may exceed 3% in the third quarter. Domestic fuel prices also respond to erratic domestic supply patterns as well as exchange rate changes between the United States dollar and the South African rand.
The Governor also summarises his thoughts on the performance of the productive sectors. On the mining sector, he believes that the following handicaps account for many of the difficulties:
(a) Uncertainties associated with the inconclusive reviews to the mining sector legislation;
(b) Intrusion of self-interests leading to mysterious procrastinations in the approval of investment proposals;
(c) Uncoordinated mining sector investment attraction strategies leading to multiple duplications of representations to the same potential investor thereby creating confusion and hesitancy by the potential counter parties;
(d) Non-allocation of meaningful fiscal budgetary resources for active surveying and exploration of country’s true worth in mineral resources terms;
(e) Serious technical capacity deficiencies in the Ministry of Mines and Mining Development due to brain drain;
(f) Capacity constraints on marketing and market penetration; and
(g) Limited capacity to value-add our primary mineral production.
The governor believes that the Mining and Minerals Act should reflect an indigenous policy that encourages foreign investment and that the policy should allow foreign investors who are bringing in capital to own more than 50% of the venture.
He also believes that the country can earn significant foreign currency from the auctioning of mining claims. This idea is much more ominous than any of those listed above. It requires that mining claims should automatically come under the control of government as soon as the minerals are discovered and the claims are registered. This is not the case now, but if changes are introduced to make it happen, they will bring prospecting to an end.
The success previously enjoyed by Zimbabwe’s mining sector was based on the ownership rights to discoveries that were acquired automatically by the person or company that found the mineral deposit. These rights were then used to arrange for development funding or to negotiate for a partnership with, or an outright sale to potential developers. If the State now proposes to assume ownership of new discoveries so that they can be auctioned for State finances, the State will very quickly run out of mining properties to auction.
Regrettably, the Governor has permitted himself to be misled by a table that is said to compare Zimbabwe’s mineral reserves with its current extraction rates. Against gold, the annual refined gold output is compared to the estimated reserves of gold-bearing ore, and by dividing the ore by the metal output, the conclusion is reached that Zimbabwe’s gold reserves can be mined at 20 tonnes a year for 650 000 years.
Unfortunately, the hard fact is that the 20 tonnes of gold referred to, an amount last mined in 2004, was lodged in at least four million tonnes of ore. That is the number by which the known ore reserves should have been divided and the answer is a much more modest three years and three months. Because this is such a short time-span, nothing should be done to discourage continuous exploration for new deposits and government should be happy to see successful prospectors rewarded for their efforts.
Although Zimbabwe has virtually wiped out its capacity to subsidise its hundreds of thousands of farmers, the Governor opens his comments on agriculture with observations on the extent of support offered by the governments of the US, the EU, Japan, Canada and Australia.
In a table, the Governor shows that the support offered to farmers by the governments of OECD countries over the 16 years to 2005 ranged between US$52 billion and US$97 billion a year, which sums came to as much as 31% of each country’s tax revenues. Even Malawi was turned from being as food deficit country into a net exporter of maize because of agricultural support.
Zimbabwe, he says, should therefore commit to the “pooled importation” of critical imports, the enhancement of farm mechanisation, the improvement of national productivity levels, the nationwide development of agricultural skills, the deepening of the strategic grain reserves and the payment of prices that will guarantee the viability of farmers.
The Governor does not acknowledge the non-existence of the funding Zimbabwe would need to duplicate such efforts, but he does suggest that government should set aside 500 000 hectares for the production of strategic crops by individual farmers under contract growing schemes run as joint ventures between the government and the private sector or foreign investors.
However, at no point does the Governor acknowledge the one-time existence of farmers who had the needed experience, had mechanised their operations, had achieved high levels of productivity, were successful enough to operate without need of subsidies, funding their activities with commercial loans that were secured by title deeds to their land and had helped achieve export surpluses almost every year for the past century.
Perhaps his very large contract farming scheme suggestions is as close as the Governor can get to a politically-acceptable means of re-engaging the skills of such people, but doing so without going back on the devastating Land Reform Programme. But if he were to make an honest assessment of why Operation Maguta, the local attempt at State farming, has been disappointing, why the USSR and China could not feed themselves until far-reaching changes were made and why North Korea is still struggling, he would perhaps accept that a few dozen central planners have no hope of replicating the energies that are released when the initiative of thousands of people is freed to set both the pace and the direction of economic and social development.
This sector is dealt with in very few paragraphs, which can be summed up as pleas for restoring the efficiency of the services infrastructure “so as to unlock greater supply response from the manufacturing sector” and suggestions that toll-manufacturing and further beneficiation of primary products would support export-led growth.
A 46% fall in manufactured exports is recorded among the helpful statistics for the first half of 2009 compared with the first half of 2008, but no reference is made to the severe shrinkage of business activity that followed upon the appropriation by the Reserve Bank of foreign currency account balances.
Neither does he mention the effects of the further losses of skills and the continuing impacts of price controls on viability, or the ability of affected companies to fund even basic maintenance programmes, let alone capital equipment replacements.
The basic fact he avoids is that a significant proportion of the manufacturing sector has lost its competitive edge. These firms will not be able to place quality goods into local shops at acceptable prices until their owners have found the money and the courage to catch up with production methods and market changes and to restore their lost efficiency.
The Governor claims that parastatals and local authorities account for at least 40% of Gross Domestic Product because of their forward and backward linkages with the rest of the economy. For a meaningful turnaround, efforts should also be geared at addressing the requirements of these critical sectors.
As the infrastructure is mainly developed and managed by parastatals, he says that it is therefore critical to capacitate the sector to ensure that the productive sectors and the rest of the economy have access to power, water, transport and communication.
Most economists would challenge the Governor’s GDP arithmetic on the grounds that percentage figures should add up to no more than 100%. The forward and backward linkages with the rest of the economy of, say, food production, housing or privately owned transport can also be shown to have enormous leverage in all productive processes, but accurate measurements that prevent double-counting would ensure that their totals, plus the totals from all other economic activities, would not exceed 100%.
While the Governor’s observations still need to be taken seriously, their main purpose is clearly to underline the need for vast amounts of money to restore and further develop the country’s power, water, transport and communication services. The message between the lines is that he knows the money has to come from elsewhere and the critical requirement to fully “capacitate” the parastatal organisations has to be supported from abroad.
The same thoughts surface in much more explicit terms in the paragraphs that repeat the government’s frequent accusations that “illegal sanctions” are the reason for Zimbabwe’s difficulties.
“Our plea to the international community is that they give Zimbabweans the deserved giant leap of faith and play a progressive and supportive role through the unconditional removal of the crippling sanctions that are now an unbearable millstone around the country’s economy”.
This section starts with the statement: “The formation of the Inclusive Government did and does indicate and confirm that the people of Zimbabwe fully understand their democratic institutions…”. This phrase appears to be as close as the Governor can get to supporting his claim that the requested “leap of faith” is now “deserved”.
The observations that have come from many visiting diplomats, politicians, investors and commentators seems never to have been heard by the Governor, or by the members of government who have displayed their increasing dismay that aid has not been pouring into the country since the Government of National Unity was formed.
In summary, they have highlighted the lack of progress in the political arena and to the clear evidence that attempts to make headway on important issues, such as the rule of law, civil rights and the freedoms of expression and association have been so frequently thwarted, if not sabotaged.
Political activists managed to vigorously reinforce the evidence that Zimbabwe’s old guard was still in charge and still determined to prevent change when the first meetings to consider new constitutional proposals were broken up by demonstrators and the police did not intervene. This event helped to confirm the belief that Zimbabwe is not yet ready to be offered assistance, specially as a safe assumption could be made that, under current circumstances, any funding supplied might be diverted to strengthen the positions of those who were responsible for Zimbabwe’s economic decline.
At the more fundamental level, Zimbabwe is still seen to be not deserving of support because the policy choices that started the economic downturn have not been revoked, or even amended, and the separate factions of the Government of National Unity appear to be in agreement that no urgent attention need be given to these issues.
Responses from development institutions, investors and donor countries are showing that none of them is prepared to support efforts to help inappropriate policies to work a little better, while good policies could be readily adopted and would make the development process more successful and self-sustaining.
Although humanitarian aid is still being provided and a few highly conditional credit lines have been offered to some banks, the amounts do not add up to the sums needed to start rebuilding the infrastructure or to start the full recovery of the productive sectors.
Sums of that order will have to await the political changes that will restore confidence among investors and will convince development agencies and donor countries that the money will not be wasted.