The Sunday Mail
Cornelius Dube
A new short-term economic blueprint, the Transitional Stabilisation Programme (TSP), was recently presented by Finance and Economic Development Minister Professor Mthuli Ncube.
In it one can sense the underlying desire and boldness to tackle the biggest problem which most of the policy pronouncements hitherto had been failing to tackle head on — uncontrolled fiscal deficit.
The TSP generally announces the intention to put in place independently monitored fiscal rules, which would guide Government expenditure and borrowing conditions to limit the damage that uncontrolled Government borrowing has imposed on the general public to date.
Domestic debt
In general, borrowing is the major reason why both individuals and institutions can smooth their consumption patterns even if their income streams are not totally in line with their expenditure patterns.
In other words, borrowing is an important mechanism where one can bridge the gap between the period when one is resource-deficient and the period when one becomes resource-secure.
However, this means that only those who are sure of their future income potential should borrow. Borrowing when one knows they lack capacity to repay is fraudulent.
Government has been borrowing heavily, largely to sustain recurrent – rather than production capacity-enhancing capital — expenditure.
Following failure to borrow from international markets, Government largely resorted to borrowing from the domestic market.
Net credit to Government from the banking sector currently stands at about $7,7 billion.
The problem with huge domestic debt is that Government was borrowing from the same sources that the private sector is largely failing to unlock productive funding from.
The TSP shows that in 2018, the ratio of net Government credit to net private sector credit stood above 2:1. This means that for every dollar that becomes available in the market for lending, the private sector gets less than 33 cents.
It is important to note that banks are not to blame for preferring Government as a borrower compared to the private sector.
Treasury Bills are generally risk-free and profitable; even if Government fails to pay when they become due and roll them over. They will be honoured in future.
Lending to the private sector is risky as there is a chance that they could fail to service their loans.
A look at the non-performing loan rate shows that it is only about six percent, which is low enough.
Thus, the presence of Government as an alternative source of income for the banks through lending probably reduced banks’ exposure to bad loans, which would have seen non-performing loan rates above six percent.
The impact of the huge domestic debt has generally been to stifle private sector development.
Efforts at recapitalising industry would remain a pipe dream as long as Government is actively crowding out private sector investment by borrowing heavily in the domestic market.
This is what the TSP is seeking to reverse.
As already mentioned, borrowers are only successful if they know that in future they would have the means of repaying. Government has to find the means to repay. Therein could lie the logic behind the two percent levy on all electronic transfers.
The October 2018 Monetary Policy Statement by Reserve Bank of Zimbabwe Governor shows that in the first six months of the year, more than 854 million transactions had been done using RTGS, PoS, mobile and Internet platforms.
These transactions gave rise to about $42,7 million in taxation based on the five cents per transaction taxation regime that was in existence. The over 851 million transactions were used to transfer about $65 billion in value. Thus, if the new tax regime had not been modified to allow for some exemptions, this would have given rise to about $1,3 billion in tax revenue.
While it is difficult to work out how the exemptions would affect this figure, there is no doubt that the capacity of Government to repay its dues, especially in the domestic economy has been enhanced by this new tax measure many times fold.
The justification has mainly been given as the need to ensure that the informal economy also contributes significantly to tax payment. However, the informal economy was contributing already under the previous taxation regime of five cents per transaction, so they were already in the tax base.
The tax base has probably remained more or less the same, meaning that the rationale was just to find a way of increasing tax revenue rather than expanding the tax base.
It is the manner in which the tax proceeds would be used that would be central in determining how effective and helpful to the economy the new tax measures will be.
In addition to improving the capacity to repay domestic debt and invest in general key enabling infrastructure, there is also need to use the proceeds to transform small-scale businesses into large-scale businesses given that they are also now contributing significantly.
This includes infrastructure for market stalls, incubations centres as well as funding value chain linkages which integrates them with the formal economy. Government schemes that provide loans to SMEs can also be funded from the proceeds as a way of further building the capacity of the SMEs to contribute to other tax heads after growing.
External balances
To get a fair understanding about the implication of Zimbabwe’s external sector performance, the trade, current account and capital account balances can be used.
The trade balance is the difference between a country’s exports and its imports. It can be interpreted as the difference between a country’s production and its absorption capacity.
In other words, it shows if domestic production (GDP) is sufficient to meet overall demand for consumption and investment.
Estimates from the TSP show that the trade deficit for 2018 is estimated at about $2,3 billion, which is about 8,8 percent of GDP. This means that domestic production in Zimbabwe needs to improve in value by about US$2,3 billion to meet demand for consumption and investment from domestic sources. In other words, GDP needs to expand by about 8,8 percent.
The current account balance is the country’s savings-investment gap. It shows the extent to which the nation falls short as far as meeting its investment needs from its savings is concerned.
Thus, the current account balance is a representation of the level of savings needed to meet the investment requirements of the economy. It is a critical determinant of the country’s position with respect to the rest of the world in terms of whether it is a net creditor or borrower.
The TSP shows that the current account for 2018 is estimated at about US$752 million in deficit. This means savings are significantly falling short as far as meeting investment requirements is concerned.
In other words, Zimbabwe is a net borrower from the world in order to meet its investment requirements. RBZ estimates from the Monetary Policy Statement show that the capital account balance for 2018 in Zimbabwe is projected at about US$208,8 million.
The capital account balance is critical as it reflects the extent to which the country can finance its position with respect to the rest of the world in terms of whether it is a net creditor or borrower (net international investment position, NIIP).
If the sum of the current account balance and the capital account balance is positive, then the country is a net saver and its net foreign assets would be expected to increase.
However, if this sum is negative, the country is a net borrower, which would see its net foreign assets decreasing. The size of the capital account relative to the current account is thus critical as it shows whether capital flows are sufficient to finance the current account or whether the country needs to run down central bank reserves.
If these projections are anything to go by, the sum of the current account and the capital account is a negative $543 million.
This generally shows that the performance of the external sector is worrying, as Zimbabwe is a net borrower, whose net foreign assets is expected to decrease by about US$543 million in 2018.
Thus, currently capital flows are insufficient to finance the current account, demonstrating the need for the central bank to accumulate reserves to bridge the gap.
As rightly pointed out by stakeholders, the huge current account deficit is largely driven by the negative balance of trade.
The balance of trade deficit can be reduced by either increasing exports or decreasing imports, or both.
As reflected by the TSP, Zimbabwe’s exports for 2018 are at about 19,7 percent of GDP, while the imports are at about 28,5 percent.
Countries that have a trade balance surplus include South Africa and Botswana. Imports for Botswana constitute about 30 percent of GDP while for South Africa, imports are about 24 percent of GDP.
At about 29 percent, the imports for Zimbabwe can be argued to be in line with Botswana and just slightly higher than South Africa.
This shows that while it should continue to be pursued, import containment should not be the sole focus.
Exports constitute about 25 percent of GDP in South Africa and about 34 percent of GDP in Botswana. Zimbabwe falls below these two trade surplus economies, demonstrating the need for expanding the export base. Export promotion should thus be prioritised over import containment.
Current export incentives by the RBZ, while helping, also reward even those products such as minerals which are exported in raw form and would otherwise have no local market. Thus, export incentives need to target products that otherwise would not have been exported without such incentives in place.
Broadening the export base should be the main priority rather than promoting traditional exporters who otherwise flourish without any incentives.
Interventions
The biggest challenge preventing a sustainable production base is broken value chains.
Broken value chains make it difficult for our economy to expand without depleting the few available foreign currency reserves through more imports.
For example, financial authorities insist that the growing economy is responsible for the depletion of foreign currency. In other words, while it would naturally be expected that as the economy grows, then it would also create opportunities for foreign currency generation and hence a net increase in foreign currency availability, the reality is that in Zimbabwe this is not taking place.
This is due to the fact that almost all the key raw materials needed for industrial expansion need to be imported. There is need to appreciate the need to prioritise resuscitation of value chains before secondary industries are developed.
A good example is the cooking oil industry.
Most cooking oil expressors in Zimbabwe have invested in both soya bean and cotton seed oil extraction. However, this process is dependent on availability of cotton seed and soya beans.
Expressors also have the option of importing crude oil and by-pass all the downstream investment that would have produced crude oil.
Crude oil importation is now more or less the de facto operation process. Significant savings of foreign currency can be done by investing in functional soya bean and cotton value chains, especially linkages between farmers and oil expressors.
This appears to be getting little priority.
Statistics from the Zimbabwe National Statistical Agency show that between February and July 2018, the crude oil import bill was about $72 million, an increase of over 39 percent on the same period in 2017.
Hence the creation of value chains has to be promoted by policy rather than oil expressors themselves.
The example also applies to other products where attention is devoted more towards the final product rather than the downstream processes that need to grow to support the upstream.
Value chain resuscitation is the only sustainable way of enhancing production and exports.
Cornelius Dube is an economist with more than 10 years experience in economic and social science research. He also has extensive experience in research in areas of competition policy, consumer protection, economic regulation, manufacturing sector, external sector, economic governance, infrastructure development, social economics and international trade
