Chinamasa needs to think long and hard

Darlington Musarurwa Business Editor’s Brief —
AS Finance Minister Patrick Chinamasa prepares the 2017 National Budget, it is understandable if he feels he is a man walking a tightrope. Any misstep will lead to a hefty and fatal tumble for an economy showing signs of tremendous stress.

Business sentiment is low, particularly with the bottlenecks being experienced in paying foreign suppliers and making remittances. Worryingly, some of Government’s biggest revenue generators are choking.

Delta Beverages, which paid US$93 million in taxes in the six-month period to September 30, 2016, is struggling to pay both creditors and shareholders. In all, it owes them more than US$30 million.

But it is the failure to meet obligations to critical suppliers that has had the most impact on its operations. For example, the commissioning of the new Chibuku Super plants in Kwekwe and Masvingo was pushed back as delayed payments affected delivery of critical equipment.

Yet sales of sorghum beer, including Chibuku Super, have been propping up the business at a time when the performance of lager beer and sparkling beverages has been underwhelming.

It is the same story with Econet Wireless Zimbabwe, which is reportedly grappling to settle some of its foreign debts as a result of “nostro funding constraints being experienced by all banks”.

This is bad for business. It not only militates against future investment, but adversely affects the performance of local companies going forward.

If kept unchecked, challenges in funding nostro accounts will undoubtedly work against the stated intention of Statutory Instrument 64 of 2016 – to enable local industry to recover.  Fuel and raw material suppliers are beginning to feel the pinch.

But this is the least of Minister Chinamasa’s worries. Public finances are in a mess. By the end of the year, the country is expected to have spent more than US$4,7 billion against revenues of US$3,7 billion – a deficit of more than US$1 billion.

The bulk of the money – about 96 percent of revenues – is going towards staff costs. This is notwithstanding the need for additional resources for operating expenses and, more importantly, capital projects that can ably stimulate economic growth.

But there is nothing peculiar with a budget deficit. In fact, the United States, the world’s biggest economy, ran up a US$587 billion budget deficit in the fiscal year ended September 30, 2016.

Its debt, which is biased towards infrastructural projects among other investments that stimulate the economy, is largely held by American investors and countries such as China (US$3,5 trillion) and Japan (US$1,5 trillion).

It is different for Zimbabwe, where the bulk of the funds are used either to liquidate debts or to fund consumption. By March this year, of the US$1,9 billion that was raised through Reserve Bank of Zimbabwe’s Treasury Bills, US$1 billion was used to pay off part of the central bank’s US$1,3 billion in its legacy debts; while the remainder was used to capitalise the apex bank itself, including some of its critical subsidiaries such as the Zimbabwe Asset Management Company which is buying toxic debts from banks and distressed companies.

In the last six years, countries in Sub-Saharan Africa have been relying on Eurobonds to raise additional funds for development. Zambia last year issued a US$1,2 billion bond issue to international investors. It was the third such issue after the 2012 debut offer.

But this is only possible for countries that are not heavily indebted.

Lima plan
This is precisely the reason why Treasury has to follow through with the Lima Plan to settle Zimbabwe’s arrears, particularly to international finance institutions. Encouragingly, the US$100 million arrears owed to the IMF has been paid.

What are outstanding are arrears to the World Bank (US$1 billion) and African Development Bank (US$600 million). Apart from being major potential financiers, IFIs act as international credit ratings agencies, helping investors – both public and institutional – to assess the creditworthiness of investment destinations.

Through the Staff Monitored Programme with the IMF, the country has developed a sound track record of public finance management that arguably endears it to markets.

But being current on debt is of paramount importance. Not only does it enhance the chances of accessing balance of payment support, but it also helps the private sector access cheap finance.

It is absurd that local commercial bank interest rates on US-dollar loans hover between 16 percent and 18 percent, considering that the benchmark rate in the US currently stands between 0,25 percent and 0,5 percent.

So, at 18 percent, local credit is scandalously overpriced; it can never support production. Ironically, local commercial bank interest rates for the Zimbabwe dollar averaged 11 percent in the decade to 1990.

This possibly explains the high rate of company failure. And, therefore, nothing short of a concrete plan for clearing the country’s arrears will suffice.
Much of the funding constraints faced by the local economy can be traced on the unsustainable debt overhang, which stands at more than US$10 billion.

Raw materials
It is unquestionable that SI 64 of 2016 has added fillip to the economic recovery of some local companies. However, low output in agriculture has limited the ability of import restrictions to have a multiplier effect on economic growth, especially on the whole production value chain of an industry that is predominantly agro-centric.

Owing to a shortage of milk, companies that produce dairy products have had to import powdered milk, reconstitute it into liquid milk in order to suit their industrial processes. This is money that could ordinarily benefit local farmers.

Similarly, companies such as National Foods have to import grain, while Cairns is buying some of its critical raw materials from foreign markets.
The command agriculture initiative, which is however focused on grain, is commendable.

The onus now is on Treasury to invest in ensuring that going forward there is at least a white paper or a structured plan of financing critical crops that are used as raw materials by industry.

Local industry does not have the luxury of time, for the window that is afforded by SI 64 is limited and will close soon. In sum, these are the two key issues that can shape or reshape the destiny of the local economy – solving the country’s debt issue and investing in local production.

Though reforms to try and improve the doing business environment are presently underway, there is need to ensure that Government departments that are charged with these exacting tasks are well resourced.

The weight on Minister Chinamasa’s shoulder is unenviable, and the 2017 National Budget will arguably define his tenure as Finance Minister.
He must, therefore, make a statement that the current trying times demand.

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  • mutongi gava

    In other words the economy has collapsed and a political solution is required.

  • Cyber Mujibha

    Voodoo Economics will not get us anywhere…!!!