The Sunday News
Dr Bongani Ngwenya
Preamble:
THE period 2009-2012 was marked by an economic rebound from a severe economic meltdown that was characterised by hyperinflation, following the introduction of the multiple-currency regime. The multi-currency regime brought about price stability and tamed hyperinflation to zero levels overnight. The economy experienced a geometric average growth rate of 11,0 percent per annum.
However, GDP growth decelerated sharply from 10,6 percent in 2012 to 4,5 percent in 2013 with an estimated 3,1 percent in 2014. Real GDP was projected to marginally improve to 3,2 percent in 2015. The basis of this projected marginal improvement was the planned investments in agriculture, mining, communications and other infrastructure projects, including in the water and energy sectors.
The negative impact of weak macro-economic policies, unfortunately began manifesting themselves in 2015 in a sustained negative inflation that has turned our economy into a deflation.
However, other factors like the continued firming of the US dollar against weak currencies, like the South African rand also contributed to deflation. The argument is, with strong macro-economic policies, a severe deflation could have been mitigated.
The weak macro-economic policies have ushered in a background of weak domestic demand, tight liquidity conditions, with inflation running in the negative from the last quarter of 2014, and with a sustained trend throughout 2015 to date.
Industrial capacity utilisation has continued to decline, and is estimated at 36,3 percent owing to underproduction and lack of competitiveness. The real exchange rate overvaluation relative to the South African rand has caused a loss in external competitiveness, as it has made imports cheaper than domestically produced goods and our exports more expensive.
Because of increasing demand for imports and dwindling export earnings, our external sector position is under severe pressure, with an estimated current account deficit of around 23,1 percent from 2014. Zimbabwe is still at high risk of debt distress, despite clearing the IMF arrears recently, with an unsustainable external debt estimated at $7 billion to date. On 29 October 2014, Government had approved a debt resolution strategy, with the main objective of expediting the re-engagement process with the country’s creditors.
The Government planned high-level international debt resolution forum in 2015 with the assistance of the African Development Bank was successful and culminated in a debt arrears clearing plan. This is the same plan that has seen the Government clearing the debt arrears with the IMF, notwithstanding the fact that there is still an unsustainable debt overhang with respect to the World Bank and the African Development Bank arrears.
Macroeconomic Policies:
Fiscal Policy — The fiscal position remains tight, with the liquidity problem worsening by day, the situation is not good at all, and the country is still under debt distress. The large amount of current expenditures in this year’s budget is effectively crowding out capital expenditure, which is essential for medium and long-term economic growth. The weakness of public investment is exacerbated by the low borrowing capacity because of the high public debt overhang.
The credibility of fiscal policy has been seriously compromised by underperformance on the revenue side of the budget. As more companies close and throwing employees into the streets, the net effect is a reduction of the revenue side of the budget.
Thus, fiscal policy does not reflect the key development priorities and social objectives articulated in Zim Asset. Government expenditures, including loan repayments, for the 10 months of October 2014 to date have been running higher than or above targeted due to additional employment costs and higher loan repayments. Employment costs alone, excluding loan repayments, average 85 percent of total expenditures. The employment costs have been higher than budgeted as public wages and salaries were increased by the civil service salary review that was implemented from April 2014. The expenditure mix remains highly unsustainable, with current expenditures constituting about 96 percent of total expenditures in the budget.
Monetary Policy — There is express desire to continue using the multi-currency regime in Zimbabwe, regardless of the costs that certainly outweigh the benefits. The issue here is that the economic fundamentals are not right yet, to support the reintroduction of a local currency. The major costs being that our central bank effectively lost direct control over money supply, interest rates and the exchange rate.
The role of the Reserve Bank of Zimbabwe has therefore been largely limited to banking supervision and facilitation of the smooth operation of the national payment system to ensure financial stability. This began with Government’s treasury accounts that were successfully transferred from a commercial bank to the Reserve Bank in July 2014, thus restoring the Reserve Bank’s function as banker to the Government. Cabinet approved the principles for amendments to the Banking Act in June 2014, with the intention of pushing through the amendments to Parliament by the end of March 2015.
The amendments to the Banking Act were meant to improve corporate governance in the banking sector, and build more confidence. There was also need to strengthen the Troubled Bank Resolution Framework, enhance consumer protection, improve regulatory co-ordination and facilitate the licensing and regulation of credit reference bureaus.
According to the 2015 national budget statement, total banking sector deposits increased by 8,3 percent from $4,8 billion as of 31 October 2013 to $5,2 billion by 31 October 2014. Total banking sector loans and advances grew by 6,2 percent to $3,9 billion on 31 October 2014, against $3,6 billion in October 2013. In the face of the high cost of doing business, the debt repayment capacity of borrowers remained under stress. Thus, the level of non-performing loans had to rise from 15,9 percent as of 31 December 2013 to 20,1 percent by 13 September 2014. The banking sector remained generally sound during this period, that is, 2014, with a total of 12 banks recording profits as at 30 June 2014.
However, the RBZ raised alarm and worry about the banks return on assets, which remained very low and was slightly negative in June 2014, while the return on equity improved somewhat. The losses recorded by the few banking institutions were attributed to high levels of non-performing loans, high operating expenses and high loan loss provisions.
In conclusion, the year 2016 hasn’t been good at all, with the liquidity crisis worsening by day. This casts a lot of doubt on the effectiveness of our macro-economic policies. The argument is, we have not instituted strong enough macro-economic policies that go or are in line with management of the multi-currency regime. This fundamental was missed right from the time we decided to adopt the multi-currency regime in 2009.
There is a need to continue implementation of structural reforms to improve the business environment, achieve a sustainable current account balance, reform public enterprises and make growth more inclusive.
Dr Bongani Ngwenya is a Bulawayo-based Economist and Senior Lecturer at Solusi University’s Post Graduate School of Business. Feedback: [email protected]/[email protected]
