Reserve Bank of Zimbabwe Governor Dr John Mangudya presented his Monetary Policy Statement on February 11, 2015.
It is worth revisiting this statement as we approach the mid-term.
The statement — themed “Rebalancing the Economy Through Competitiveness and Compliance” — was indeed a masterpiece; rich in innovation, originality and clarity of ideas and in complete harmony with the accelerated implementation of Zim-Asset.
The policy, liberalisation and compliance measures are brilliant, while the policy advice to Government is remarkable.
Fuel and competition
The statement’s main thrust was to create a conducive macro and microeconomic environment that makes the economy competitive from an investment perspective, ensuring compliance to achieve this.
It focused on the fundamental issue of the ease of doing business locally.
Further, it pointed out how the economic environment was characterised by very high costs of goods and services, low production and lack of confidence, which reflect negative perceptions that increase country risk and negatively affect liquidity.
This leads to despair and despondency, among many people, both within and without the country.
High costs of goods and services emanate in the main from high production costs, arising from – among other factors – the use of antiquated plant machinery as well as high labour, utility and other overheads.
There is lack of capital and/or financial resources to replace old equipment, and whenever these resources can be secured, they are very expensive in terms of interest rates and other levies. Sluggish performance of the utilities sector – both in terms of cost and supply – especially electricity energy inefficiency, also impacts productivity negatively.
Low production is also attributable to poor work ethics as they relate to attitudes towards work and lack of the necessary discipline.
Zimbabwe is flooded by relatively cheap and, in some instances, sub-standard imports, which are all conspiring to make a bad situation worse.
Given the lack of competitiveness against our trading partners and the negative economic effects, Dr Mangudya said there was no room for salary and wage increases this year.
He said present circumstances instead called for downward adjustments in prices of goods and services.
I suggest that the main reductions should have their roots in the price of fuel.
Following the drastic drop of crude oil prices on the international market of about 50 percent from around June 2014, the cut in domestic retail prices to a maximum of US$1,44 per litre of petrol and US$1,32 per litre of diesel does not seem to have resulted in much-anticipated price reductions across the economic spectrum, even against the background of small denomination bond coins.
I recommend a further reduction in the maximum fuel retail prices to those previously set: US$1,32 per litre of petrol and US$1,20 per litre of diesel.
This should be done even after allowing a further increase of at least USc10 per litre in excise duty on each product to finance the National Budget deficit and subsidies.
Our fuel sector players are – in my view – still enjoying hefty and unjustifiable margins when one considers fuel prices in other Sadc countries. The price as well as insurance and freight total cost for a litre of diesel is below USc50 per litre – the price of bottled water.
Add to this our supposed advantage of blending petrol with ethanol and it becomes pretty obvious that there is plenty of scope for further fuel price reductions.
Our entire legal framework governing fuel pricing has fundamental flaws needing urgent review.
In addition, I suggest electricity tariffs be subsidised for some major consumers with a view to achieving. Ideally, such subsidies should be financed in whole or part from this excise duty.
Beneficiaries could include farmers and value-adding industrial concerns. Others might be, but not limited to, fertiliser manufacturers and chrome refiners.
Under this subsidy system, these industrial concerns can be called upon to pay, say, 50 percent of the current electricity tariff, with Government chipping in with the other half.
However, payment should be prompt so as not to compromise viability of power producers.
The same concept could apply to agriculture, with the farmer paying, say, a third of the price of electricity and water, and Government settling the remainder. And the same could be extended to farming inputs suppliers.
We have over the past few years seen such subsided agricultural inputs in neighbouring Zambia and Malawi result in amazing maize harvests of upwards of three million tonnes per season.
Demonetisation
Among the RBZ’s exciting policy measures is the demonetisation of the Zimbabwe dollar, which now appears destined to be finally resolved. This issue has been mentioned in at least three of the dysfunctional inclusive Government’s National Budget Statements without anything tangibles.
It was last mentioned in the 2014 Budget and Mid-term Fiscal statements, but not in the 2015 Budget. Better late than never.
The preferred cut off date now appears to be December 31, 2015. We should be flexible on this and even use the date of the last Monetary Policy Statement of 2013, when the last 12 zeros were dropped and an official exchange rate of Z$20:R10:US$1 was proclaimed.
This has the dual advantage of an official exchange rate free from the distortions of parallel or black market rates, which were rampant and ever-changing at that time.
Other possible cut-off dates are November 14, 2008 when we had the last recorded and useful UN exchange rate, or March 31, 2009 when some in the inclusive Government declared the Zim dollar “dead and buried”, even though no legislative action had been taken to this effect.
Secondly, we should desist from the belief and notion that all (though most) money in Zim dollar accounts was part of proceeds of “burning”, whatever the origins and/or cause of that rather peculiar and unusual economic phenomenon, as some would like us to believe.
Some such Zim dollar amounts were the product of honest, hard work.
We shall all be the wiser and happier when this whole saga is over and done with, but what now remains and should be prioritised is the need for Government to settle Zim dollar-denominated prescribed asset values of pension funds and insurance companies.
These values were dishonoured by Government at the time at great expense, cost and inconvenience to these entities, pensioners and policyholders. We cannot afford to wait for the results from the proposed Commission of Inquiry when this should be obvious and clear to most.
We should also take advantage of the Zim dollar demonetisation process to promote financial inclusion by simply reactivating Zim dollar bank accounts as savings accounts, and asking depositors to use them as the proposed low-cost accounts with requisite minimum deposits.
Such deposits may include Zim dollar coins.
However, before these coins are deposited, Section 44(2-3) of the Reserve Bank Act (Chapter 22:15) should necessarily be amended or repealed since the coins will then have also been demonetised.
The Section reads: “A tender of payment of money in Zimbabwe, if made in coins of current mass which have not been demonetised in terms of sub-section (3) shall be legal tender.”
We should also be wary of bringing forward unwarranted, unnecessary, ambitious and unwise conditions for the return of our local currency such as a minimum foreign exchange reserves equivalent to one year import cover, and a healthy job market.
Such economic measures were largely rendered obsolete and redundant in a US dollar economy. Our economy is now largely informal, thus making determination of a “healthy job market” a less straightforward affair.
As an aside, it should be stated that bond coins were issued in terms of Section 44 cited above and are, therefore, legal tender.
They are so-called to reflect the fact that the coins are backed, anchored, cemented or bonded to a US dollar facility. Companies responding positively to their use should be applauded.
I advocate the use of Zimbabwe coins almost immediately for change purposes primarily, and that these coins be backed by existing gold reserves and be at par with US dollar notes and coins.
These Zim dollar coins are already in RBZ vaults in Harare and Bulawayo, in people’s homes and some entities’ premises, sitting idle.
Concurrently, we should remove and withdraw from our financial system South African rand and other foreign coins as these tend to confuse the transacting public by virtue of exchange rate dissementary.
When eventually Zim dollar notes are brought back, they will be backed by the existing reserves of gold, diamonds and platinum.
Effective policy measures
Policy measures such as the US$200 million Interbank Facility funded by Afreximbank; the US$100 million Government facility intended for the RBZ’s lender-of-last resort function; the Accelerated Gold Production initiative; enhanced coal production by Hwange Colliery and platinum refinery projects are most welcome.
Farm mechanisation – previously spearheaded by the RBZ – was a noble initiative worthy of resuscitation.
The RBZ US$1,3 billion Debt Assumption Bill is poised to become law. We should learn from experience and ensure measures are in place for recovery of debts from farmers who benefit from such schemes.
Only small-scale and communal farmers should be subsidised or get equipment and machinery for free, as these are mostly inexpensive and rudimentary like ox-drawn items.
Under liberalisation and compliance measures, various amnesty measures appear to all have expired on December 31, 2014. These include the Absolute Exchange Control Amnesty; Amnesty of Non-Recoverable Export Receipts and the Non-Acquittal of Import Bills of Entry Amnesty.
These should be extended for another year or at least to June 30, 2015 for deserving cases, buttressed by hefty fines and penalties in cases where irregularities are unearthed.
My good guess is that there are still billions of US dollars of Zimbabwean money off-shore emanating from the following activities, among others:
(a) Foreign exchange not being repatriated after platinum and gold value-addition outside our borders. On leakages to do with gold refined by the Rand Refinery in particular, I fear not less than 30 percent of refined gold sold through this Refinery after we lost our membership of the London Bullion Market may have originated from Zimbabwe. I stand corrected on this. I strongly believe that the target of 30 tonnes of gold per year by 2020 will very easily be surpassed and that the proposed setting up of a special purpose vehicle called ZimGold will not only expose the scale of prior gold leakages, but will ensure the set target will be exceeded.
ZimGold is intended to be a joint venture between the Zimbabwe Mining Development Corporation and Fidelity Printers and Refiners, an RBZ subsidiary;
(b) Massive historical leakages of our diamonds such as that of about 100 000kg of ore taken as “samples” from Chiadzwa, which has never been satisfactorily accounted for to date;
(c) Sales of diamonds, gold and various other minerals whose proceeds were never repatriated as a result of under-invoicing, under-pricing and under-declarations.
The discourse on illicit financial flows from Africa relating to the continent’s mineral resources is very instructive and worth studying seriously.
On the matter of policy advice to Government, we should continue to push for urgent amendments to the Labour Act and recommendations to the tourism sector for expeditious implementation.
Edmore Ndudzo is the first black Treasurer of the City of Harare, a chartered accountant and certified public accountant.