The Sunday Mail
Dr Brian Mangwiro
Zimbabwe’s new political dispensation has created a wave of optimism.
Several investment fora have been held in recent months and the mantra is “Zimbabwe is open for business”.
The messaging is consistently positive and constructive, and the investor community seems well-engaged.
With appropriate planning and execution, Zimbabwe could soon be on a sustainable path to economic vibrancy.
One critical challenge for Zimbabwe over the next two to five years is managing the issue of currency and liquidity.
We have no doubt that this will be a key driver of economic performance, both in the short and medium term.
As such, this will require careful coordination between the State, economic ministries and the Reserve Bank of Zimbabwe.
From a growth-liquidity-policy mix, tight (or expensive) liquidity regimes are contractionary and vice versa.
Thus, Government’s pro-growth push needs to be complemented by an improvement in both the cost and flow of credit.
However, the lack of an own currency and mainstream use of foreign currencies for all transactions means Zimbabwe has inadvertently imported foreign monetary policy and liquidity conditions.
It lacks any meaningful control of both.
In essence, within the classic economic-monetary policy framework mix, Zimbabwe lacks interest rate and other monetary levers to manage the domestic business cycle; either to stimulate activity via loosening monetary policy when economic activity weakens, or tighten policy when the economy is at risk of over-heating.
At this juncture, the predominant use of United States dollars means the country’s liquidity conditions are inextricably linked to global financing conditions and the actions of the US Federal Reserve Bank.
Stated differently, Zimbabwean businesses’ financing conditions depend more on the US than the RBZ.
Below are some key considerations for improving domestic financing conditions I believe will create necessary conditions for eventually launching a new Zimbabwean currency.
Think of a currency like a company share.
Why should investors, both retail and institutional buy yours? And are investors likely to be selling your company shares to buy others?
On a future projection, is there likely to be an improvement in the company revenues and earnings, and enough to entice investors to make a bet on you?
If the answers are mostly in the negative, then it’s not yet time to focus on launching a new currency. Rather focus on creating enterprise value; economic growth.
Economic activity
The administration should not prioritise launching a new currency when the economy is still in poor shape.
There are two key considerations:
(i) The huge import bill (and the subsequent trade deficit) implies that the new currency will consistently face selling pressure (in preference for forex); and
(ii) subsequent currency depreciation will likely foment inflation, which erodes the currency’s value.
By extrapolation, a stable currency regime requires a strong domestic productive base, which either reduces demand for import and/or creates external demand for Zimbabwe’s products (ie strong exports).
Thus the new Zimbabwe currency should be an outcome of economic renaissance.
Medium to long-term
Planning for the medium to long-term is indispensable.
It, therefore, follows that Government needs to develop pro-active strategic plan on which sectors are high priority for development, the strategy for execution and how this will be funded.
Such long-term strategic planning needs highly competent technical teams, must not to be restricted to past or current activities, encompass the full value chains, be well structured, detailed, collaborative and practical.
For example, lithium miners ought to consider establishment of battery manufacturing technology in Zimbabwe.
Equally, diamond mining ought to integrate the cutting process within Zimbabwe and the local textile industry needs to be revived to support better cotton pricing regimes.
This approach not only reduces over-reliance on one or a few sectors, which creates significant vulnerabilities in global cycle downturns, but also speaks to what the country aspires to be.
For example, countries like Angola, Nigeria, Venezuela and Colombia were hit particularly hard by the commodity cycle downturn of 2014-16 due to over-reliance on oil exports.
A diversified economy is critical for sustainable medium growth; one with cross-sector buffering through business cycles.
But growth needs to be financed, and credit institutions need to be strengthened and well-monitored.
Clean banking system
An independent regulator must urgently be established alongside a new regulatory framework with transparent reporting.
Balance sheet clean up can take the classic form of utilising Zimbabwe Asset Management Company, but asset disposals also need to be transparent.
Cheap valuations and strategic assets should entice investors and sustain the appetite.
The RBZ could also gently force consolidation of weak banks, including, where necessary.
This has been a common resolution framework in the post-crisis era.
It will likely be a painful exercise, especially in an environment of relatively weak confidence.
However, it is crucial and indispensable for establishing a sound financial system.
One of the critical measures of recovery from a crisis in emerging markets is growth in bank deposits, which denotes a return of public confidence in the domestic financial system.
It is often a precursor of a recovery in the credit cycle, which creates positive multipliers in the broader business cycle and a sustainable economic recovery.
The medium-term goal should be a deep and vibrant financial services industry, complementing or even rivalling that of South Africa.
Deep credit markets are often synonymous with favourable liquidity conditions for growth
Policy consistency
Policy consistency is key in areas such as property rights and bankruptcy regulation. Zimbabwe, like most emerging market, has tended to suffer from policy volatility.
Time and again, we have seen currencies significantly depreciating on poor policy design, implementation and/or weak institutions.
Recent examples include South Africa, Brazil, Turkey, Russia and the UK. In all these cases, currencies depreciated 20 percent plus.
Given that at least 50 to 70 percent of emerging market investment returns are tied to currency, policy consistency becomes critical for investors to take a long-term view on the economy. Zimbabwe will not be an exception.
Domestic savings
In line with the previous comment on using bank deposit growth as an indicator for return of confidence, the general public (as retail investors in an economy) need to feel secure leaving their savings in local commercial banks.
This speaks to two items: general security of savings and confidence about the future; and the need to have confidence in a currency as a store of value.
And this emphasises why solid bank balance sheets are critical, and why a Deposit Guarantee Scheme may also be required, sooner rather than later.
An improvement in, and institutionalisation of, domestic savings can help fund domestic growth, both via commercial banks, pension funds and insurance funds.
Globally, particularly in Europe and Asia, pension funds have been major co-investors in large infrastructure programs and in financing the private sector.
And no country has ever been on a sustainable development path while experiencing major net capital outflows; without locals having faith to save and invest into their own system.
Often it is the general public’s confidence in their own system that tends to attract foreign investor appetite.
The general thrust towards ‘local ownership’ of the economy starts from improving domestic savings, which would then acquire stakes in domestic wealth.
FDI and portfolio
Government has rightly embarked on a programme to engage international investors, with major deals being announced.
It is the hope of every Zimbabwean to see each and every deal being executed.
The administration should keep in mind that in a world where countries compete for capital, investors will always seek the best risk-return profile.
It is up to us as the investment target to ensure that our future growth potential is not compromised. Once again, the narrative of ‘beggars not being choosers’ does not fit here because when it comes to nation building, bad deals can haunt countries for many years.
FDI should be channelled into productive capital stock, and growth ought not to be too reliant on portfolio (capital market) inflows, which tends to be volatile. South Africa and Turkey today face a similar challenge; their growth is highly correlated to portfolio flows, and for that reason, tend to suffer to mood swings in investor sentiment.
And the reason why Eastern Europe fared better than Southern Europe (Portugal, Italy, Greece and Spain) through the global financial crisis was because the latter’s pre-crisis boom was predominance via portfolio inflows, which quickly seized and caused a system rigor mortis once sentiment soured.
Transparency and integrity
Trust and confidence arrives on horse-back but leave in Ferrari. Building a good reputation is always much harder than losing it.
If high-profile deals are poorly structured and/or governed, and they fail, this could be a significant hit to investor sentiment and overall growth for the medium term.
Mozambique and the “Tuna bonds” fall-out is a classic example.
A soured $1 billion deal brought the entire country’s system to a halt, and today — four years on — Mozambique is still struggling to engage international investors.
The currency is rattled and the central bank has burnt through precious reserves trying to stabilise it and the economy.
Billions in potential deals have been lost due to poor structuring and governance on Tuna bonds.
Zimbabwe should learn from its neighbours and need not fall in the same traps. This requires deep, well-thought, structured national economic planning with highly competent committees, with long term views, and perhaps most importantly, on a non-partisan basis.
Trust begets more trust, and success begets even more success. There are no short cuts to long term sustainable development as Asia has demonstrated.
Reserves
A stable currency regime will require significant reserve accumulation, which will enable the Finance Ministry (through the RBZ) to perform smoothing operations.
Building a forex war-chest depends on attractive inflows through improving growth prospects, FDI and portfolio inflows.
It is all reliant on building and preserving confidence, taking into consideration all of the issues raised above.
It is critical to understand that reserves are a currency management tool, which do not necessarily insulate the currency when confidence sours.
China, Saudi Arabia, Russia, Brazil, Malaysia and Mexico are recent examples of countries where despite central bank intervention, currencies continued to crater until confidence in the system was restored.
Stated differently, if not managed carefully, hard-earned reserves could end up being used to pay foreigners as they liquidate investments during crises.
Capital controls
I am not advocating a closed capital account. That is expensive and not helpful for confidence.
However, we would not advocate a completely free floating currency regime either as effective currency management is inextricably linked to structuring medium-term growth targets, and especially for a weak economy such as Zimbabwe.
Experience with Asia (ex-Japan) and Emerging Europe shows that, to obtain and maintain some competitive advantage in a highly globalised world, a dirty floating regime is necessary well into the future.
Thus, assuming the new Zimbabwe currency is launched within the next five, I would propose a closely managed currency regime into the next 20-30yrs.
Dr Brian Mangwiro wrote this article for The Sunday Mail
