Zimbabwe’s Z$18bn stimulus package

THE Zimbabwean government announced a well-timed stimulus package of Z$18 billion (US$360 million using market rates) on May 1, 2020.The stimulus package coincided with the partial lifting of lockdown restrictions with key sectors of the economy such as manufacturing, mining, agriculture and the tobacco auction floors resuming production.

By Victor Bhoroma

Covid-19 and the subsequent lockdown are having a devastating effect on the fragile local economy where hopes of a recovery have quickly vanished. The government now expects the economy to contract by 15% to 20% in 2020 (off-track from the 2020 budget forecast of 3% growth rate) and deeper than the minus 6,5% recorded officially in 2019. If this were to happen, it means that the local economy would have shed more than US$6 billion within two years.

Treasury announced that the Z$18 billion figure is 9% of gross domestic product (GDP), which puts Zimbabwe’s GDP at about ZW$200 billion. The stimulus package follows a similar move by neighbouring South Africa whose government announced a R500 billion (US$26 billion) stimulus package on April 21. The South African package equates to about 10% of that nation’s GDP.

Funding options

Even though the Zimbabwean government did not reveal the source of the funds and the actual modalities for disbursement, there are a number of options that could have been considered to raise the funding.

In February 2020, the Reserve Bank of Zimbabwe (RBZ) announced that 50% of the total bank deposits of Z$34,98 billion are owned by less than 200 entities, showing that there is excess liquidity on the market concentrated in the hands of a few corporates and financial institutions.

The government (through the central bank) could issue savings bonds with a longer term (maturity) of two to five years so as to mop up excess liquidity concentered in those few entities and reallocate the liquidity to the whole market through the stimulus package. This move would be ideal in managing inflation and growth in money supply on the market. However, the appetite for such Zimbabwean dollar-denominated bonds is very weak due to the inflationary environment.
The government could also consider restructuring the 2020 national budget and deducting the stimulus from there since the package is 28,6% of the budget.

This may be possible since the prevailing inflationary environment pushes tax revenue collections beyond the budgeted figures. Already, the Zimbabwe Revenue Authority (Zimra) has collected net revenues of ZW$13,88 billion in the first quarter of 2020, surpassing the set target of ZW$12,57 billion by 10,42%.

Another ideal consideration could be an external loan of US$360 million from the all-weather Africa Export-Import Bank (Afreximbank). This loan would be distributed to commercial banks in exchange for the Zimbabwean dollar equivalent at the interbank rate for onward lending to the specified productive sectors. Zimbabwe would not have difficulties in repaying such a facility to Afreximbank in under three years, bearing in mind that the central bank retains more than 35% of all foreign currency export earnings.

A distant but disastrous source of funding would be through simply printing the Z$18 billion. The central bank operated under such modus operandi in the past and may revert to factory settings without much consideration to the adverse impact of money-printing on the inflation rate.

Stimulus package adequacy

The ZW$18 billion package falls way short of economic demands. However, it is appropriate, considering the impact of contracting more debt or printing money on the same market where inflation for April 2020 is likely to be over 750%.

The government has been on the market with US dollar-denominated savings bonds and Treasury Bills (TBs) before, without whetting the appetite of the private sector which prefers buying foreign currency as a store of value.

Further, local financial institutions are not short of liquidity to lend to the productive sector. The loan-to-deposit ratio has been going down due to increase in lending risk and high levels of inflation. The latest move by the central bank to cut interest rates from 25% to 15% is in itself a stimulus to the economy, despite strong reservations from the banking sector.

The interest rate cut follows an increase of the Medium-Term Bank Accommodation (MBA) to ZW$3 billion, while a further ZW$2 billion is set to be raised from the market through money market instruments. This means liquidity for on-lending to the productive sector is abundant and failure to lend has to do with macro-economic factors that pose risk to the lenders.

Sector allocations

The government announced that the small to medium enterprises (SMEs) sector will get ZW$500 million while the manufacturing, health and mining sectors will get ZW$3 billion and ZW$1 billion each, respectively. Of the total amount, ZW$2,4 billion will be set aside for social welfare and food grants for the vulnerable in society.

The biggest shock came in the allocation of ZW$6,1 billion to agriculture while giving the tourism and hospitality sector ZW$500 million.

The tourism and hospitality sector has all but collapsed for the rest of 2020 because of Covid-19 and thousands of jobs have been cut by all tourism players who have suspended operations indefinitely. Key players such as African Sun, Rainbow Tourism Group, Cresta Hotels, Africa Albida Tourism and others suspended operations after the lockdown restrictions were first announced.

In spite of bringing in foreign currency earnings that average US$1 billion in the last three years to the Zimbabwean economy, the tourism and hospitality sector will get a stimulus package less than 1% of what it brings yearly.

Despite pouring billions of dollars every season into the agricultural sector since 2016 and announcing a new command agriculture programme for winter wheat to the tune of ZW$2,4 billion, the farming sector got a lion’s share (34%) of the stimulus package.

Likely impact to the economy
The stimulus package falls short of matching the disruption caused to the economy by the pandemic. The economy had already been declining due to falling consumer incomes, low investment drive and limited production capacity. Market confidence in government policy is at an all-time low due to policy inconsistency and lack of traction on the much-needed reforms.

Zimbabwe’s formal employment numbers will shrink by a larger magnitude than the current estimates of 600 000 due to the impact of Covid-19 on production. Supply chain disruptions on trade have already affected exports and importation of critical raw materials by producers. However measures such as the relaxation of import duty on selected raw materials and corporate tax credits of 50% of expenditure will help producers sustain their operations in the short term.

There is no doubt that the package falls short of the amount needed to stimulate the economy which is set to register a successive decline in 2020. A package in the range of US$2 billion to US$3 billion would have made a huge impact to the struggling economy. Nevertheless, half a loaf is better than nothing.
Provided the stimulus package is implemented on time and reaches the actual producers in the market, there could be hope yet. The market is well accustomed to empty government rhetoric on mega deals and rescue packages and is doubtful about the authorities’ commitment to sustainable policies which are traceable and transparent to the taxpayer.

Only time will tell as to how much will actually be disbursed, on what terms and to which sectors.
Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.