Dr Kupukile Mlambo
IT is a pleasure for me to be here this evening and I would like to thank the organisers of this event for inviting me to make a few remarks. I also want to thank the Peace Messengers Quartet for the wonderful music. May God bless you in your music ministry as you bring more people closer to the feet of Jesus.
I was told that the purpose of this meeting is to give a refreshing moment to Bulawayo’s highly stressed executives and allow them to sit at the feet of Jesus. At first this description of Bulawayo top executives alarmed me and I feared for my safety. As you know, stress-related symptoms tend to be consistent with depression, anxiety, somatisation, phobia or paranoia. So what better way to de-stress than spending a beautiful evening listening to the soothing music of Peace Messengers Quartet. I just hope I won’t spoil all for you by what I am going to say and then add to your stress.
Let me begin my talk by giving you an outlook of the economy. I believe there is now consensus that in 2017 our economy will perform better than in 2016. Our estimates suggest that in 2017, the Zimbabwean economy will grow by 3,7 percent, the highest since 2013. The IMF projects a GDP growth of between 2,5-three percent, while the World Bank is projecting a growth rate of 2,8 percent for 2017.
This recovery is spearheaded by two main sectors, namely, agriculture and mining. Agriculture benefited from the good rains we were blessed with at the beginning of the season. Also Government incentives to the sector through Command Agriculture led to farmers putting 19 000 hectares under maize cultivation. A caveat is however, important here: the agricultural sector is recovering from a very low base, and its contribution to GDP is still very low compared with pre-2000. In mining, we expect robust contributions from gold, platinum, and chrome. The contribution of manufacturing remains lacklustre.
As a result, today, Zimbabwe depends mostly on minerals and agriculture for export earnings (83 percent in 2016). Minerals accounted for 55,5 percent while agriculture (mostly tobacco) accounted for 27,5 percent.
The prospects for sustained growth, especially in the medium term are not entirely bleak. Although much of our physical infrastructure has deteriorated, it remains adequate to sustain economic recovery. The level of human capital remains high. In the high growing countries of East Asia, high human capital played a significant role in fuelling economic growth. In Zimbabwe we need more focus on Maths, Science and Technology and Engineering.
The low capacity utilisation in manufacturing suggests that growth potential exists within the sector. The implementation of SEZ (Special Economic Zones) and import substitution has the potential to expand capacity.
There is also scope for increasing agriculture output through irrigation infrastructure rehabilitation. However, sustaining economic recovery going forward hinges on us addressing the persisting downside risks. I can identify three significant risks to economic recovery that require urgent attention, namely:
A large domestically financed fiscal deficit. A large consumption fuelled current account. A huge deficit, which has made it difficult to attract significant foreign capital inflows. It is these three deficits that are behind the current liquidity crunch.
To put this in contest, let me note that the current cash shortage is essentially a scarcity of foreign currency, and this is a challenge we have always faced since the 1960s. Let me explain. For local banks, there are two accounts that are important: their accounts with the central bank known as Real-Time Gross Settlement (RTGS) which banks use to settle local payments. Then they have Nostro-accounts, which hold their foreign currency. This account received foreign inflows and is used for foreign payments. In Zimbabwe it’s also used for importing cash.
Before dollarisation in 2009, local payments were settled in Zim dollars, while foreign payments were settled mostly in US$. Because foreign currency was scarce it was strictly rationed by the authorities. But after dollarisation the scarce foreign currency was now also used to settle domestic payments as well as effecting local transactions. Now in the current situation we can loosely think of RTGS balances as the local dollar and the Nostro balances as the foreign dollar. Overtime we have seen a growing mismatch between the local and foreign dollar.
Ratio of Nostro to RTGS Balances; Dec 2009 — 391,7 percent; Dec 2010 — 247 percent; Dec 2011 — 249 percent; Dec 2012 — 155 percent; Dec 2013 — 157 percent; Dec 2014 — 68,9 percent; Dec 2015 — 55,3 percent; Dec 2016 — 27,2 percent; May 2017 — 26,1 percent.
The result of this mismatch is revealing itself through a high demand for cash, leading to long queues in front of banks and in the emergence of the black market. We have seen the ratio of cash to bank deposits decline from 43,5 percent in the 2009 to 4,8 percent. Also notes and coins account for only two percent of the commercial banks’ total liquid assets.
With regard to the emergence of the parallel market, this is usually an indication of real exchange rate over-valuation. Preliminary results of the work being done by RBZ economists using the Old Mutual rate which compares the sterling price of Old Mutual shares in the LSE with the USD share price in the ZSE suggests that the intrinsic value of the dollar in Zimbabwe is 50 percent lower than the actual USD. Put differently foreign investors perceive a 50 percent premium for investing in Zimbabwe.
Explaining the mismatch. So what explains the mismatch between the RTGS and the Nostro balances?
(a) Persistent deficit and its financing
-Zimbabwe has a large fiscal deficit which has grown over time in the face of declining revenues.
-The deficit has been financed through domestic borrowing to the tune of $1,2bn in 2016 (mostly Treasury Bills and RBZ overdraft)
-A large part of this borrowing goes towards financing civil service employment costs, which accounts for close to 20 percent of GDP. This is clearly unsustainable.
-The bulk of Government revenues are in RTGS balances but Government spending requires foreign currency (puts pressure on Nostro balances)
-Sustaining economic recovery hinges on our ability to align Government spending of revenue flows.
(b) Consumption fuelled external deficit
-Due to loss of competitiveness following the appreciation of the USD against regional currencies well as the high cost of production, exports remain subdued.
-Zimbabwe is also heavily reliant on commodity exports, whose prices are subdued.
-Against this high import bill, due to high propensity for imported goods, low domestic production and cheaper imported alternatives.
-The large demand for imports also reflects the structure of the industrial sector in Zimbabwe which is highly import dependent. By some estimates (old) dependence on imported inputs and raw materials to the manufacturing sector could be as high as 25 percent and in some sectors over 50 percent.
-This explains why banks are reluctant to advance loans to companies, because while loans or overdrafts are advances in form of RTGS, companies will require part of that loan in foreign currency to import necessary raw materials and equipment. This puts pressure on the Nostro accounts of banks.
(c) Confidence/credibility deficit.
-Foreigners are reluctant to make equity investments, preferring loans.
-In 2016 Foreign Direct Investment to Zimbabwe declined by 14 percent (from a very low base) while portfolio investment fell by 78 percent, reflecting a decline in foreign investor confidence.
-Another key indicator of loss of confidence is the increase in the accounts held by resident Zimbabweans in foreign banks as reported by the BIS in Switzerland. After initially declining from $821m in 2009Q1 to $299 in 2013Q3, the amount in these balances increased to $940m in 2016Q2.
-Loss of confidence is also reflected in the preference for cash settlements by Zimbabweans.
i. Promoting a cash-lite economy.
ii. Promoting export of goods and services.
iii. Addressing the fiscal deficit and its financing.
iv. Promoting production and productivity across all sectors.
v. Promoting financial inclusion
vi. Implementing an investor business friendly environment.
vii. Re-organising State Owned Enterprises
What does this mean for you and your business?
-Dr Mlambo is the RBZ Deputy Governor and was speaking during a business forum organised by the Peace Messengers Quartet (SDA Church) in Bulawayo on Thursday.