This article was sent out as an email on October 4, 2018
Dr Tinashe Nyamunda and Happiness Zengeni
HARARE- Throwing monetary solutions at economic problems is nothing new in Zimbabwe’s economic history. In 1981, the Zimbabwe Conference for Reconstruction and Development (ZIMCORD) was held to raise money required to finance economic development. There was excitement about the new independent country then and this was seen through the successful raising of US$3 billion that Finance Minister Enos Nkala and Economic Development Minister Bernard Chidzero (https://www.youtube.com/
However, the economic blueprints of Growth with Equity and the Transitional National Development Plan culminated in the government needing more money from the International Monetary Fund and this resulted in Zimbabwe adopting the disastrous Economic Structural Adjustment Programme by 1990; the effects of which the country never recovered from as has been well studied by various scholars. The raised funds were simply consumed and the country acquired more debt. In fact, all of the plans which were to follow even after 1981 were then adopted from long standing political culture that enforces bad fiscal practices
Why? Because the problem is not monetary! The monetary challenges in the country are a painful symptom of the problem and emanate largely from political spending. As it is currently, the Reserve Bank of Zimbabwe is just an overdraft institution for bad government spending Ever since dollarisation the country has been attempting to fix its problems using monetary solutions. However as many have for long been advocating, including the governor himself, the solution is connected to production! Put people to work, produce, sell and then get the money! Forget the reforms if you do not put the country to work. No matter how much money you put in the economy, whether it is the $27 billion that some estimate would bring the economy back to equilibrium, or even more, if the country is not producing, forget it! It will simply consume the money and get into even more debt!
Perhaps it is in this light that the move by Finance and Economic Development Minister Mthuli Ncube to announce fiscal measures at the same time as the MPS, could signal a shift towards correcting this. In his parting statement, which he personally believes was tough talk, RBZ governor John Mangudya admits that the measures he presented would need to be supported by a package of measures to reduce fiscal imbalances that are exerting pressure on money supply and hence inflation as a result of increased consumer spending which in turn requires increased foreign currency inflows. The country needs to live within its means.
Mthuli’s great plan to capture the informal market?
There is need to reduce a gaping fiscal deficit while boosting spending on priority areas such as infrastructure. For the Government to set itself to achieve any semblance of fiscal balance, the new Finance Minister quickly announced a new tax of 2 percent for every dollar transacted but one which also has unintended consequences particularly on the socio-political front. Going by the current levels of transactions within the economy, this would result in revenue of some RTGS $3.5 billion. But given that in a single stroke, they have subjected other non-foreign exchange monies to inflationary pressure because of the separation from FCA, even this is unworkable. And even for the capital markets where rates as low as 3% per annum would result in a negative return for short term tenors unless there is an adjustment to the interest rates. A 90-day TB tender would require a much higher compensatory yield to cover the flat charge. On the stock market, investors would now face charges of just above 8%. The negative effects of such will ultimately become a huge cost to Government.
The attempt to reign in the informal sector in this way is ridiculous as the players will simply just pass on the cost to the consumer who will bear most of the brunt of government revenue targets. These policies, to say the very least, are not people friendly and neither will they yield the aspired solutions.
Its most likely there will be an adjustment, reversal or even a shelving to the tax tomorrow when Ncube launches the Transitional Stabilisation Plan (2018-2020) only for the obvious reasons that it was an ambush on the people and that the quantum is against the push to improve the doing business environment for companies who are the main drivers of high value transactions.
Only for his PR, Ncube should start by apologising to the nation for presenting this tax to them and before he announces the new position, he will do well by presenting the available options. While still on it, its clear that there is a serious gap and that there is no time for a Government, which has to implement things fast, it would be wiser to call for an AUDIT into how the Government ended up with a $10.8 billion debt, how the money was used particularly on the TBs side. They also need to be honest about the maturity profile given that half of the TBs mature within 15 months.
Kenya presents the nearest example of what such kind of decisions can be out-rightly rejected by the people. In August, the Kenyan parliament threw out an earlier version of proposed fees on bank transfers, a so-called “Robin Hood” tax of 0.05% on transfers of more than 500,000 shillings. Perhaps its useful for Government to make a case study of this.
Reining in the informal market?
The government’s financial authorities are deluding themselves if they think that the measures they have announced have the capacity to rein in the informal market. First, separating FCAs from RTGS balances will only accelerate rather than slow down the parallel currency market. It makes all these other forms of money worthless. This is a veiled admission that an exchange rate actually exists in real terms, otherwise, there would be no need to do so! His explanation that this is to not discourage exporters is unconvincing.
Moreover, Mangudya and Ncube, went further to tax intermediate money transfers including mobile money, cell phone and all sorts of money movements to try raise more revenue for the state. The other explanation was to try and reign in the informal economy which they have no direct methods of extracting from.
If anything, most informal sector traders buy their products from South Africa and sometimes Botswana. Most of what they sell is imported and the government cannot possibly provide them with the foreign exchange they require to keep them in business. If the object is to drive their market into the ground or slow down their activities in favour of boosting the formal market, then their only option is to put these people to work. The informal sector will continue to thrive and formal sector will soon begin to face numerous viability challenges because of the structural misalignment just introduced into the economy. Both the RBZ Governor and the Minister of Finance’s diagnosis of the problem and their proposed solutions are seriously erroneous. Not only should they rethink their approach, but they now need to really consult widely in order to get to the real issues to be addressed. If anything, the outcry following the announcement of Dr Mangudya’s statement is a strong indication that many Zimbabweans are fully aware of the challenges that confront the country and the solutions suggested are untenable.
Everything boils down to the need to improve production
If the erstwhile financial authorities pursue the production agenda, they would need to confront the politics of state capture in the major primary industries of the country. How will they confront leakages in, for example, mining where high ranking politicians have huge interests? How do they regularise production to insure that all that is what is sold is captured through proper fiscal channels to insure revenue is not hemorrhaged out of the country through the various smuggling and laundering methods? How do you retake all of those sectors that have been parcelled out to influential politicians who control them and profit irregularly, outside proper fiscal channels? How do you retain money locally to build capacity for capital and economic expansion?
Mangudya suggested that inflation had been contained within the SADC threshold of 3-7%, which he argued to be okay for the country’s development trajectory. Not only is this figure woefully inaccurate in real terms, but the Governor is contradicting the institution he leads. A paper from the RBZ previously noted that if inflation passed 4.62 percent, it would be bad for economic growth and they would treat this as a danger zone. Official inflation is at 4.83%.
Overall, as was noted on tambarara earlier this week, there was a lot of tinkering and fiddling but no real solution to the challenges facing the nation.