When Mthuli Ncube assumed office in September of 2018, his work was well cut out for him. Zimbabwe was experiencing an acute cash shortage which was now in its third year. The bond note, then an export incentive, was losing value against a basket of currencies under the 9-year old multicurrency regime. The economy was overheating, with disguised growth emanating from a disproportionate money supply growth, which in turn was a result of government over expenditure. At the material point international financiers wanted a convincing figure to unlock 2 decades of funding dry-spell which was on the back of defaults.
Over a period of 5 years (between 2013 and 2018), Zimbabwe loosely managed its fiscus, always spending more than it generated in turn creating huge budget deficits which demanded that government had to borrow from local banks to cover for shortfalls. In 2018, Zimbabwe incurred a deficit of $3 billion against a budget of $5 billion while cumulatively between 2013 and 2018 budget deficit totalled $7.8 billion. Since the country had been isolated from the international community and the economic situation further compounded by a huge foreign debt exposure which deterred new foreign debt, government only looked inward for a temporal budgetary reprieve and indeed banks used value created between 2009 and 2013, which was in USD, to finance government’s monetary demands.
At the end of Dec 2018, government had outstanding Treasury Bills totalling $8 billion in US dollars. Money supply grew from $4 billion in 2013 to $10 billion at the end of 2018 as a consequence of the over-issuance of sovereign paper. As money supply grew, hard currency earned over exports grossly lagged and this was to be the source of monetary imbalance. Exports enjoyed a 20% growth in 2018, the highest in 10 years, but they were coming off a relatively low base compared to money supply. The ratio of foreign currency amounts held in nostro accounts to total money supply stood at just 4% at the end of 2018, a clear indication that “local currency” was now the dominant force.
On taking over as Finance Minister, Mthuli Ncube promised to deal with the currency issue decisively and restore macroeconomic stability. He promised to do away with the local currency, a term referring to the bond note and RTGS balances on the system, which he condemned as bad money. Barely 3 months later, he did the opposite and by October 2018 he began the process of getting rid of the USD completely, but it was not without consequence. The initial plan was to stem further growth in money supply and this could be done by limiting the 2020 expenditure to levels not so far off the expected revenue levels, hence the 2019 budget’s austerity theme. Taxes were scaled up particularly on Mobile Money, a popular payments platform accounting for over 80% of the transactions volumes in Zimbabwe.
While austerity is a universal approach in periods of high macroeconomic disequilibrium, there are conditions that should be achieved in order for it to succeed. Primarily prices have to be stable and if a country is using own currency, relative currency weakness during the austerity period can be a plus as it cushions local industry, but the extend of weakness has to be stable other than freefall. In February 2019, the USD accounts were officially separated from RTGS Nostros, giving birth to the new currency. The currency went on to lose 86% by year end, making it one of the weakest in the region.
Although this has been a plus for local producers in the exporting business, the underlying weakness in currency had negative effects of pushing inflation up, in a market that is psychologically dollarized. Consequentially rattling of markets through a rushed currency reform led to hyperinflation. What the authorities seemed not to understand is that by embarking on austerity, the objective of rebalancing the fiscus with a view to lower the deficit level could only be attained if other variables are stable. By letting inflation run through a concurrent currency reform, it meant the cost function would be impacted. Costs rose in line with inflation and by the end of 2019, inflation had reached 521% according to ZIMSTAT.
The 2019 budget was thus revised twice, initially moving from $8 billion to $18 billion and then to $25 billion, yet no meaningful balancing was achieved on the fiscus. The excesses such as production loss due to unavailability of power, disruption of value chains due to cost increases and sharp energy cost increases, coupled with social service collapse, were some of the costs which militated against austerity. Consequently, key targets within the 2 year Transitional Stabilisation Program, launched in 2018, were grossly missed and these included inflation and economic growth.
2020 is yet another test for the beleaguered professor, his reputation has already been badly buttered. Despite the IMF agreeing to a staff monitored program and consequently applauding efforts to rebalance the fiscus in its first SMP review, the net result has been worse off. Poverty levels are seen entrenching and now estimated at above half of the population, GDP will fall for the second straight year in 2020 while inflation is expected to rise further. FDI is likely to become more elusive in the face of macro instability, while remittances through formal channels will be deterred by speculation of policy changes.
The local financial sector’s ability to fund domestic needs has grossly diminished, while foreign portfolio divestment has been predominant. Earners of forex will maintain preference for holding on to hard currency, given local currency weakness. Although the deficit to GDP levels might have come down and current account deficit eased to the lowest in a decade in 2019, the key drivers were weaknesses in macro fundamentals such as demand dearth and forgoing of critical services and imports.
In nominal terms, the 2020 budget comes in as expansionary, and yet contractionary in real terms. The budget for 2020 is circa US $2.8 billion (assuming an average exchange of about 1:22 for 2020) in real terms which is almost at the same level to last year. These figures are already below the 5-year average budget between 2014 and 2018, which means in essence we are spending less, even so as there has been a drastic tilt against recurrent expenditure, a damaging phenomena. If in a very conservative sense, the budget is let to run at its current levels which is highly unlikely as upward pressure mounts, it means aggregate demand in the economy will remain low and get further diminished by inflation, thus pushing production lower and consequently GDP in that same direction.
There are already pressures emanating from weak salary adjustments, sustained subsidies demanding further funding as well low capacity from banks and pension funds to finance domestic capital needs including that of government, which makes money printing inevitable and when this happens, chickens will come home to roost, the exchange rate will explode and speed up the Zimdollar demise. It is the writer’s view that Mthuli Ncube’s figurative orbituary is about to be written and put paid. It is apparent that the prevailing environment, like in 2008, cannot be sustained and 2020 will be the defining year. – Source: Equityaxis