Change of Currency Not Ideal to Revive Economy

Christopher Mugaga

THE country’s economic crisis has deepened since the recent fiscal and monetary measures announced by Finance minister Mthuli Ncube and Reserve Bank governor John Mangudya. The economy has plunged into turmoil, amid shortages of basic commodities and skyrocketing prices, while the parallel market trade in foreign currency has spiralled out of control. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) spoke to Zimbabwe National Chamber of Commerce CE and economist Christopher Mugaga (CM) on currency reforms, challenges facing the economy and what is needed to kick-start the troubled economy:

KK: President Emmerson Mnangagwa has revealed his objective of achieving a middle-income economy in 2030. Do you think this is achievable?

CM: Well, a middle-income economy, let us clarify here what we are talking about; we are talking about an upper middle income economy. It is very achievable. But then a lot of headwinds stand in our way of achieving this. Let us look at countries which are in the middle-income bracket. You are talking of countries like China and Malaysia. You are also looking at a country such as the Philippines which will be joining the ranks of upper middle-income countries next year.

So when you talk about a middle income, let it be known that you are talking about Gross Domestic Product (GDP) rather we emphasising on gross national income per capita of between

US$1 000 to US$12 000. So it is achievable but there are lot of headwinds, especially the currency regime currently obtaining in the economy. The political tolerance in the country is still shaky. We have an opposition in the country which constitutes no less than 45% of the populace. So without a truce between the politicians in the country, I think it will be a case of a dragged solution to the extent that it will not be easy to reach middle-income status within the next 12 years.

KK: Talking about the political shakiness, Finance minister Mthuli Ncube spoke of the constraints posed by operating under a political collar despite his wishes to induce what he termed a fiscal shock. What do you make of these remarks?

CM: We need to be very clear to each other. One of the problems we have as a country is the lack of independence of institutions, which is one of the major threats in the country. When institutions in the country are quite compromised, getting results might not come easily. One compromised institution will have a ripple effect on another institution. That is what we certainly had when former president Robert Mugabe left power in November last year. What he left was a captured kind of institutional system where the central bank was answerable to a ministry and a ministry will be answerable to a political party and the political party will be answerable to one or two powerful individuals. If you look at how the new President Mnangagwa is implementing a number of policies, you will see that chances are it was a case of the winner-takes-all, with the sitting president calling the shots without much consultation, even with those just below him. This is what we need to see stopping forthwith. The solutions we need do not lie with the Finance minister. The personality might induce confidence in the short term, but in the long run you need proper institutions which are independent to support the policies. At the moment we are yet to come up with those institutions.

KK: What policy reforms are needed to revive the economy?

CM: The issue of currency has been a minefield since 1997 when we had “Black Friday”. Zimbabwe, since then, has never had a stable currency of its own, whether it was a domestic currency which was under pressure and overvalued, such as the Zimbabwean dollar when we maintained a fixed exchange rate, up to the time we had to discard the local currency. The short-term solution does not lie in the choice of currency; it certainly lies with the choice of solutions and prescriptions of solving the economy.

I tell you when you have got proper policies which bring confidence into the economy, the whole carnage regarding the exchange rate where you have the bond rate; the RTGS and so on will stop forthwith. Actually, a choice of currency will never be an issue that will, in any way, solve the problem. So in the short term we must have policy prescriptions that will contain the continuous deepening of fiscal deficit to GDP. Look at countries like Venezuela, they now have a fiscal deficit-to-GDP (ratio) of almost 30% and it is not a surprise that they have an inflation hitting 46 000% per annum. There is a clear reason why they are in that mess. In Zimbabwe, a lack of fiscal order, prudence or discipline is a major problem. Secondly also we do not have factories which are ticking. People think you can solve a currency problem in order to restock shops but actually currency is only a reflection of what is pertaining in the economy. The currency challenges we have in Zimbabwe are a reflection of the fiscal imbalances, the current account imbalances, confidence imbalances and be it even to do with independence of institutions imbalances. Once a central bank cannot call the shots or cannot set a monetary pace or trajectory, what then happens is they end up being answerable directly to Treasury. The Treasury in Zimbabwe is known for an expansionary fiscal policy and government through the RBZ will become weaker.

KK: The Finance minister will soon present the national budget. What are your expectations?

CM: I think for the new Treasury boss it is about coming down and accepting the realities of this economy. It is an economy which is in a comatose state. It is an economy in a debt trap. It is an economy which has become so informal to the extent that if the new minister is to focus 80% of his literature on how to re-capture the informal sector, it will be an ideal way of driving the economy forward. This is simply because right now it is only the few taxpayers who are in formal employment and supporting almost the whole economy, especially regarding infrastructure development, worse still, when we are not getting any lines of credit to support infrastructure development. He is a minister that has come to the reality of imbalances, especially the indiscipline by government in violating the 20% limit when it comes to the RBZ overdraft. Also he has to call for Parliament to have more powers of oversight, more than that of political parties.

It is important for President Mnangagwa to support Ncube by avoiding a caricature of a second-tier cabinet, where former ministers who were posted to the Zanu PF building remain powerful and remain shadow ministers. If that support comes, he can deliver. One issue he cannot avoid is the issue of tax refunds. A lot of businesses are struggling today for the simple reason that Zimra is not able to refund them because of a settlement gridlock.

Today if you are to owe Zimra US$2 million through accruals in PAYE and they owe you US$5 billion, the problem is that they do not allow a net-off despite the law allowing a net off. Figures coming out say the capacity utilisation is around 40% and I personally think it is nowhere near 40%. If that is appreciated then any policy interventions that are going to come will drive the economy with the right statistics. If you look at the South African economy, it is sitting between 65 and 70% in terms of capacity utilisation. If you compare with Zimbabwe, at 40% capacity utilisation, a lot should be happening. We need to move away from looking at capacity utilisation of firms to try to understand the capacity utilisation of sectors which will give us a better picture and Ncube should be alive to what is the real state of this economy.

KK: One of the challenges is that of skyrocketing prices of basic goods. What should be done to contain that?

CM: Let me simplify one thing about prices. Prices of US dollar-denominated goods are not that inflationary. We need to appreciate that when you talk of prices in Zimbabwe, there is what you call the RTGS inflation then the US dollar-denominated inflation. The US dollar-denominated inflation is very stable, crawling at an inflation rate of 1%. But what we have is RTGS inflation where there is an exchange rate dynamic that is creating what we call a domesticated imported inflation which is very unusual. It is domesticated in the sense that the exchange rate dynamics are happening within the borders of Zimbabwe, hence the gap between RTGS, bond and the US dollar, while the RTGS is losing value, which means you need more of those RTGS “dollars” to buy the same commodity creating inflation. As long as we have these dynamics, inflation remains a threat to the extent that the inflation figures as reported officially might be a far cry from what is on the ground. I think it is also important for ZimStat to revise how they calculate the Consumer Price Index. We need to move from CPI inflation data to what we call the Producer Price Index and also to the CPIX, which looks at the inflation outside those goods which have prices that fluctuate regularly. Those three forms of inflation (statistics) have to be given to the market regularly.

KK: There has been a lot of debate on the need to scrap bond notes. What is your take on the issue?

CM: For starters to think of removing bond notes is missing the point because a bond note at the moment can be interpreted as the physical bond note. There is also the bond note in electronic balance which is the RTGS balances we are having, although it is depressed. By removing that bond note, which has been printed to the tune of slightly above US$300 million, you are not solving the problem because we will still be left with deposits of US$9,2 billion which are compromised by RTGS balances spearheaded by how government has been trying to pay debts through domestic borrowing. Even if those bond notes are stopped today, we still have to live with those RTGS balances, to the extent that possibly by withdrawing the bond notes, it can even price up the RTGS balances.

KK: How much, in capital terms, is needed to revive industry?

CM: I think to revive industry in Zimbabwe, it is not a stock concept where you say Zimbabwe needs US$5 billion or whatever to revive industry. What we need for starters is a culture where banks, both domestic and international, are willing to extend lines of credit. What we need at the moment with the threat of the African Continental Free Trade Area being real, the major source of production we need at the moment is not capital, it is the markets. If you are going to inject money into the manufacturing sector to produce steel which will not have takers because of its quality, you will end up putting money in a bottomless pit. We have done our survey as the Zimbabwe National Chamber of Commerce regarding the magnitude of infrastructure requirements for Zimbabwe. We are looking at annual financing requirement of US$1,7 billion for infrastructure. Energy needs about US$11,3 billion, for transport we need about US$13,4 billion, for water and sanitation we are talking about US$1,8 billion, for information communication technology we are talking about US$6,75 billion.

Overall, I will not put my head on the block and say we need such a particular figure. What we need more than anything at the moment is markets, but markets can only come if you start producing competitive products. The focus should not be how much this economy needs, but to what extent can this economy be revived and be competitive, of which one of the major drivers is not capital itself but it is infrastructure, it’s the markets, it’s the perception and it is how we are going to deal with the debt. The pressure should be on how to handle the external debt and you will see funders coming on board.

Fact File: Takunda Mugaga

Born a triplet;

Prominent economist at both local and regional level;

Commissioner with Competition and Tariff Commission; and

Chinhoyi University of Technology councillor