23 March 2018

Zimbabwe: Two Half-Truths - Imports Decline, Exports Increase

opinion

Two half-truths have been aired for a long time now. It's time we got the whole naked truth:

Imports decline half-truth

It has been widely believed that the Statutory Instrument 64 of 2016 played a significant part in reducing our country's import bill. The argument ventilated by several government officials is that the imports-restricting instrument was instrumental (pun not intended) in reducing our trade deficit. This is a half-truth. The World Bank is of the opinion that government-engineered liquidity shortages were largely responsible for curbing imports. Growth in exports led by mining has been modest.

The World Bank contends: "The liquidity shortages eroded the purchasing power of importers, and goods imports fell by 13,6% between 2015 and 2016."

This trend that blossomed in 2016 has continued as a result of fiscal indiscipline, prompting fiscal expansion to finance government's legacy debts and a massive budget deficit that is expected to top US$2 billion when the full fiscal count for 2017 is completed. Government has been leaning on our local commercial banks for its borrowing requirements through the sale of Treasury Bills (TBs). At the end of the Government of National Unity (GNU), our domestic debt was less than US$200 million. A year after the GNU folded, our domestic debt skyrocketed to almost US$2 billion, a 1 000% pole-vault jump.

Finance minister Patrick Chinamasa, in his 2018 budget statement estimated our domestic debt at US$ 6,031 billion. It is this heavy and unrelenting borrowing from the domestic market that has been crowding out the private sector and causing severe liquidity shortages in the economy. This is what has been suppressing imports. It would be disingenuous of government to congratulate itself for paring down the import bill through import restrictions. The falling import bill is not a sign of a successful policy intervention; it's an unintended by-product of fiscal profligacy. This is the bare truth.

Export incentive half-truth

A fortnight ago, the Reserve Bank of Zimbabwe (RBZ) smugly put up a defence of its bond notes intervention, touting it to have been a successful policy intervention. The RBZ parried the question on cash shortages, instead, drawing attention to exporters who have increased production as a result of the bond notes incentive scheme.

On the surface, it sounds like an impenetrable argument, until one hears the World Bank's view on the matter. The World Bank is of the view that the apparent success is for perverse reasons. Pundits from 1818 H St NW, Washington DC, cite the very discount of our wannabe-currencies (bond notes and electronic balances) to the greenback as a powerful incentive for a selected number of exporters who are allowed to retain the bulk of foreign currency earnings. The more they export the more they benefit from their retained US dollar earnings gaining value against the nominal US dollar balances. In all honesty, would we hail this as evidence of the success of the quasi-fiscal scheme? Methinks not.

Foreign debt obsession

Here is the root of our reduced import bill and apparent success of bond notes incentives.

During the morning and evening of the GNU, our debt-to-GDP was well below the alarm-trigger level of 70%. It played in the neighbourhood of 45%. In 2014 the debt-to-GDP shot up by almost 10 percentage points to almost 55%. The culprit was not foreign debt; it was domestic debt. In 2015 debt-to-GDP climbed to 60%. In 2016 it reached the alarm-trigger level of 70%.

All this furious clambering of our national debt was due to domestic borrowing. Banks smiled all the way to the bank (pun not intended) as they feasted on a windfall, courtesy of government profligacy.

Even as the liquidity crunch hit the private sector, the engine room of the economy, banks posted huge profits. That is an undeniable sign of a morbid economy. For 2017 Chinamasa gave us an estimate of 73,4% debt-to-GDP level. I believe this is heavily conservative, given that government in 2017 did not put brakes on fiscal profligacy and heavy domestic borrowing. We need to note that our domestic debt has grown to a point where it is almost equal to foreign debt. This is huge, given that before the GNU our domestic debt was less than US$200 million.

While we give a lot of prominence to foreign debt, it is the domestic debt that is choking us and distorting the economy. What's sad is that this domestic debt is controllable; government needs to restore fiscal discipline.

Our way out of the current economic cul-de-sac is reducing our country risk premium and walking the talk on fiscal and political reforms. Government needs to take us back to cash-budgeting; we need a zero budget deficit until we sort out our economic fundamentals. That single act will greatly improve our liquidity and bring down the discounts of quasi-currencies.

Bible-based tips for Mnangagwa

Granted that credible, free and fair elections are a must to help reduce our country risk premium and potentially move the IMF to give us developmental finance, there is more we can do.

We need to start paying what we owe multi-lateral and bilateral lenders. The rob-Peter-to-pay-Paul Lima approach is meant to be a quick win. Quick wins in the financial world call for raising the red flag. The Bible in 2 Kings 4 lays down a principle of repaying debt in a case of over-indebtedness. Elisha asked the widow suffering from huge legacy debts left by the husband to borrow vessels (at zero cost) for oil production. The advice to the widow was to sell the multiplied oil and pay off the entire debt and live off the remainder.

The principle here is clear: obtain a concessionary loan or grant for the purposes of production, using the profits to pay off the debt. This model is what we should follow as a country. The only asset we have towards this is a full restoration of the credibility of government in the eyes of the international political community. Restoration of that trustworthiness can convince some bilateral partners to give us sizeable grants and concessionary loans that should be channelled towards production, restoring our ability to repay loans from liberated fiscal resources.

Zimbabwe's production restoration cannot be credible if agriculture is not set as the lynchpin of production recovery. Land use rights cannot be wished away. The Bible has a brilliant model to help us out. Leviticus 25:23, 24 (KJV) state that "The land shall not be sold forever: for the land is mine; for ye are strangers and sojourners with me. And all the land of your possession shall grant a redemption of the land." This land tenure system is a freehold-leasehold system. This is not an oxymoron. It can be an oxymoron if one is thinking using Western dichotomous logic. In the ancient near East, poles could co-exist.

In the freehold-leasehold system, there is a primary freeholder who is allowed to lease the land for a maximum of 49 years.

That lease was transferrable. However, in the 50th year, land reverted to the freeholder or the freeholder's closest relative (in case of death). If the freeholder wanted to redeem the land before the expiry of the lease, he or she had to pay the full rental price for the remaining years of the lease. That guaranteed stability, predictability and a thriving land market.

Our government should look into this model to address our property rights challenge with respect to commercial farming land.

Cyril Ramaphosa needs these insights too.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer reviewed international journal. 

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