Looking into the Zimbabwe financial crystal ball

The economy was rattled particularly after the highly contested elections of July 30 2018, which saw domestic debt soaring to $9,6 billion by August 2018, with more than half the amount contracted between 2017 and 2018.
In what is viewed as an effort to displace politics with economics, President Emmerson Mnangagwa appointed Professor Mthuli Ncube – a respected technocrat – to run the country’s Treasury.

By Persistence Gwanyanya

It looks as if the President is giving the new Finance Minister the much-needed support to effectively executive his mandate, which is commendable given the task that lies ahead.

Whilst economists and experts are agreed that Zimbabwe’s economic challenges are structural and, thus, need long-term solutions, the ideal policy sequencing dictates that we start by dealing with the current market aberrations in order to set the platform, tone and pace for meaningful reforms.

It is, therefore, unsurprising that Prof Ncube is now focussing on stabilising the economy first through the Transitional Stabilisation Programme (TSP), which is supposed to run for the next 24 months to December 2020.

And this involves maintaining the multiple currency regime, with the US dollar as the anchor currency until the fiscal imbalances are addressed.

However, it seems the USD/RTGSs/bond peg is causing discomfort to the Reserve Bank of Zimbabwe – which has assumed the intermediary role of collecting and allocating foreign currency resources – as it is now essentially subsidising critical imports such as fuel.

As such, policy makers should brace themselves for increased calls for the devaluation of RTGS and bond note values.

To achieve the required fiscal rebalance, TSP prioritises austerity measures to cut back Government’s urge to spend, a phenomenon that drove the hyper-inflationary trend of 2008.

It has to be noted that excessive spending is also a challenge to achieving macro-economic stability.

Supported by the recently introduced two percent transactional tax, austerity measures are expected to see a reduction in the budget deficit from the projected level of 11,7 percent in 2018 to 5 percent of GDP in 2019.

However, there are significant headwinds such as mounting inflationary pressures from the recent price increases, and excessive money supply from Treasury Bill (TB) maturities.

It will be particularly interesting to see how Treasury will deal with the $2,2 billion worth of TBs maturing in 2019.

There is one big challenge: continuing to roll-over the TBs will make them increasingly unattractive as their value will likely be affected by inflation.

It is important to note that by the end of October last year, inflation had risen to 31 percent from an average 3 percent in the first seven months of the year.

But as inflationary pressures mount, the economy will trend towards redollarisation occasioned by the concomittant increase in foreign currency demand.

Government is already coming under immense pressure from civil servants seeking a salary hike in order to cushion themselves from the rising cost of living.

However, Government cannot afford to pay salaries in foreign currency, which are projected at around $4 billion, as foreign currency inflows are not even enough to meet our import demands, hence increased reliance on borrowings.

It is not advisable for the country to increasingly rely on commercial facilities such as the Afreximbank one – which are understood to cost around 7 percent per annum – as it will be trapped in a debt rut that is too difficult to come out of.

As such, redollarisation should be discouraged.

However, the last thing we need is for civil servants to start demanding salaries in foreign currency.

It is quite unfortunate that the country is experiencing volatility in the currency market at a time when its external position is improving.

Government currently forecasts a current account deficit of  0,8 percent of gross domestic product (GDP) this year compared 1,8 percent in 2018.

This simply implies that excessive money supply occasioned by disproportionately high Government expenditure used to be the elephant in the room.

As such, Government should continue to tighten its belt.

As is often the case, the tendency to resist austerity measures is high.

The recent move by Members of Parliament (MPs) to force Treasury to allocate them more money to buy trendy vehicles, among some of the luxury items they are demanding, is quite telling.

Overall, there is a general tendency to resist austerity as it is considered as a euphemism for pain.

The pressures currently affecting the local economy means inflation is likely to be more than the targeted 5 percent, which will inevitably drive dollarisation faster and, thus, increase the urge to abandon the current exchange rate peg.

But this imperative can be best achieved through a gradual process, which may start with the liberalisation of the fuel sub-sector, which takes up more than 45 percent of the country’s foreign currency.

There may be need to allow some fuel dealers to import their own fuel and sell at locally viable prices for efficient price discovery, which will effectively ration out demand.

This approach can be extended to other sub-sectors until its spread throughout the economy. Thereafter, it will be easy to abandon the current exchange rate peg, probably after 2019.

It is important to note that the current measures to tackle obtaining economic challenges are contractionary in nature and may warrant a further downward revision in economic growth from the current 4 and 3,1 percent in 2018 and 2019, respectively.

However, the final economic outturn will largely depend on the weather outturn, which, however, is not expected to be so great.

All what this tells us is there is no easy way out.

We will all have to endure pain for a better future, which largely calls for the Government to walk the talk on the implementation of austerity measures.

Let me end by wishing all of you Zimbabweans a happy and prosperous New Year!!

Persistence Gwanyanya is an economic and financial expert. He is the founder and Deal Maker of Percy Advisory Services and Percycon Global Fund Managers (SA).