The Sunday Mail
The ongoing economic reforms have been quite topical as they are viewed as a key factor to resetting the local economy. As Government forewarned, there has been a lot of upheaval and pain associated with the reforms as subsidies and market distortions are eliminated.
Our senior business reporter Tawanda Musarurwa caught up with Mr George Manyere, a Zimbabwean entrepreneur, investor and banker, to discuss issues around ongoing economic and currency reforms.
Q: As a key player in Zimbabwe’s private sector, in what ways is the depreciating local currency affecting business?
A: Well, I think to start with, before you look at the effect of the currency issues to the private sector, one has to look at where our economy is coming from. I think we have gone through probably, since 2000, close to 20 years of economic stagnation, which means a prolonged period of little or no growth in an economy. We have faced all sorts of problems as a country that if you look at where we are now, we have to start by appreciating that we are a recovering economy starting from the bottom.
There is a lot of things that need to be redone in order to get to a stage where you can say you now have a stable economy, and that process will take some time and it is a journey.
It is not going to be an overnight process, and it will require a lot of patience and understanding by every Zimbabwean.
So when you look at where we are, the fundamentals are very, very strong and we are probably one of the few countries in the world that still has significant real opportunities.
What do I mean by that? Because of the under-investment over the last two decades or three, we have real opportunities in infrastructure, real opportunities in energy, real opportunities in mining, real opportunities in agriculture, real opportunities in redeveloping our municipalities to cater for the significant growth in urbanisation.
We are literally rebuilding the country. So when you look at all these real opportunities, supported by a population of more than 15 million people, a well-educated population, strong structures in terms of our institutions, the country’s potential is very strong, but it is not easy to unlock that potential without addressing a lot of basic issues.
And the basics are not only currency reforms, it is a number of issues that have to be done in order to set a base that can underpin Government’s efforts to rebuild the economy and support real economic growth going forward.
Q: Currently, there is parity between the Zimbabwe dollar and the South African rand, how sustainable is this in your view?
A: So moving on to the aspect of the currency, before I talk about the parity aspect, when we dollarised in 2009, the reason was primarily because our own local currency had become worthless, it was no longer credible; there was no confidence.
So what we needed at that stage was to find a reference point in transacting in the economy that could at least restore some sense of confidence and stability as well as help in curbing exorbitant pricing of goods, which was driving hyperinflation.
So it was prudent at that particular point that the only way we could instil confidence in people was to adopt a multicurrency system, which was dominated by the United States dollar, and it did serve us well probably from 2009 up to around 2016, but the weakness in having a basket of currencies – which was pretty much a dollarised environment – is that the US dollar is the most traded currency in the world and is accepted currency everywhere, so if you start using the US dollar, it can be exported anywhere in the world at any given time.
So it was a matter of time before we ran out of US dollars, both in cash and Nostro balances, and being a heavily import-dependent country then and now, we were going to have some challenges. That is the background that we need to appreciate first.
Now, to address the impending challenges arising from the depleting US dollars in a dollarised environment, the solution was to dump the US dollar and adopt a local currency. I think on the face of it one can say either way we were in a situation where we were going to do that anyway. But I think the challenge that was there, if you look at the efforts that Government has done right now in introducing a local currency, was the lack of critical ingredients that are required to underpin any currency, which I will start with, a reference point. We have embarked on our currency reforms with the local currency referenced to the US dollar on a free-float basis with the hope that it will discover a stable exchange rate with the US dollar. And this has caused significant pain because mentally you are moving from 1:1 exchange rate and we are now at 1:15, you can imagine the amount of value destruction that has been caused to savings by Zimbabweans who have had to experience this free fall of our currency.
And yes, we are going through major economic reforms so they will come with significant pain and its much-needed pain for us to come out of the bad situation we have gotten ourselves into over the last two decades, but when you make it an open-ended affair in the free falling of the currency, it can become catastrophic and destroy peoples lives.
To back stop the current runaway free-falling currency, I believe we have a unique opportunity at this particular point in time where our Zimbabwe dollar at the interbank rate is trading at the same level as the South African rand, so I strongly believe that there is a serious opportunity that as a country, both private sector and Government, must seriously engage and evaluate this reality and re-assess whether this is not an opportunity for us to bring stability in the economy through a referencing of our Zimbabwe dollar to the South African rand, and I think there is a lot of justification for such a position.
And if we do not do that, I think we are likely to see a continued runaway falling currency. And it might not be because there are no fundamentals to justify that free fall, but it is just that the market needs to develop confidence in our currency and the need of a reference point in its movement is critical. An exchange rate can be any number, today it can be 15, tomorrow it can be 12 or 20, or it can be 30. So the market is crying for a reference point of saying where are we going with the currency reforms and I think there is justification of actually saying we were moving from the 1:1 to the US dollar and we decided to remove the peg to the US dollar so that we devalue our new local currency to a 1:1 peg with the South Africa rand, and that is a sensible reference point for our economy that can bring about much-needed stability, even if it is in the short term, while other benefits of our economic reforms kick in to strengthen that continued 1:1 peg with the South African rand.
Q: What are these justifications?
A: South Africa is now Zimbabwe’s biggest trading partner. Trade between the two countries has grown quite substantially in the past decades, with more than 60 percent our trade being with South Africa. We have exported a significant chunk of our population – probably 20 percent, if not more – into South Africa, these have been largely economically active in one form or another.
If you look at resultant numbers, that is perhaps two to three million Zimbabweans who are working in South Africa. If you look at industry in Zimbabwe right now, it has a strong link with South Africa.
A lot of private sector activities are linked to South Africa, whether in terms of importing or exporting goods. So when you tick off all these things, we are going to have significant positives in inflows from South Africa in terms of remittances, which at an average of 1000 rand per year from every Zimbabwean living in South Africa; assuming three million, that is 3 billion rand of physical cash that can be exported into Zimbabwe, which can be used for transacting if we are pegged to the South African rand, and this will help in reducing our money supply in the local economy.
We also have potential for significant inflows into Zimbabwe of FDI (foreign direct investment) coming out of South Africa because of the intertwining of our economies.
We have a number of key corporates here that have their parent companies in South Africa and with a stable currency, particularly pegged to the rand, I can only see them investing more into the country because of the real opportunities I have indicated before.
So that should deliver a significant inflow of much-needed foreign currency into the country. Third, South Africa is a very liquid, significant economy – the largest in Africa – whereby the potential for our Government and various businesses, private sector involved, to arrange lines of credit in South Africa in rands is very real.
To top it up, the South African rand is in the top 20 of the most tradable currencies across the world, and that tells you something. You are not talking of a currency without credibility, it is a credible global reference point in any economy.
I mean we have seen Namibia, Swaziland and Botswana economies, they have all functioned reasonably well pegged or linked to the South African rand, and I think it is very logical for the Zimbabwean economy to fit into that basket as well, even if it is unofficial. The qualitative aspects of formalising that arrangement can be dealt with at the appropriate levels over a period of time.
Q: It might be logical yes, but what kind of mechanics would be required for pairing the currencies?
A: Initially, we should start with our own mind-set. When we introduced the US dollar here as a main currency, I do not remember at any time our Government having to engage the US Treasury to work out the modalities of how to do that. But that was legislation here that allowed that and US dollars were flowing.
I think right now, without getting into the bureaucratic processes of officialising this position, we need to configure the mind-sets here, adjust our legislations here, particularly if you look right now the recent Statutory Instrument 212 that was published last week (a fortnight ago), which was banning all foreign currency, in my view, it should be adjusted to outlaw all other currencies and only allow the Zimbabwe dollar and the South African rand.
So if you do that, you then legalise rand pricing, rand payments, but you still have your Zimbabwe dollar, and allow them to operate as a dual currency because they are operating on a 1:1 basis. We will basically be adopting an exchange rate protection policy, which is fine because there is nothing wrong with protecting your own currency, because you also cannot have a free-falling rate. When a currency falls uncontrolled, everybody gets hurt.
Our currency has devalued by more than 510 percent since its introduction barely seven months ago – no other currency has performed badly like that and it continues to be on a free fall. We cannot expect that for some reason it will stabilise. At what rate?
There is no reference point; that is why it keeps on going down. The process that the authorities have gone through in creating an interbank market is commendable, but it should be capped once it reaches a reasonable reference point that we can now all work towards and complement Government’s efforts to meet, and I think that is where we are now.
We cannot have fuel price adjusted upwards every week because we have a continuously free-falling exchange rate, the rate we have been free-falling no longer justifies a market-driven exchange rate.
Q: Do you think Zimbabwe’s collective psyche is ready for such a move?
A: Look, the reality of what is going on now is absolutely not normal. I think the Zimbabwean psyche will get used and accept a peg of the Zimbabwe dollar to the rand. As I have said, we have had a significant devaluation of our currency, which has impacted all of us in a major way, pensions have been lost once again, balance sheets wiped out, companies struggling to remain open et cetera. It has created significant instability in our economy. It has pushed us again on the brink of hyperinflation.
Government has had to stop printing inflation figures because they are trying to contain this situation, but because we are an import-dependent country at the moment, pricing of goods is not being done based on market forces, it is being done based on the exchange rate movements, and that exchange rate is particularly being driven by uncontrolled parallel market activities.
And yes, you can never eliminate the parallel market activities completely, but the parallel market rate should never be a reference for economic activities in a country. Parallel market activities, even in South Africa they are there, but they are at a level where they are unrecognised and inconsequential to the functioning of the economy, and people play in the parallel market for extremely different reasons, but in Zimbabwe it has become a threat to the stability of our economy, even to the stability of the country because you cannot have any successful economic reforms in any form or shape when your exchange rate is devaluing even at one percent per day, which has been the case in our country over the course of this year.
Q: And finally, your last words?
A: I think the opportunities in Zimbabwe are quite significant. We are probably one of the few countries left that has real opportunities.
Sometimes you can go through a very bad patch, but it can also give you an opportunity to come out very strong, and I think we are exactly in that situation.
But the reality is that unlocking that growth and potential is not an overnight process, it is going to take a couple of years, there is going to be a lot of pain in that process, but it is very important that the authorities become sensitive to the need of a reference point when implementing certain reforms in order to achieve stability through confidence from the people.
Because without confidence and understanding, our people will not be able to best appreciate where the economic reforms are taking us to.
I think for us gravitating from the US dollar and finding the reference point next to the rand is just a logical way and there is nothing in-between, and only disaster beyond the rand as a reference point or peg.