Economic outlook

ECONOMIC OUTLOOK AND OPTIONS

John Robertson, Zimbabwe

16 June 2016

Zimbabwe:  Outlook and Options - mid-2016

Descriptions of Zimbabwe’s business environment have at least as many twists and turns as the descriptions of the economies of much more developed countries, but Zimbabwe distinguishes itself from nearly all the others because a very high proportion of the problems are self-inflicted. More accurately, they are inflicted on the country’s business sector by the country’s authorities. In very blunt terms, the country’s formerly impressive productive capacity has come under such a sustained attack that now most of it can barely function.

Unfortunately, the nature of this attack had a political objective that was considered to be of overwhelming importance, so much so that all attempts to point out economic consequences were dismissed as irrelevant. These consequences have now solidified into so much damage that only a small number of well-positioned people can be said to have enjoyed the empowerment benefits that were promised to the whole indigenous population. These benefits were supposed to arise from the claimed dramatic increases in earnings that every loyal supporter of government policies would enjoy when they were given collective ownership rights over the country’s productive assets. 

Confiscations of land, which was re-allocated to people who were believed to be deserving supporters, is often considered the first of the wealth-redistribution attempts made by government, but a much earlier exercise had seen the withdrawal and redeployment of the foreign exchange allocations and import licenses that had been competed for and awarded to thousands of established businesses. As most of the selected beneficiaries of this empowerment plan discovered that the easiest way to enrich themselves was to sell the allocations and licenses back to the people from whom they had been taken, most of them never learned to make productive use of the funds, but the businesses that recovered their money had to contend with much higher costs.

Empowerment promises that depended on land redistribution then appeared to offer the best options, but as the dispossession of skilled farmers, plus the elimination of billions of dollars-worth of the collateral that had served as the security for most bank loans, caused Zimbabwe’s major productive sectors to suffer a steep decline, government had to turn its attention to new empowerment promises. For these to work, every company started by non-indigenous people was required to relinquish 51% of its shares to indigenous people, none of whom should be expected to pay for them any time soon. And if the companies depended upon mining or natural resources, government declared that no payment would ever be made for their shares.

Curiously, government seemed unconcerned by the consequences of these policy decisions, mainly because they tied in with the “take control of business” objective. Severe licensing restrictions were among the many factors that badly discouraged new manufacturing investment in the 1980s, and the IMF’s Structural Adjustment Programme in 1992 was of far more value to retailers than it was to manufacturers. Stores filled with imports and consumers started to turn their backs on local suppliers.

But when Land Acquisition Orders, backed by constitutional amendments, began to cause the eviction of farmers, the falls in agricultural output were quickly followed by further declines in manufacturing. Falls in foreign exchange earnings from agriculture as well as manufacturing then accelerated the country’s shrinking ability to service foreign debts, or to pay for the imports on which the country was becoming increasingly dependent. And all of these caused the loss of hundreds of thousands of jobs.

A lengthy list of casualties began to emerge from this staggeringly poor set of policy choices. In specific areas, such as employment creation, food security, the textiles industry, pharmaceutical production, steel production, city centre property development, vehicle assembly and consumer goods exports, the sectors have almost collapsed, or they have gone out of business. Even those that have survived, such as the milling industry and the edible oil-expressing firms, National Railways of Zimbabwe and Air Zimbabwe, are all in severe difficulties, none of which will be solved without expenditures of hundreds of millions of dollars, if not billions.

Perhaps the most spectacular casualty of all was the Zimbabwe dollar. As this broke world records, taking the length of time it did to move its decimal place 25 steps to the left, its destruction can be described as absolute. A consequence of that is, simply, it is not on its way back. No currency can possibly be worthy of respect if it does not have the support it needs from a sound and dependable national productive capacity. When Zimbabwe’s productive capacity was so thoroughly disabled by government policies, and when the same policies were defended and even reinforced by the country’s supreme authorities, the country also ceased to be worthy of respect.

That describes the problem that now has to be overcome. Recent measures by the Reserve Bank barely even address the symptoms, but the inept way they were put across to the public caused misinterpretations and rumours that were enough to prompt and sustain large cash withdrawals from the already depleted balances. Unfortunately, the distrust for the authorities is so severe that if an announcement were made to reverse the latest pronouncements, that retraction would not encourage many people to start banking their cash again. But bank balances remain and appear to be accessible for settling accounts, provided those who have to be paid have bank accounts into which the money can be paid. If it all keeps working, physical cash seems unnecessary, but real money has to be somewhere in the system if it is to keep working. It is in this regard that Zimbabwe has come off the rails.

Because the country is up against a deadline for settling the most pressing component of its total $10 billion debt, this being the arrears now amounting to $1,8 billion, and because it has other international obligations, it is in urgent need of foreign exchange. The most important feature of the recent Reserve Bank measures is not the bond notes at all. It is the decision to demand that the commercial banks release to them at least half of the foreign exchange earned by all the banks’ commodity export clients.

In normal circumstances, a country’s exporters will happily accept that country’s local currency in exchange for the foreign currency it is earning, so the exporters surrender the foreign exchange to their central bank. Exporters can usually settle a good proportion of their payment obligations in their local currency, but when they have to pay for imported raw materials or machines, they will expect to have no difficulty exchanging some of their local money for the foreign exchange that they need.

Unfortunately for Zimbabwe, no local currency is now available to exchange for the foreign currency that the State needs to settle, or even service its international obligations. And to make matters worse, the country’s damaged productive capacity means that it now imports goods worth about twice the amount that it earns from its exports. Because they have no option, the exporters need all of the foreign currency they are earning to settle their local debts, as well as to pay for their imports, so the decision to capture at least half of their export proceeds has placed at risk their ability to pay some of their local accounts as well as to continue generating their exports.

The Reserve Bank’s answer to this is to assure the markets that amounts equivalent to the value of the export proceeds captured from exporters will be credited to the RTGS accounts of the exporters’ banks. RTGS stands for real-time gross settlement, and it means that funds are instantly transferred electronically from one bank account to another, either in the same bank or in another bank, but it has to be a bank in the same country. The real money backing those transactions is supposed to be in the foreign exchange reserves earned by the country’s exporters, part of which is now being sent to the Reserve Bank. More is brought in by foreign investors or tourists, or offered to the country as Balance of Payments support, Budget Support, foreign loans or foreign aid.

Regrettably, Zimbabwe’s policy decisions in recent years and its inability to service its existing debts have disqualified it from receiving Balance of Payments support, Budget Support or further international loans, and foreign investors are almost all severely discouraged by the investment climate. Some foreign aid is arriving, but it usually comes in the form of food. If it arrives as money, the donors have most often identified the people who need it, and to ensure that all of it reaches the targeted communities, they are choosing to bypass government.

As a result, Zimbabwe’s foreign reserves have become so low that they are not sufficient to provide for the rate at which importers want to place orders and pay for goods from foreign suppliers. In its efforts to manage the growing imbalance, the Reserve Bank has established a Priorities List that is intended to regulate the release of foreign exchange to pay for imports. The fact that the trade balance is so severely negative is evidence enough that the country has badly damaged its ability to produce the goods that used to satisfy most of the needs of consumers. Many were even good enough to attract orders from foreign markets.

The damage itself is a complicated mix. Many of the businesses that used to produce excellent consumer goods were not able to update their production methods when price controls were imposed and wiped out company profits. Others could no longer continue when Land Reform caused the eviction of the farmers who were supplying their inputs. As the inflation problems developed into hyperinflation, the falling access then to foreign exchange arrested all forms of investment spending, even affecting basic maintenance of plant and equipment, and by the time that the Zimbabwe dollar collapsed, the entire manufacturing sector was in need of retooling and modernisation. Recapitalisation would have called for massive injections of capital, which could come only from external shareholders or new investors, but such people were swept from the board by the imposition of the indigenisation legislation in the first months of 2010.

Zimbabwe’s trade unions then further complicated the scene by demanding wage increases from the already handicapped productive sectors, all of which had to struggle against rising costs while export commodity prices were entering a long, downward slide that might not yet be over. With local productivity remaining low, but wages and other costs rising and the US dollar also appreciating, imported consumer goods became cheaper, while what was still on the list of locally manufactured goods became more expensive. When the prices of almost everything produced in Zimbabwe were higher than the prices of imports, the hopes of building up foreign reserves disappeared.

As the crunch appears to have arrived, the issue of most concern is the real value of the balances represented in the RTGS accounts of the banks. Domestic transactions seem to be carried out smoothly enough, but when the payments are being made for imports, how soon will the sellers be allowed foreign exchange to replace their stocks?

If the money being accumulated by the Reserve Bank is to be used to settle some of government’s foreign commitments, when that money reaches the creditors, the balances in our RTGS accounts will no longer have the needed backing. In practical terms, this will translate into lengthening queues of delayed payments for goods already bought and even longer queues for applications for funds to pay for new imports.

Government is arguing that these conditions should energise Zimbabwe’s entrepreneurs and investors to restart all the closed factories and rebuild local productive capacity. To this end, government’s contribution is a 5% export bonus. Given the scale of the problems that need solving and the fact that we still have in place all the political features that have discouraged investors for years, these government hopes have attracted a great deal of criticism.

As the difference between local goods prices and their imported equivalents is closer to 50% than 5%, the export bonus is being dismissed as irrelevant. For the producers of gold, platinum, diamonds and tobacco, reducing the royalties and levies could have much more easily generated the incentives of that order, but more importantly, they did not need incentivising; all these were being produced only for export markets anyway.

For any consumer goods factory to be reopened, the immediate need will be for foreign exchange to pay for new machinery and stocks of raw materials. As Zimbabwe’s credit rating has fallen to the bottom of the scale, such funding can come only from abroad and the only source of such funds would have to be courageous investors. But they would want to see a very extensive remodelling of our investment climate before making any such commitments.

The total repeal of the Indigenisation and Economic Empowerment Act would be a good start. This should be followed by the removal of the several dozen licences, permits and approval procedures that slow the investment process, add to the costs and uncertainties, and unproductively absorb large amounts of time.

Those dependent on agricultural inputs would want to see their farming suppliers regaining secure property rights, as these would facilitate their own access to finance as well as strengthen their longer-term planning abilities. The investors themselves would also need uncomplicated procedures for obtaining residence permits and work permits.  

Looking to the future is extremely important, but having to start from where we are now places an additional requirement on all Zimbabweans: we have to reassess our understanding of the nature of money.

From the point of view of investors as well as consumers, money is supposed to serve as a Store of Value. This value can be expressed as both an income and a capital amount. The income value describes the earning capacity of the assets in which the original money has been invested, or the interest being earned from money if it is out on loan, or if it is a deposit in a bank. Earnings usually amount to rents, profits, dividends or interest. And better wages can flow from investments in skills. All of these can go up, or down, depending on conditions in the economy and how well they are managed.

These conditions can be described in many different ways, but most of them can usually be summarised by comparing demand and supply. If demand is rising faster than supply, prices will normally rise, and vice versa. But other issues can come into such debates, such as the quality of what is being offered by the supplier, or the buyers’ ability to purchase other requirements. Declining local demand can force the producers of good products to search for external markets against much fiercer competition.

Wages are usually treated separately; we don’t often expect them to go down, but the supply – demand relationship is still there: if wages are not allowed to fall when demand for labour falls, the jobs cease to exist. So, wages do fall anyway – to zero.

Focusing on investors, if the capital amount is tied up in properties, or in a selection of shares, the income will be in rents or dividends, but if these actually rise, or even if they are expected to trend upwards, the capital value of such assets can go up. Capital appreciation is then said to have improved their market values, but just how much will depend upon what other market forces are doing to property or share prices. Market forces will also influence interest rates, if the money has been placed on fixed deposit in the banks, but these market forces might be different from bank to bank.

Popular banks might offer less interest because, having attracted more money than they can readily lend to shrinking numbers of sound borrowers, they might offer lower rates to discourage the inflow of deposits that cannot be put to good use. But all these facets of the flows of money, the demand, supply, prices and rates, bring in the behaviour, conduct and responses of people. This highlights an important fact: the country’s main productive assets were people, not factories, mines or farms. For that reason, the effect of the persistent and strenuous efforts by government to impose regulations, controls and limitations on every business decision-making process has been to de-motivate and discourage the very people whose contributions were most needed.

These deteriorating conditions have put Zimbabweans into survival mode. Many of the supply gaps have attracted informal operators and the more successful of these have recognised trading opportunities that they could turn into income sources. But buying and selling, not manufacturing, has become the most common of all the informal activities and this makes a very limited contribution to the creation of wealth.

For these traders, the liquidity collapse has impacted on the buying power of their target markets and has made their lives far more difficult. Unfortunately, recent trends suggest that if dramatic changes to the damaging policies are not made very soon, even more people will find themselves forced to join the increasingly stressed informal sector. Already, far too many people are relying on the limited purchasing power of the markets targeted by informal traders, so adding to that number while further cutting the total earnings through additional job losses will cause the very low average informal earnings to fall even further.

But there are limits to everything. The country’s whole population now needs to become much more critically aware of the needed process of change. Very big problems need very big policy changes, and so far, we have had only very small attempts that are dealing only with the symptoms. If we all recognise that we need to be stimulating changes that will lead to the creation of hundreds of thousands of jobs, and if we keep reminding ourselves that each job costs thousands of dollars to create, we will readily accept the fact that many hundreds of millions of dollars-worth of new investment has to be attracted into the country. Only by rebuilding productive capacity can we hope to restore our international credibility, employ our people and generate foreign reserves.

To attract investment, investor confidence has to be rebuilt so well that the investors, who could choose from 200 other countries, become eager to choose Zimbabwe. Very big policy changes are needed if we are to make ourselves that attractive. Confidence will be rebuilt when we show complete respect for civil rights, judicial rights and property rights, and when we entrench that deep respect in very clear Constitutional guarantees.

Fixed property, particularly land, is by far the best form of collateral that can be offered to banks as security for loans, so it is essential that all the land that was declared to be the property of the State should be placed back onto the market to allow it to becomes the financial foundation upon which the whole economy can be rebuilt. With their rights respected and access to local working capital, local investors who are empowered by secure property rights will regain the faith and courage needed to start the reconstruction process. Without doubt, many foreign investors will arrive too, with millions of dollars to take up the many other opportunities that so clearly exist.

The current official mindset claims that being allowed to invest in Zimbabwe is an enormous privilege, so investors should pay dearly for that privilege. This is particularly so for the mining sector, for which the minerals under the ground are said to have such immense value that half of every mine has to be given to government free of charge.

But the cold, hard fact is that the minerals under the ground have no value whatever while they are still under the ground. The business of mining is locating them, reaching them, extracting them and putting them through expensive processing to turn them into something of value. That long process carries with it huge costs and enormous risks, only one of which is that the world price of the mineral might fall and make all those cost impossible to recover.

Government’s current demands on mining companies are preventing any prospect of new mining investment inflows. For that reason, they are preventing the creation of tens of thousands of jobs and the generation of billions of dollars-worth of export revenues.

Common sense demands that the policies must be changed. When they are, Zimbabwe’s recovery will start. And when Zimbabwe does turn that corner, the restored property rights will provide farmers with the collateral they need to borrow the working capital and regain the confidence to make the very considerable efforts that will be needed to rebuild Zimbabwe’s agricultural sector.

For property owners in the residential, commercial and industrial areas, one of the first signs of economic recovery will be an improvement in property prices. As the adoption of the needed policies will greatly improve economic prospects, and as Zimbabwe, even now, offers a better investment platform than can be found in most other African countries, the country will regain the recognition that it is the best placed in the entire region to become the transport and communications hub, the prime financial services centre and the major supplier of agricultural inputs for the full range of agricultural processing companies.

All the evidence suggests that the conditions now in place are too damaging and totally inappropriate to our needs, so they cannot be left in place for much longer. Therefore, change must be on the way. We have to remain hopeful that it takes place soon and that the changes will be in the right direction.

ENDS

John Robertson is an economics consultant and past president of the Zimbabwe Economics Society.

For further information:

John Robertson

Robertson Economic Information Services

Tel:  +263 4 740 205

Cell: +263 772 224 755

E-mail:  jmrobertson@umaxlife.co.zw

Website:  www.robertsoneconomics.com