News / National
Mthuli Ncube gets shock reality check
14 Sep 2018 at 16:27hrs | Views
NEWLY-appointed Finance minister Mthuli Ncube - who arrived in the country from Switzerland early this week amid a populist storm and blaze of publicity on how to fix Zimbabwe's critically broken economy - got a quick reality check when fiscal and monetary authorities as well as business executives reminded him of the shambolic state of things in the real world.
Ncube met Ministry of Finance and Reserve Bank of Zimbabwe (RBZ) officials, besides business leaders who told him of myriad problems that confront him.
Having arrived talking enthusiastically and confidently about how he is going to resolve the country's economic problems, briefings quickly showed him the grim reality: his tough assignment would be like trying to climb Mount Everest.
Before and upon his arrival, Ncube spoke about macro-economic fundamentals, fiscal and monetary policies reforms, budgetary issues, debt, budget deficit, current account deficit, clearing of arrears with international financial institutions (IFIs) to secure new funding, lines of credit and currency reforms.
While his ideas, eloquence and clarity were widely welcome, fiscal and monetary authorities, and business leaders, as well as the market were rattled by his pronouncements on currency issues. His remarks that the bonds notes would be abolished in December sent the rate of the quasi-currency rocketing in relation to the United States dollar in the parallel market. Yesterday the rate was US$1:1,85 bond up from around US$1:1,75 bond.
Zimbabwe has multiple exchange rates for the US dollar, bond note, Real Times Gross Settlement (RTGS) and mobile money transfers. This has created huge room for the black market and arbitrage.
Currency reforms
To give him a soft-landing, fiscal and monetary authorities told Ncube that his three proposals on currency reform- dollarisation, joining the Rand Monetary Area, Common Monetary Area or the Multilateral Monetary Area (MMA) or re-introducing the Zimbabwean dollar – were dead on arrival.
Ncube had told the media bond notes could be gone by the end of this year.
"I am very clear that there have to be currency reforms and the (current) currency approach is not working. In doing so, there are three choices that I will explore and pursue with urgency: One, adopt the US dollar only and remove the bond notes from circulation through a demonetisation process and also liberalise exchange controls.
"Two, adopt the rand by negotiating to join the Rand Monetary Area, and this will close the gap in loss of competitiveness against our largest trading partner, South Africa.
"Three, adopt a new Zim dollar, and here one needs to be clear that it has to be backed by adequate foreign reserves and macroeconomic conditions for its stability. Foreign currency accounts will also be introduced. For sure, currency reforms will be implemented."
However, official sources say Ncube was shocked when he was told that bond notes could not be removed so soon because there was no alternative at the moment.
"Ncube held meetings to engagement stakeholders. He was not only told of the economic problems the country, companies and individuals were facing, but that his currency proposals were dead in the water, at least for now," a senior government official said.
"He was also told that government is in a deep fiscal crisis and how it was surviving through printing or creating money through quasi-currency instruments, running huge and certainly illegal borrowings with the central bank, and widening budget deficits to fund its runaway expenditures. In short, that government is living its means and has created a huge financial mess which will not be easy clean up."
Dead in the water
Officials say Ncube was told that dollarisation would be very difficult without enough dollars. Zimbabwe only has US$1,5 billion and about US$400 million in bond notes in circulation. The market is dry in terms of hard currency because of low production and low exports.
The other sources of foreign currency such foreign direct investment, diaspora remittances, investments inflows and donor aid are limited, hence forex shortages.
To exacerbate the situation, formalising a currency deal with the United States was out due to Washington DC's economic and financial sanctions on Harare. US President Donald Trump recently signed Congress amendments to the Zimbabwe Democracy and Economic Recovery Act which tighten the restrictions.
"On the options advanced by Mthuli, full dollarisation is a long short because for that to happen we need sufficient forex and liquidity in the economy; so where will the money come from?" an official said.
"Joining the Multilateral Monetary Area will be impossible because Zimbabwe does not meet the convergence criteria, which includes the fact that a member must have their own currency. There are also many other benchmarks."
The official said member countries of the Multilateral Monetary Area — South Africa, Namibia, Lesotho and Swaziland — would also need to agree on whether to admit Zimbabwe or not, taking into account its macro-economic imperatives and economic indicators.
"The third option of removing bond notes and bringing back the Zimbabwean dollar is a non-starter. We need to fix the macro-economic issues first, ensure economic recovery and growth, and build reserves. Besides all that, we need to rebuild confidence in the economy and the local currency."
A government economic expert added:
"We must remember where we are coming from. As the Zim dollar collapsed following one of the worst inflation episodes in modern history, hyperinflation amid economic meltdown, Zimbabwe moved to a multi-currency system in early 2009, with the US dollar, the rand, and other international currencies becoming legal tender.
"As the US dollar strengthened against the rand in the mid-2010s, it came to dominate. The absence of a local currency anchored prices and helped improve policy credibility, but the regime was imperfect from the start, as the net external and fiscal positions were negative, the RBZ was not adequately capitalised, the financial sector was weak, and liquid assets were scarce. So these issues are still with and will affect the minister's proposed currency reforms."
Rebalancing economy
Another source said Ncube must grapple with the urgency of fiscal consolidation to restore policy credibility and economic stability. It said public sector employment costs remain at an unsustainable level, constraining social and infrastructure spending.
"At the moment, salaries are gobbling up 96% of government revenue, while government agricultural subsidies, bonuses, travel expenses and top-of-the-range vehicles for ministers and other officials drain the fiscus. Expenses far outweigh revenues.
"To resuscitate the economy, Ncube must engage in well-targeted, cost effective, and properly budgeted support to the agricultural and other productive sectors. He also needs to boost tax revenue collections, strengthen public financial management and reform state-owned enterprises, while containing broader, adverse spillovers from the fiscal imbalances. The ongoing deficit financing modalities, particularly the credit from the central bank, which is now way above the legal 20% of the previous financial year's revenues limit, are unsustainable and have significant potential for generating inflationary pressures. The marked increase in public debt is crowding out private sector activity, aggravating liquidity shortages, and exacerbating debt distress," the official said.
"Forex shortages have led to administrative controls on current and capital account transactions. Unless adjustment and reforms are made, these conditions would further undermine economic performance and weaken confidence. Ncube needs to also ensure urgent structural reforms and to create a conducive environment for private-sector-led growth."
Officials say Ncube is a catch-22 situation. He needs to stop the quasi-currency instruments which government is surviving on to restore fiscal stability and credibility, but if he does government will be crippled or will run into serious problems as it may not even be able to pay salaries.
RBZ intervention
RBZ governor John Mangudya yesterday said stakeholders must give Ncube working space.
"The market should not put too much pressure on the honourable minister as he works on measures to deal with fiscal imbalances that are exerting pressure on the financial sector and the foreign currency market," Mangudya said.
"As correctly enunciated by the president in his inauguration statement on 27 August 2018, the genesis of money creation and pressure on the currency is fiscal imbalances."
Mangudya said Ncube was aware that the introduction of the Zimbabwean dollar could not be rushed.
"The minister is being taken out of context. What I understood from the honourable minister is that he was emphasising on the need to right size the economy before the introduction of the local currency," he said.
"He emphasised on the need for fiscal consolidation, creation of a foreign currency buffer and enhancing confidence before the introduction of the local currency. We subscribe to these essential elements which are the platform for currency reform."
Political pressure
Tendai Biti, who served as finance minister in the government of national unity between 2009 and 2013, said Ncube, who comes into the position as an outsider as he is not in the ruling Zanu-PF structures, central committee or politburo, would need to be a maverick to resist political pressure. He said he also needs latitude to operate in a cutthroat political environment, in a post-coup situation.
"The position of finance minister is 30% technical and 70% politics. I have no doubt in his technical capacities but he has 0% political skills," Biti said. "He has to be careful; the environment in government is toxic and capricious. Zanu-PF will not change easily, it may remain the same as it was (under former President Robert) Mugabe or now President Emmerson Mnangagwa.
"So Ncube has to look the beast in the eye and confront it. It is either you run away like (former Industry minister) Nkosana Moyo did or they conscript you and, from the look of things, he is going to end up conscripted".
Quasi-currency instruments
Sources said Ncube also learnt this week in detail that government was financing its expenditures and growing budget deficit through quasi-currency instruments. Zimbabwe had a budget of US$1,4 billion in the first quarter of 2018, indicating persisting fiscal indiscipline.
Broad money increased by 40,81% on an annual basis, from US$6 491,67 million in June 2017 to US$9 140,89 million in June 2018, according to the RBZ June monthly bulletin. This reflected yearly increases in transferable deposits, 93.31%; and negotiable certificates of deposits 1,79%. Time deposits, however, declined by 5,18%.
Bond notes and coins circulating outside the banking system increased from US$175,77 million in June 2017, to US$379,20 million in June 2018.
Month-on-month, broad money increased by 6,84%, from US$8555,39 million in May 2018 to US$9 140,89 in June 2018.
The central bank overdraft facility, in the absence of sufficient cash reserves, has set in motion the creation of money in the nominally dollarised economy.
"Government entities spend the borrowed funds by crediting bank accounts of the payment recipients (employees, suppliers, contractors) through the real time gross settlements (RTGS) electronic system. These transactions increase deposits in the banking system, but without a concomitant increase in the quantity of US dollars available in cash or external (nostro) accounts," the International Monetary Fund (IMF) said in its country report No 17/196.
"To finance the remainder of the deficit, the government issued T-bills, mainly acquired by commercial banks but also used as payment for services."
As a result, RTGS balances in the economy now stand at US$2,5 billion, while Treasury Bills stand at about US$2 billion.
The RBZ's monthly economic review for June shows that transactions handled through the RTGS system continue to grow.
"A cumulative total of 2,5 million transactions valued at US$27,4 billion were settled through the RTGS system from 3 January to 30 June 2017 accounting for just above 70% of total transactions in the economy," the report says.
Although there are some US dollars in the economy, they are not freely circulating as people and banks hold on to the currency which they treat as reserve currency.
The US dollar balances in the economy stand at US$1,5 billion, while bond notes in circulation total US$400 million. Total deposits in the economy stand at US$9,7 billion of which US$4 billion are loans.
In the meantime, domestic debt has risen to US$10 billion, while external debt stands at US$8,5 billion.
Government officials say there is an urgent need to inject cash into the economy, with the best hope being that the Chinese government will advance a US$2 billion loan to Zimbabwe. However, talks with the Chinese have not yielded anything yet.
President Emmerson Mnangagwa arrived home from China last week where he attended the Forum on China-Africa Co-operation (Focac) in Beijing and held a bilateral meeting with Chinese President Xi Jinping. He came back empty-handed.
Officials say Zimbabwe has arrears of about US$300 million from previous Chinese loans.
The Lima Plan
Ncube has also spoken about reviving the Lima Plan under which Zimbabwe needs to pay US$1,8 billion to the World Bank and African Development Bank (AfDB) to open new lines of credit and fresh funding.
However, officials say Ncube has to figure out first where Zimbabwe will get that money after previous attempts to pay it through offshore loans and corporate structured finance deals, with gold guarantees, failed.
Currently saddled with a debt overhang of US$18 billion accrued from both public and private sector borrowing, the country has been sinking deeper into a fiscal quagmire since 2013.
Its debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million). It owes the Paris Club about US$6 billion. Arrears contribute about US$1 billion. The amount overdue to non-Paris Club creditors is US$476 million.
Previously government tried to get funding from Lazard and the Standard Bank Plc, as well as Trafigura in a last-ditch attempt to save the Lima Plan, but all in vain.
Analyst Brett Chulu says Ncube's proposals must be realistic.
"Reality check: we must first pay what we owe the multilateral institutions before we can plead for debt cancellation, rescheduling and restructuring of debt in order to restore blocked channels of external credit. This is how capital works. The biggest question then should revolve around how Ncube will get us a knight in shining armour to give us an affordable bridging loan to clear the arrears with the AfDB and the World Bank," he said.
"Ncube says domestic investment is key to triggering external investment flows in that foreign investors want to gauge how confident the local investors are with their own economic environment as that will signal a good or bad investment environment. The challenge then is for him to rebuild confidence in the local economy.
"With a stable currency and a fiscally disciplined government, the confidence of domestic investors may go up, sending positive signals to external investors."
Efforts to talk to Ncube this week were unsuccessful as an arranged interview with him failed to materialise.
Ncube met Ministry of Finance and Reserve Bank of Zimbabwe (RBZ) officials, besides business leaders who told him of myriad problems that confront him.
Having arrived talking enthusiastically and confidently about how he is going to resolve the country's economic problems, briefings quickly showed him the grim reality: his tough assignment would be like trying to climb Mount Everest.
Before and upon his arrival, Ncube spoke about macro-economic fundamentals, fiscal and monetary policies reforms, budgetary issues, debt, budget deficit, current account deficit, clearing of arrears with international financial institutions (IFIs) to secure new funding, lines of credit and currency reforms.
While his ideas, eloquence and clarity were widely welcome, fiscal and monetary authorities, and business leaders, as well as the market were rattled by his pronouncements on currency issues. His remarks that the bonds notes would be abolished in December sent the rate of the quasi-currency rocketing in relation to the United States dollar in the parallel market. Yesterday the rate was US$1:1,85 bond up from around US$1:1,75 bond.
Zimbabwe has multiple exchange rates for the US dollar, bond note, Real Times Gross Settlement (RTGS) and mobile money transfers. This has created huge room for the black market and arbitrage.
Currency reforms
To give him a soft-landing, fiscal and monetary authorities told Ncube that his three proposals on currency reform- dollarisation, joining the Rand Monetary Area, Common Monetary Area or the Multilateral Monetary Area (MMA) or re-introducing the Zimbabwean dollar – were dead on arrival.
Ncube had told the media bond notes could be gone by the end of this year.
"I am very clear that there have to be currency reforms and the (current) currency approach is not working. In doing so, there are three choices that I will explore and pursue with urgency: One, adopt the US dollar only and remove the bond notes from circulation through a demonetisation process and also liberalise exchange controls.
"Two, adopt the rand by negotiating to join the Rand Monetary Area, and this will close the gap in loss of competitiveness against our largest trading partner, South Africa.
"Three, adopt a new Zim dollar, and here one needs to be clear that it has to be backed by adequate foreign reserves and macroeconomic conditions for its stability. Foreign currency accounts will also be introduced. For sure, currency reforms will be implemented."
However, official sources say Ncube was shocked when he was told that bond notes could not be removed so soon because there was no alternative at the moment.
"Ncube held meetings to engagement stakeholders. He was not only told of the economic problems the country, companies and individuals were facing, but that his currency proposals were dead in the water, at least for now," a senior government official said.
"He was also told that government is in a deep fiscal crisis and how it was surviving through printing or creating money through quasi-currency instruments, running huge and certainly illegal borrowings with the central bank, and widening budget deficits to fund its runaway expenditures. In short, that government is living its means and has created a huge financial mess which will not be easy clean up."
Dead in the water
Officials say Ncube was told that dollarisation would be very difficult without enough dollars. Zimbabwe only has US$1,5 billion and about US$400 million in bond notes in circulation. The market is dry in terms of hard currency because of low production and low exports.
The other sources of foreign currency such foreign direct investment, diaspora remittances, investments inflows and donor aid are limited, hence forex shortages.
To exacerbate the situation, formalising a currency deal with the United States was out due to Washington DC's economic and financial sanctions on Harare. US President Donald Trump recently signed Congress amendments to the Zimbabwe Democracy and Economic Recovery Act which tighten the restrictions.
"On the options advanced by Mthuli, full dollarisation is a long short because for that to happen we need sufficient forex and liquidity in the economy; so where will the money come from?" an official said.
"Joining the Multilateral Monetary Area will be impossible because Zimbabwe does not meet the convergence criteria, which includes the fact that a member must have their own currency. There are also many other benchmarks."
The official said member countries of the Multilateral Monetary Area — South Africa, Namibia, Lesotho and Swaziland — would also need to agree on whether to admit Zimbabwe or not, taking into account its macro-economic imperatives and economic indicators.
"The third option of removing bond notes and bringing back the Zimbabwean dollar is a non-starter. We need to fix the macro-economic issues first, ensure economic recovery and growth, and build reserves. Besides all that, we need to rebuild confidence in the economy and the local currency."
A government economic expert added:
"We must remember where we are coming from. As the Zim dollar collapsed following one of the worst inflation episodes in modern history, hyperinflation amid economic meltdown, Zimbabwe moved to a multi-currency system in early 2009, with the US dollar, the rand, and other international currencies becoming legal tender.
"As the US dollar strengthened against the rand in the mid-2010s, it came to dominate. The absence of a local currency anchored prices and helped improve policy credibility, but the regime was imperfect from the start, as the net external and fiscal positions were negative, the RBZ was not adequately capitalised, the financial sector was weak, and liquid assets were scarce. So these issues are still with and will affect the minister's proposed currency reforms."
Rebalancing economy
Another source said Ncube must grapple with the urgency of fiscal consolidation to restore policy credibility and economic stability. It said public sector employment costs remain at an unsustainable level, constraining social and infrastructure spending.
"At the moment, salaries are gobbling up 96% of government revenue, while government agricultural subsidies, bonuses, travel expenses and top-of-the-range vehicles for ministers and other officials drain the fiscus. Expenses far outweigh revenues.
"To resuscitate the economy, Ncube must engage in well-targeted, cost effective, and properly budgeted support to the agricultural and other productive sectors. He also needs to boost tax revenue collections, strengthen public financial management and reform state-owned enterprises, while containing broader, adverse spillovers from the fiscal imbalances. The ongoing deficit financing modalities, particularly the credit from the central bank, which is now way above the legal 20% of the previous financial year's revenues limit, are unsustainable and have significant potential for generating inflationary pressures. The marked increase in public debt is crowding out private sector activity, aggravating liquidity shortages, and exacerbating debt distress," the official said.
"Forex shortages have led to administrative controls on current and capital account transactions. Unless adjustment and reforms are made, these conditions would further undermine economic performance and weaken confidence. Ncube needs to also ensure urgent structural reforms and to create a conducive environment for private-sector-led growth."
Officials say Ncube is a catch-22 situation. He needs to stop the quasi-currency instruments which government is surviving on to restore fiscal stability and credibility, but if he does government will be crippled or will run into serious problems as it may not even be able to pay salaries.
RBZ intervention
"The market should not put too much pressure on the honourable minister as he works on measures to deal with fiscal imbalances that are exerting pressure on the financial sector and the foreign currency market," Mangudya said.
"As correctly enunciated by the president in his inauguration statement on 27 August 2018, the genesis of money creation and pressure on the currency is fiscal imbalances."
Mangudya said Ncube was aware that the introduction of the Zimbabwean dollar could not be rushed.
"The minister is being taken out of context. What I understood from the honourable minister is that he was emphasising on the need to right size the economy before the introduction of the local currency," he said.
"He emphasised on the need for fiscal consolidation, creation of a foreign currency buffer and enhancing confidence before the introduction of the local currency. We subscribe to these essential elements which are the platform for currency reform."
Political pressure
Tendai Biti, who served as finance minister in the government of national unity between 2009 and 2013, said Ncube, who comes into the position as an outsider as he is not in the ruling Zanu-PF structures, central committee or politburo, would need to be a maverick to resist political pressure. He said he also needs latitude to operate in a cutthroat political environment, in a post-coup situation.
"The position of finance minister is 30% technical and 70% politics. I have no doubt in his technical capacities but he has 0% political skills," Biti said. "He has to be careful; the environment in government is toxic and capricious. Zanu-PF will not change easily, it may remain the same as it was (under former President Robert) Mugabe or now President Emmerson Mnangagwa.
"So Ncube has to look the beast in the eye and confront it. It is either you run away like (former Industry minister) Nkosana Moyo did or they conscript you and, from the look of things, he is going to end up conscripted".
Quasi-currency instruments
Sources said Ncube also learnt this week in detail that government was financing its expenditures and growing budget deficit through quasi-currency instruments. Zimbabwe had a budget of US$1,4 billion in the first quarter of 2018, indicating persisting fiscal indiscipline.
Broad money increased by 40,81% on an annual basis, from US$6 491,67 million in June 2017 to US$9 140,89 million in June 2018, according to the RBZ June monthly bulletin. This reflected yearly increases in transferable deposits, 93.31%; and negotiable certificates of deposits 1,79%. Time deposits, however, declined by 5,18%.
Bond notes and coins circulating outside the banking system increased from US$175,77 million in June 2017, to US$379,20 million in June 2018.
Month-on-month, broad money increased by 6,84%, from US$8555,39 million in May 2018 to US$9 140,89 in June 2018.
The central bank overdraft facility, in the absence of sufficient cash reserves, has set in motion the creation of money in the nominally dollarised economy.
"Government entities spend the borrowed funds by crediting bank accounts of the payment recipients (employees, suppliers, contractors) through the real time gross settlements (RTGS) electronic system. These transactions increase deposits in the banking system, but without a concomitant increase in the quantity of US dollars available in cash or external (nostro) accounts," the International Monetary Fund (IMF) said in its country report No 17/196.
"To finance the remainder of the deficit, the government issued T-bills, mainly acquired by commercial banks but also used as payment for services."
As a result, RTGS balances in the economy now stand at US$2,5 billion, while Treasury Bills stand at about US$2 billion.
The RBZ's monthly economic review for June shows that transactions handled through the RTGS system continue to grow.
"A cumulative total of 2,5 million transactions valued at US$27,4 billion were settled through the RTGS system from 3 January to 30 June 2017 accounting for just above 70% of total transactions in the economy," the report says.
Although there are some US dollars in the economy, they are not freely circulating as people and banks hold on to the currency which they treat as reserve currency.
The US dollar balances in the economy stand at US$1,5 billion, while bond notes in circulation total US$400 million. Total deposits in the economy stand at US$9,7 billion of which US$4 billion are loans.
In the meantime, domestic debt has risen to US$10 billion, while external debt stands at US$8,5 billion.
Government officials say there is an urgent need to inject cash into the economy, with the best hope being that the Chinese government will advance a US$2 billion loan to Zimbabwe. However, talks with the Chinese have not yielded anything yet.
President Emmerson Mnangagwa arrived home from China last week where he attended the Forum on China-Africa Co-operation (Focac) in Beijing and held a bilateral meeting with Chinese President Xi Jinping. He came back empty-handed.
Officials say Zimbabwe has arrears of about US$300 million from previous Chinese loans.
The Lima Plan
Ncube has also spoken about reviving the Lima Plan under which Zimbabwe needs to pay US$1,8 billion to the World Bank and African Development Bank (AfDB) to open new lines of credit and fresh funding.
However, officials say Ncube has to figure out first where Zimbabwe will get that money after previous attempts to pay it through offshore loans and corporate structured finance deals, with gold guarantees, failed.
Currently saddled with a debt overhang of US$18 billion accrued from both public and private sector borrowing, the country has been sinking deeper into a fiscal quagmire since 2013.
Its debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million). It owes the Paris Club about US$6 billion. Arrears contribute about US$1 billion. The amount overdue to non-Paris Club creditors is US$476 million.
Previously government tried to get funding from Lazard and the Standard Bank Plc, as well as Trafigura in a last-ditch attempt to save the Lima Plan, but all in vain.
Analyst Brett Chulu says Ncube's proposals must be realistic.
"Reality check: we must first pay what we owe the multilateral institutions before we can plead for debt cancellation, rescheduling and restructuring of debt in order to restore blocked channels of external credit. This is how capital works. The biggest question then should revolve around how Ncube will get us a knight in shining armour to give us an affordable bridging loan to clear the arrears with the AfDB and the World Bank," he said.
"Ncube says domestic investment is key to triggering external investment flows in that foreign investors want to gauge how confident the local investors are with their own economic environment as that will signal a good or bad investment environment. The challenge then is for him to rebuild confidence in the local economy.
"With a stable currency and a fiscally disciplined government, the confidence of domestic investors may go up, sending positive signals to external investors."
Efforts to talk to Ncube this week were unsuccessful as an arranged interview with him failed to materialise.
Source - the independent
