Economic
Developments
Second Quarter,
2016
Bond notes
The
Reserve Bank’s statement that, in order to ease the shortage of bank notes in
the country, it plans to place exchangeable tokens into circulation by means of
a five percent export incentive bonus, has been met with severe misgivings. The
so-called bond notes are to be tied to exports of about $250 million a month,
so 5% of that amount would place an additional $12,5 million-worth of buying
power a month at the disposal of mainly the exporters of gold, platinum and
tobacco. Working to a maximum of $200 million in bond notes, these tokens would
therefore trickle into the monetary system over a period of 16 months.
It
appears that nobody has found this description of the proposal to be either
helpful or believable, so the speculations of some observers suggest that a
more rapid disbursal of perhaps far larger numbers of bond notes might be made
through their use in settlement of maturing Treasury Bills, or to pay other
government debts. The Reserve Bank’s statements reject this assertion.
However,
the procedure laid down by the Reserve Bank invites more speculation on the planned
seizure of export proceeds. Banks in receipt of all export proceeds in US
dollars are now required to credit the exporter’s foreign currency account with
only half the amount. The balance will be sent to the Reserve Bank, which will
deposit that amount into its offshore nostro account. At the same time, it will
extend credit facilities of the same amount, plus bond notes to the value of 5%
of the total value of the export consignment, to the RTGS account of the
exporter’s bank for the use of that exporter.
The
purpose of this feature of the arrangement appears to be two-fold. The first is
to reduce the proportion of export revenues being used to pay for imports. Only
the half of the exporter’s revenue placed in the company’s foreign currency
account will be readily available to pay for imports. To use the credit
recorded in the bank’s RTGS account to pay for even more imports, it has to be
assumed that approval will have to be sought. If it is granted, this is likely
to place the importer into a queue, the length of which will be determined by
the imported goods’ position on a priorities list. The apparent intention
behind this is to encourage the business concerned to look for and support
local suppliers of the needed products.
Because
the US dollars taken by the Reserve Bank will be placed in its nostro account,
the second of the objectives must be to enable the Reserve Bank to build up a
US dollar balance that it can use to meet external obligations. The most
pressing of these at present is the commitment to pay, by June 30 2016, the arrears
of $1,8 billion owed to the World Bank, the IMF and the African Development
Bank.
However,
if RBZ does manage to raise and pay over the $1,8 billion, Zimbabwe will not
automatically start receiving IMF facilities. For some reason, government
statements on the issue imply the belief that IMF money will be flowing in as
soon as the $1,8 billion is paid, but the country will merely qualify to be
considered for the possibility that it has recovered enough to handle more
debt. To improve its credibility that much, the country will first have to
restore productive capacity sufficiently to earn the points needed to show that
it can meet additional loan repayments, even while resuming payments on the remaining
$8 billion that is still owed on outstanding debts.
Indigenisation
Changes of importance made to the indigenisation policy on April
11 2016 helped prevent the threatened closure of the very large number of
companies that had not obtained Indigenisation Compliance Certificates by the
March 31 deadline. A Presidential Statement effectively rendered null and void
the various Indigenisation Ministry declarations that companies failing to
achieve compliance would have their operating licenses revoked.
This is significant, as a few weeks earlier, in the March 22
Cabinet meeting, the ministers unanimously passed a resolution “directing that from
1st of April 2016, all line ministries proceed to issue orders to
licensing authorities to cancel licenses of non-compliant businesses in their
respective sectors of the economy”.
However, that same cabinet meeting abandoned the levy that had
been proposed as a penalty. This was to have become payable by all companies
that had yet to meet the 51% indigenisation target, but its removal was a good
indication that policy changes were in progress.
The subsequent Presidential Statement confirmed that a significant
revision of the government’s position a week earlier had taken place, even though
the very first line of the Presidential Statement states that the intentions of
the policy are to “empower historically disadvantaged indigenous Zimbabweans,
and to grant them ownership and control of the country’s means and factors of
production”.
What remains in place, therefore, is the President’s belief that
rights of ownership can be granted, or that business assets belonging to
corporate bodies remain freely available for confiscation and redistribution. The
President claims that conflicting interpretations of the policy have led to
confusion. In reality, however, investors are not at all confused. They are
inherently and unequivocally opposed to policies that grant ownership and
control of their business assets to anyone else.
Most of the confusion has come from efforts to make an
unworkable policy work, compounded by the frequent rehashing of compliance
demands. Each change has involved more bad ideas that make more changes inevitable.
Then, more confusion was generated by equally inevitable speculation.
The latest uncertainty has been reinforced by the closing line
of the Presidential Statement: “To the extent that the Indigenisation and
Economic Empowerment Act may not sufficiently conform with this policy
position, I have directed that the Law be amended or changed forthwith
accordingly.”
As amendments to Acts have to go through Parliament, the assumption
has to be made that the President believes his Directive has already determined
the outcome of yet to be debated Parliamentary motions. Of interest, the
Presidential Statement does not refer to the Minister of Youth, Indigenisation
and Economic Empowerment’s claimed power to force the closure of companies and
neither does it recognise the powers, claimed by the Ministry, to fine or
imprison directors who fail to comply with indigenisation regulations. Both of these
are at odds with the President’s new approach.
His Statement also contains an amended list of the Sectors Reserved
for Indigenous Zimbabweans. Of special importance, Agriculture: primary
production of food and cash crops, which formerly
headed the Reserved Sectors, is no longer on the list. Official
statements appear to have been careful to avoid drawing attention to this
change.
However, revisions
to the indigenisation policy affecting
the Reserved Sectors appear unlikely to reassure the business community, or
encourage hesitant foreign investors, even though just how strongly the ring-fences
will protect indigenous businesses from competition in the remaining eleven
Reserved Sectors is now also in doubt. A provision allows line Ministers to
grant special dispensations to persuasive non-indigenous applicants. 
Unfortunately, the almost
automatic effect of allowing ministry staff to use their discretion when
handling applications is to invite them to generate additional fees for
themselves in exchange for ensuring quick and favourable responses. These will
add to the already very high costs of establishing a business, but for those in
business already, the challenges of remaining in operation have also become
more expensive. Changes affecting indigenous as well as non-indigenous investors
now include having to seek approvals for renewals of existing licences and
permits, and many additional renewable licence requirements have been imposed.
Many of these renewals are also to be granted or denied at the discretion of
ministry officials.
Indigenisation
and Banking
Banks and financial
institutions have been effectively removed from the indigenisation debate by
the simple statement that the banking sector will “continue to be under the
auspices of the Banking Act, which is regulated by the Reserve Bank of
Zimbabwe.” Similarly, the Insurance Sector will continue to be under the
auspices of its own Act of Parliament. The implication carried in the wording of
the Presidential Statement is that
these Acts supersede the Indigenisation and Economic Empowerment Act and these
institutions are therefore not subject to indigenisation requirements.
However, these institutions,
the President says, will “be expected to make their contributions by way of
financing facilities for key economic sectors and projects, employee share
ownership schemes, linkage programmes and such other financial empowerment
facilities as may be introduced by the Reserve Bank”.
Mining
and Natural Resources
Mining companies and other
businesses relying on natural resources will benefit from a major change that
drops all reference to a handover of 51% of the shares of existing companies.
Instead, the emphasis is placed on the need for these companies to ensure that
their payments for locally supplied goods and services absorb not less than 75%
of their total revenue from the of the sales of minerals or other products.
As these payments will
include wages, salaries, taxes, royalties and the costs of everything procured
from local suppliers, it is likely that almost all of these companies are
already meeting that requirement. Just the total cost of employment for most
mining companies is likely to come close to that figure, most of the time, as
this total would include the costs of housing, medical and education services
for mineworkers’ families plus the costs of safety equipment and protective
clothing, as well as direct wage payments. Additional local expenditures would
include charges for electricity, water, staff training costs and all the taxes,
royalties and fees paid to central as well as local government and rural
councils.
On new mining companies, the
President, said that, as they would be exploiting depleting resources, it was
essential that investors accept as non-negotiable the 51% - 49% split in favour
of government. The claim that, as the natural resource being mined is owned by
the State, the government of Zimbabwe automatically becomes the owner of 51% of
every mining company, without paying for any of the shares, also stays in
place, as no amendment to this is suggested in the Presidential Statement.
Attempts to use logic, or to
offer basic arithmetic facts, to counter this argument, have proved
unsuccessful. The government’s proposition rests on an emotional base that it chooses
to sustain by rejecting any need to recognise the costs of establishing and
running a mine; this supports their line of reasoning that the value of the
minerals sold constitutes the entire topic.
However, mining establishment
and operating costs are substantial. They have to be met well in advance by the
investor and recovered eventually from the sale of the minerals. Despite this,
investors are being told that they will be permitted a return from only 49% of
their total investment and that this sum will be heavily taxed.
Because this arrangement will
almost certainly prohibit the recovery of development and running costs, no new
mines of any importance are likely to be developed in Zimbabwe before
government either agrees to pay for its shares, or allows this policy to be
negotiated out of existence. A new policy could be formulated on the entirely
supportable basis that, while other countries need the minerals, Zimbabwe’s
most important needs are employment, skills transfers, export revenues and tax
revenues.
Empowerment
In the indigenisation debate,
the Empowerment facet of the policy is failing most spectacularly. In the six
years since Statutory Instruments brought the Act into operation, tens of
thousands of jobs have been lost and perhaps more than that number have been
prevented from being created.
With local manufacturing
production falling, employment has declined further and dependence on imports
has increased, but shrinking domestic wage payments have impacted on local
spending power. A significant proportion of the population now depends on
remittances from family members, working mostly in neighbouring countries, but
the weaker exchange rates of all these countries have reduced the values of the
Diaspora inflows. Consumption patterns have moved down market as a result and
the sales of many products have become dependent on innovative packaging to
cater to the needs of customers who can afford only smaller units.
The most important form of
empowerment for the bulk of the populations in any country on Earth is regular,
paid employment. Unfortunately, in Zimbabwe the normal job creation process has
been put into reverse. The discouraging policies in need of drastic revision
appear to be clear enough to everyone, except those in government.
Settlement
of Arrears
The timing of the indigenisation policy
changes appears to link most closely to the efforts being made to settle $1,8
billion in arrears on external debt repayments. To win support for the efforts
being made to borrow the money needed to pay the arrears, government had to
assure possible lending institutions at the International Monetary Fund annual
meeting, held in Lima in September last year, that economic reforms would be
carried out.
These reforms were listed in an
External Debt-clearing Strategy paper presented at the Lima meetings. The list
included revitalising agriculture, advancing value-adding processes for mining
and agriculture, making progress with infrastructure development, strengthening
financial sector confidence, accelerating public enterprise reform, improving
the management of public finance, and re-engaging with foreign investors. By
making tangible progress in all these areas, government believed it would be
able to overcome lenders’ reservations and raise the funds needed to pay off
the arrears.
Unfortunately, even though the recent IMF
mission to Zimbabwe issued a favourable report on the efforts made, the actual progress
has fallen a long way short of the expressed hopes. Agricultural output in 2016
has been close to the lowest on record for food crops; many value-adding factories
already built for processing agricultural products remain under-utilised; some
minerals that used to be processed into higher value alloys are now being
exported as low-value concentrates; road resurfacing contracts have taken
several years to negotiate and work on the most important has yet to start;
work on only one of four power station projects is in progress; many banks are
reporting increases in non-performing debts; falling bank liquidity has caused
embarrassment to the whole country; a growing list of public enterprises cannot
pay regular wages and can offer only seriously restricted services; the public
sector salary payments are still absorbing almost all the tax revenues; expenditures
on government services are now dependent on deficit spending, which is being
funded by the sale of long-dated Treasury Bills, and attempts are only now being
made to ease indigenisation demands in ways intended to make the country more
attractive to foreign investors.
A preliminary assessment of the
government’s achievements was made at a meeting of the IMF’s Executive Board in
May, but the reports issued did not suggest that progress had been made on
settling the arrears. Several references were made to the severe conditions
affecting the economy and the report called for “bold policy revisions”, but
these comments appear to suggest that strict conditionality will apply to a new
stand-by facility, if one is eventually granted. If the arrears have not been
settled by the June 30 2016 deadline, the start of the long process will be
further delayed.
Given Zimbabwe’s
desperate need for investment inflows and the yet to be bridged gap between
investors’ needs and the government’s demands, the IMF is still likely to argue
that, as self-inflicted policies remain Zimbabwe’s principal handicaps, these
must be removed before the country’s pleas for help can be taken seriously. The
changes to the indigenisation policy are likely to be seen as important, but
the basic precepts of the policy are still so divorced from investor
requirements that only one move would be likely to impress investors as well as
the IMF’s Executive Board. That move would
be a decision to repeal the entire Indigenisation Act.
The sheer
scale of assistance now needed might easily be claimed to qualify the country
for disaster relief as, without question, any country that has seen its
productive capacity cut by about half, the bulk of its employed population
thrown out of work and a quarter forced to leave as refugees, could claim to
have experienced a disaster.
However,
countries normally qualify for disaster relief only after natural disasters,
such as earthquakes or floods. When the destructive forces are man-made and vigorously
sustained by those who made them, it is those perpetrators who are disqualifying
the whole country from receiving assistance. As any help would be seen to be
encouraging bad government, Zimbabwe’s challenge is to demonstrate that a genuine
change of course is taking place, gathering momentum and is not at risk of
being compromised by deviant political agendas.
The Trade Balance and Liquidity
Having generated the need to import a wide
range of goods that used to be grown or manufactured locally, and having lost
the export revenues that many of the same goods used to earn for the country,
Zimbabwe’s Balance of Trade has been severely negative for many years, as
illustrated in this graph. In 2015, imports did decline by almost 6% to $6,002
billion, but as export values fell by 11,7% to $2,7 billion, the trade deficit
of $3,298 billion for 2015 was only fractionally lower than the $3,316 billion
deficit in 2014.
As at
this date, no Ministry of Finance or Reserve Bank statistics have been released
for 2016, so the trade statistics and tax receipts needed for analysis are not
available. However, liquidity problems holding up payments and delaying
shipments are thought to be important indications of a marked first quarter slow-down
in business activity.
In the
first quarter of 2016, Press reports have referred to evidence of increased import
percentages of basic foods, even maize meal, indicating deepening levels of
stress among consumers as well as traders. Government tax revenues in the first
quarter of 2016 are reported to have missed their targets by substantial margins,
which forced the tax authorities to redouble their collection efforts and to
bring inordinate levels of pressure onto the shrinking number of survivors in
the business sector.
The
causes of the liquidity shortage have been linked to government’s decision to
fund an expanding budget deficit, which it has done by persuading pension funds
and financial institutions to take up long-dated Treasury Bills. Funds that
might have been made available for medium to long-term investments have been
captured by government and applied almost exclusively to recurrent
expenditures, including salaries.
The
direct or indirect use of almost all of this money is on consumer goods, but as
almost anything produced in Zimbabwe can be more cheaply sourced from abroad,
the bulk of the country’s needs are being met by foreign suppliers. Borrowing
for consumption is already serious as it inevitably adds to a growing burden of
unproductive debt, but having to spend the borrowed funds on imports is
accelerating the decline in domestic liquidity. Increases in non-performing
loans are now adding to the problem.
Businesses
that are trying to survive are now even more handicapped by the shortages of
medium-term capital. The signs that business is being crowded-out by
government’s efforts to mop up all available liquidity are escalating by the
day and the viability of many businesses is now being threatened by the delayed
settlements of accounts to foreign suppliers. Several companies have reported receiving
notice of possible suspensions of delivery consignments if timeous payments
cannot be assured.
Although
arrangements are claimed to have been made to acquire loans that will help recapitalise
commercial bank nostro accounts, these funds have yet to materialise. The
tightening liquidity is adding to distrust for government and its likely
ability to honour its repayment obligations on the maturity of the Treasury
Bills. This has prompted the holders of many of these Bills to offload them
onto the market at discounts of up to 50%.
Fiscal Reform
Despite
the assurances of fiscal reform delivered in the presentations at the IMF
meetings in Lima, a build-up of deviations is well illustrated by the deficit
spending and the extremely questionable way government has chosen to fund the
deficit. Then, in his Independence Day speech on April 18, 2016, President Mugabe
appeared to be even more determined to demolish the chances of meeting Lima’s government
spending reduction promises by assuring public sector employees that they will
get further salary increases this year.
Salary
increases will become affordable only if the public sector establishment is
reduced very significantly, but government’s declared intention to retain its
very expensive retrenchment procedures is keeping the downsizing process on a
very slow path. As percentages of both Gross Domestic Product and of government
revenue, Zimbabwe already spends more than any other country in Africa on public
sector workers’ salaries. This appears set to continue, but at great cost to
service delivery.
Another
key commitment made in Lima was to assist the revitalisation of agriculture by
generating leasehold documents that farmers could pledge to banks as security
for loans. As this has been the subject of frequently heated debate for the
past fifteen years, the population is eagerly awaiting the outcome of the most
recent attempts to prepare bankable documents.
To make
the arrangements acceptable, government will have to agree to a private
sector-run market structure that will permit foreclosures if farmers default on
loan repayments. Formal transfers of the leasehold rights to these properties
must be allowed to follow and they must be registered, take place at acceptable,
market-related prices and available to anyone who is able to pay. For these
conditions to be met, government will have to waive its current stipulation
that no such transfers can be in favour of people of colonial stock, from whom
these or other pieces of land might have been confiscated.
Food
Imports
Agro-processing
industry organisations are said to be combining forces to reduce food imports
from neighbouring countries. Their proposals, which call for restrictions to placed
on import flows, are needed, they claim, because these imports are undermining
the viability of local companies. However, the viability of local companies had
already been damaged by policies that forced efficient food producers off the
land. Accordingly, the reason why food imports are needed is that local production
volumes now fall a long way short of requirements.
However,
restricting imports will deal only with the symptoms of the problem and the
fact that these goods land in Zimbabwe at prices that are lower than the prices
of locally produced food is the more important issue. Local costs per unit of
output are too high, so removing the need for imports has to be the first step.
This calls for massive increases in production at much lower prices. For this,
production methods are needed that will deliver the required volumes
efficiently enough to yield profits at those prices.
Local
costs could be so greatly reduced by improved efficiencies that a large number
of other handicaps could be eased, if not overcome. The US dollar’s exchange
rate is only one of these and Zimbabwe does not have the option to devalue its
way back to profitability. The real problems are low crop yields, too few large-scale
farmers, too little collateral to secure the needed finance, extremely weak
security of tenure and the country’s inability to keep pace with changes in
production and processing methods. All of these problems stem directly from
deliberate policy choices that can be changed.
Changes
are urgent, but not only in the farming sector. The policies affecting
investment in new manufacturing production methods and the inability to
properly maintain existing machinery have kept costs high, making local goods increasingly
uncompetitive with the cost of their imported equivalents. Companies that have
to import raw materials that used to be supplied by local producers face
additional costs that also weaken their ability to compete, particularly if
their inefficiencies are tied to obsolete technology as well as to erratic
electricity and water supplies.
Hopefully,
the proposals from the agro-processing industry organisations will argue for
the return of large-scale farming operations to restore the effectiveness of
economies of scale, recover the dependability of high volume supplies and
encourage the inflows of investment capital needed to re-equip and modernise
the processing factories. These challenges require the total overhaul of
investment conditions to give the country better prospects of attracting the
essential capital inflows.
In the
initial statement of the Agro-processing industry organisations, the food
processors placed the emphasis on maize-meal imports as these sideline the
local millers and stock-feed producers. However, the successful imposition of
restrictions on already milled products will skirt around the local cost,
efficiency and volume issues. When they are addressed, the commercial operators
will automatically transfer their support to local suppliers.
Current
Trends
Zimbabwe’s Consumer Price Index’s downward trend
continued in the first quarter and by April, the meat index reached 87,21,
almost 6% lower than in April last year and almost 13% lower than in December
2012, the base date for the Index. Food prices decreased more steeply than the
overall CPI index and only fresh produce prices decreased more rapidly than
meat prices.
Retail
spending has been affected by job losses, delayed wage payments, wage cuts and
unpaid debts, all of which have contributed to a distinct downturn in disposable
income. In March and April, this was worsened by a growing cash shortage that
continued into May.
Falling
prices last year and in 2014 were made possible partly because of the weakening
rand, but this graph shows that the pressures on the rand eased in January,
since when the currency strengthened until early in May. Strong competition
between retailers, as well as between the retail sector and the informal
traders, has become the more important reason for the falling price levels.
Commodity Prices
On the international markets, commodity price
movements have shown encouraging signs of recovery through the first three
months of 2016 and the figures in April suggest that the five-year decline
might have bottomed out. As the graph shows, that fall had accelerated from
mid-2014 through most of 2015, so the very modest respite, just visible in the
slight upturns visible in the graph, has been welcomed by commodity exporting
countries all over the world.
The
improved indications appear still to be under pressure from the very severe
debt levels of most of the world’s industrialised countries and the low
interest rates – some now even negative – that might explain the continuing low
levels of consumer demand.
The
claims made by severely indebted governments that low interest rates should
stimulate consumption have proved to be misleading. Uncertainties since the 2008 financial crisis
made most householders concerned about their existing debt, but falling incomes
led to the debt becoming bigger percentages of Gross Domestic Product.
Hopes that the event would
prove very temporary initially supported attempts to sustain living standards,
but that kept the debts going up without increasing retail sales. So, all major
economies today have higher levels of debt than they had in 2007 and total debt
around the world, governments included, has grown by $57 trillion. Uncertainties
have therefore mounted and the concern shown by most households is being
expressed in decisions to spend as little as possible. Unfortunately, debt on
this scale poses risks to financial stability and this is slowing the whole
world’s recovery prospects.
For Zimbabwe, the gold price has improved to levels that are higher
than at any time since the third quarter of 2014. This has been a helpful
development, which has supported official efforts to win the confidence of
small-scale gold miners and gold panners, many of whom had chosen to smuggle
the gold into South Africa for immediate cash payments. Those activities were
illegal, but government has now decriminalised gold sales by anyone who is not
registered. Estimates claim that several tonnes of gold will be added to annual
production figures because of this move.
Platinum prices have also moved
up, but by much less than gold. However, the risk that the depressed prices
might jeopardise the prospects of Zimbabwe’s platinum producers is now being
reassessed as a new refining process has been developed and its adoption in Zimbabwe
could reduce the capital costs of building a refinery and even more
dramatically reduce the energy requirements for operating the process.
Known as the Kell Process, the method does away
with the need for a smelting furnace as the concentrate of the mixture of base
metals and precious metals is put instead through a high-pressure oxidation
process that first dissolves the base metals. These are drawn off as a solution
from which the base metals can be recovered through electrolysis.
The
solid oxidised residue then contains the precious metals, and this is put
through a roasting plant that prepares them for a subsequent leaching process. This
results in another liquid solution from which the gold, platinum and other
platinum-group metals can be recovered.
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• Electrical energy
consumption—84% reduction
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• Energy consumption
costs—76% reduction
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• CO2 - emissions—70% reduction
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• Installed power
requirement—92% reduction
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This
development will be important to Zimbabwe, but only if it encourages the
opening of many more platinum mines. Platinum-group metal mining has already become
the country’s most important source of export revenue and the yet to be agreed
adoption of the patented technologies involved will bring forward the date by
which the PGM beneficiation target can be reached. Producers using this method will
have a significantly lower energy consumption, so installed electricity
generation requirements will be much reduced. Compared with the currently used smelting
and refining methods, these calculated reductions are said to be the figures
shown in the table.
Hopes that the start of the tobacco-selling
season would end the liquidity crisis have been somewhat dulled by the
increasing proportion of the crop that is being grown and sold under contract.
The money loaned by contract buyers to contract growers is sourced offshore and
the total proceeds of the first few months’ sales will be absorbed in making
repayments to the foreign banks. The smaller proportion paid to the growers who
sell their tobacco on the auction floors is likely to remain the only addition
to liquidity for most of the first half of the selling season, but for longer
than that if average selling prices decline.
Growers
have been encouraged by the prices paid in the first weeks and they are hopeful
that prices will remain reasonably good. Some of the tobacco delivered has been
of excellent quality and early indications have increased market optimism.
However, the seasonal difficulties have led to forecasts that the volume on
offer might be as much as 15% lower than in 2015, so the total crop is unlikely
to yield an increase is export revenues through the year.
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