Zimbabwe: Inflation Out of Control - Guvamatanga

Reserve Bank of Zimbabwe.
interview

Finance ministry permanent secretary George Guvamatanga has revealed that the government is not considering removing the 2% tax on mobile transactions despite criticism that it is fuelling inflation.

The government collects an average of $100 million every month through the tax, which was declared illegal by the High Court in September.

Guvamatanga (GG) told Alpha Media Holdings chairman Trevor Ncube (TN) on the platform In Conversation with Trevor that assessments by the government had shown that assertions that the tax was causing price instability on the market were not true.

The former banker also spoke about the state of the economy, command agriculture and the austerity measures, among other issues. Below is an excerpt from the interview.

TN: You have moved from the private sector as the managing director of Barclays Bank, being the president of the Bankers' Association of Zimbabwe, you are now in government, how has that transition been to you?

GG: Actually, it is just over a year since I crossed over from the private sector to government, and it has been a very good experience, which is quite different from a narrow view within the banking sector where all you need is to create value for one or a couple of shareholders.

The difference now is that in government, you need to make value for 14 million shareholders and that's the biggest difference.

So you are not only looking at one issue, aspect or one sector.

There is need to take full consideration that there are over 14 million shareholders whom you have to please all the time -- that is the difference.

TN: What's been your biggest surprise coming into this job?

GG: My biggest surprise is everything that you hear about people in government not working.

You need to carry an extra jacket on your chair so that when you leave your office to your other activities, it would appear that you were in the office.

People actually work and there are lots of professional individuals in government, who are highly qualified, dedicated and committed people.

There is actually better structure in government than you would find in the private sector in terms of governance and guidance.

You have the executive, legislature and Parliament and that is why at times you will find, when things are not well sometimes we have to answer to Parliament.

This is very different from the private sector where you sit with your board and sign a resolution and you are done.

Government is very different as the structure that is there is much more pronounced than in the private sector.

For me that has been a great surprise when I noticed that there is much better structure, more policies, guidance and most of the leadership is not discretionary. So the room for discretion in government is very narrow than what you would find elsewhere.

TN: You are filling big shoes really where there has been big men before you like the late Charles Kuwaza and the late Elisha Mushayakarara. These were men that were feared and were bigger than life. I hear whispers that you are the same. People are scared of George, is that true?

GG: I wouldn't say that I am feared or that my preference is to be feared. My preference is to be supported.

However, what people are supposed to understand as well is that I am the treasurer of the country.

Technically, I could be the de facto financial director for the country. If you are a CEO and you find that your finance director is liked by everyone, then he is not doing the job because he would have to manage very limited resources and manage them well and there are various conflicting and competing demands.

Sometimes there comes a delegation of 20 and I would have said 10 and it will be 10.

Something comes and we believe that it is not the best value for the use of government resources and we say no, this is not the way we are going to deal with this. You, therefore, become unpopular. But you see it is not a populist contest.

I have said that if you are sitting on a budget and I need departments and ministries who are saying they are the best men who have to control the budget, I think we have got a problem.

TN: Let's move on to the Transitional Stabilisation Programme (TSP), is it still on track?

GG: I will say largely it is still on track by understanding what we want to achieve with the TSP. The major achievement we wanted was fiscal consolidation. We wanted to be able to control deficit. We were running deficits, which were in double figures and government sometimes could pay the civil servants two months late.

So we needed to address those issues and make sure that we lived within our means.

We also wanted to contain the trade deficit or trade gap that was also running away.

Those were two of the major objectives of the TSPs to say how do we stabilise the economy and we have managed to achieve that.

The budget deficit for 2019 will definitely come in single digits and we have narrowed the trade deficit from around $1,7 billion or $1,8 billion previously to around $300 million to $400 million, which to us were the major objectives of the TSPs.

The other major objectives of the TSPs was actually to slowly deal with structural issues that were there in the market.

Some subsidies that we were running in the market like for fuel, power and grain, much as we are aware that these reforms are very difficult on our people, it does not necessarily mean that this is the wrong thing to do, but actually the right thing to do.

We are particularly cognisant of the impact on our people and how do we then alleviate the difficulties and the challenges facing our people?

That is why we have come up with various social protection nets to make sure that while we carry out reforms, we make sure that we do protect the more vulnerable members of society.

TN: Then tell me about fuel. Are you no longer subsidising fuel as a fact?

GG: With the move of the last price change on Monday, oil companies buying fuel are doing so at the interbank rate.

The subsidising rate is gone, so there is no longer any subsidy.

Anyone who is saying that people are benefitting and there is cross movement of money, that is gone and we have dealt with that.

TN: The other issue you raised were the social safety nets. Which are the key social safety nets that you have come up with so that people deal in a sort of comfortable way with the austerity that they have to face?

GG: We have sort of always run a harmonised cash transition programme to identify vulnerable groups in our society.

We have also run other programmes like (the Basic Education Assistance Module) Beam, which is really to support in the education sector. In the past we used to run into arrears but we have made sure that given the difficulties that people are facing, the expense on the social side is always met. People might actually be surprised that government pays out cash to certain members of society.

That amount would range from anything from about $85 upwards per person.

On the global figure what we have spent on the protection excluding grain and everything else goes in excess of $543 million, an amount as government we have spent to make sure that we protect the vulnerable members of society.

It is also part of our (Staff Monitoring Programme) SMP where there is a social protection target, which we have met.

TN: You said that the TSP has largely succeeded, then what have been the failures?

GG: The failures have been around inflation. We are out of the inflation target and we are also out of our reserve money target.

The growth of money supply has been much larger than what we expected or planned for.

Those two areas have actually been failures and we now need to go back on track and deal with those as well.

TN: What have been the reasons for those two failures?

GG: When we came up with the TSP we did not factor in the drought, we still believed that we would have a good season.

We did not factor in Cyclone Idai and we did not even consider that because our power is largely generated off water and that if you have a drought then you do not have water at Kariba Dam, which is currently at 19% capacity.

Because of that the electricity generation also went down and when it did, productivity came down.

So we have had to deal with three major shocks and trying to manage those shocks also created its own challenges and then resulted in certain aspects and TSPs getting off target.

TN: Finance minister Mthuli Ncube has spoken about command agriculture becoming smart agriculture. Explain to us what the difference is between the two.

GG: I will also link that to the TSP because one of the elements is that we talk about a market-led economy where we want to reduce government's involvement in the market. When we talk about the market-led economy despite the price madness that we are seeing now, government has never come in with price controls even when we have seen how wild market players have been.

As part of the TSP we sincerely believe that the market should lead the economy.

The transition or the movement from how we now fund agriculture is that rather than government funding directly through injection of money and treasury bills, we have said to the banks, we will give you guarantees. Play your traditional role as banks.

We are working with CBZ, Women Empowerment Bank and we are working with Agribank and all the others that are now coming on stream.

TN: There is always a question to ask, why those banks?

GG: Those were the first ones to react and the others wanted to get a feel of how this would look and now that they have seen it is working because to date working with the partners that I have already alluded to we have enrolled and funded half the contracted hectrage for 2019 and 2020.

TN: What is the quantum in terms of the money that the government has provided?

GG: At the moment, our partners have actually disbursed money off their liquidity while we finalise on the numbers.

To date, we almost have a billion disbursed into agriculture through smart agriculture.

We have got another scheme and there is always confusion around agriculture schemes, we have got the command agriculture, where people actually have to borrow and have to repay and they do repay.

I was looking at the numbers for the 2018-2019 season, we have actually had the highest repayments despite the fact that we have a drought and I will explain why this is so.

We have already received about $105 million to $120 million of repayments from last season, which account for about 20-25% of the total disbursement.

As a banker, 25 % is still not good enough but it is better than nothing and, therefore, it is not a free scheme because people have to repay and there is now an understanding that why did people repay faster this season, it is because now we have moved to the banks and they do not lend money to people who do not pay back.

I think all the farmers had to make the call on whether they are called or labelled a defaulting farmer and be unable to access funding from the participating bank or I pay whatever I owe now and be able to access a bigger loan for the season of 2019-2020.

TN: Clarify to this, is the traditional command agriculture dead?

GG: Yes, traditional command agriculture is dead. It is gone.

TN: No politicians behind the scenes?

GG: There is no way you can come in as a politician. There is no way because for one to be able to access the inputs, you have to go to the banking partners, open an account and be credit rated and then one is given an electronic voucher you take wherever you pick up the inputs, so you cannot go as a politician to the partners and say "I am Guvamatanga the secretary and I need money," because you need to have a voucher and you need to have signed to the money being used.

It's very easy for us now to reconcile the inputs distributed against the voucher because there is no room in that process for anyone to ask for money and inputs.

Command agriculture in its traditional form as we said in the TSP, is dead even in our budget as well.

TN: Let's move on to how much, the numbers have been bandied all over, how much has been disbursed towards command agriculture -- the traditional one under your watch?

GG: Under my watch, I came in when there was an outstanding amount from the previous season, which was around $71 million and that is what I signed off and it was paid. Let me explain that since inception in 2016, the total for command maize, wheat and soya is just over $900 million.

So when people come here and sit and talk amounts of $3 billion, I do not know where they are getting those figures because it's not more than a billion since inception.

We have got another programme, which targets vulnerable members where they get 20kg of seed, 50kg of fertiliser and a little bit of chemicals -- that one is not paid back.

It is for the people in the deep rural areas to secure themselves in terms of food and that has also run from 2016 up to date and it accumulated approximately $600 million since inception. For this season we have contracted over $200 million for that scheme.

TN: Who handles that amount, is it Treasury or you have contracted a company to handle that as well to give the money and seeds to the vulnerable people?

GG: In terms of the contracting and so forth we obviously have the Ministry of Agriculture taking a position and then they come to Treasury for funding and then we fund them and that is how government works.

I know there is also a name that is always thrown around. Sakunda does not participate in the presidential scheme in any way or form. In the presidential input scheme there is cotton as well in there which is actually the bigger part of that scheme, which is managed by the Cotton Company of Zimbabwe.

TN: So we have the United States ambassador making allegations around Sakunda being given $300 million, so you are basically dismissing those allegations.

GG: That's not correct, there is an issue that is there of the legacy debt owed to Sakunda and let me explain. When we had all these schemes, government was also making a commitment with all of the suppliers that would provide them with foreign currency because what we were issuing was local currency.

For anyone who wanted to import like the fertilisers and chemicals imported and some of the equipment is imported as well and so for all of those suppliers, whether it is FSG, Sakunda e.t.c., there is not one single contractor in all these schemes. They then have to import the inputs and we had promised as government from 2016 that we would provide foreign currency and we never provided that enough foreign currency and we do have issues that we are dealing with at the moment for various players and most people are affected by what we are calling legacy debts.

As government we had unsettled foreign obligation with Sakunda. We then had to design a mechanism to settle the debts.

The issue for Sakunda became more urgent because we also wanted assistance from them.

TN: How much did you owe Sakunda?

GG: I think what we owed for the legacy debt was just over $150 million that we had not settled. We gave them the local [part], but the $150 million, they had to use their own resources and their own bankers to fund. So their own bankers were now coming to them and saying we are not giving you inputs for 2019. We are not giving you fuel because within their partners, there are also suppliers of fuel and that was going to create a grid lock and so we had to find a mechanism of bridging while we finalised on the overall legacy debt issue with them.

TN: Thank you for clarifying the issues around Sakunda. Let us move on to the spectacular collapse of the local currency end of August and September. What is your understanding of what caused that?

GG: There are various reasons, which would actually cause a currency to collapse. But let me give you facts and figures. As of today we are sitting on over US$650 million in foreign currency accounts. The money is here. We have about $150 million in cash with banks and I am not talking about cash in people's pockets, mattresses and various other corners.

We are already on US$800 million. Then we do have over half a billion dollars of United States dollars sitting offshore for export proceeds that have not been repatriated to Zimbabwe.

If you check the trends, we normally sit on US$200 million because that is an acceptable number, as you export the money comes in, but US$500 million starts to show you a developing trend.

In total officially we are sitting on US$1,3 billion that should have come into the market but is being held for one reason or the other.

So when you now start to be holding that money to increase what you are holding, it means that what you are feeding into the market is reduced and when you reduce supply and there is demand then the rates will go up.

Let me explain another phenomenon, traditionally when we were in our best years, Zimbabwe's currency always moved in October and November.

In fact, when I was a trader at the bank that is how I used to make money because I would create my cash flow so that in October, November and December that is when all my cash flows would actually come through because you then have your tobacco, which is one of the major sources of foreign currency in the country drying up and as you get into November and December, it will start to affect mining activities, mines flood and the mining output is reduced, but we had the impact of reduced power, which also affected gold production and we started to feel the impact during the same period.

We then have a reduction in gold, tobacco going away and an increase in demand, which normally comes from the need to fund agriculture.

We need to change that model and we are in the process of doing so. What is very interesting is that we want to fund our agriculture in August and September in foreign currency requirements during our worst foreign currency infill period.

Our best is April to July, which means that if this is an agricultural economy, we should be able to pay for our agricultural inputs.

TN: Are we changing into that now?

GG: We will be changing it. That increased demand and reduced supply naturally you would find that the rates increase because everyone will now panic and say there is no foreign currency, but foreign currency is there.

TN: We saw after that the RBZ freezing certain accounts, Sakunda being one of them. The impression given being that these entities were playing the market, is that a fact?

GG: The central bank will always deal within normal banking systems. If there is increased activity in an account, you would normally want to see what is happening within that account.

There were several accounts that were frozen by the RBZ, but the freezing of accounts does not necessarily mean that there is a problem.

Every day all the banks in this country report to reserve bank and all the transactions that are considered to be suspicious or abnormal, and every bank as part of the regulation now is supposed to have someone called an anti-money-laundering officer, which is now a requirement. We will soon be requesting that even the mobile operators have the same officer.

TN: Is there anything concrete happening in the mobile payment system and monitoring of them to ensure that there is no money laundering happening. Is there a concrete bill coming up?

GG: We are now also considering having anti-money-laundering officers within the mobile money operation systems because there has been an increase in activities there and we need to make sure there is monitoring and these things happen from time to time but they are never reported.

TN: So your answer basically is that these guys were not playing the market.

GG: No, they were not playing the market.

TN: Let's move onto the monetary policy committee, which met last week and it looks like the interbank market is still being fine-tuned to use your words. Why is it taking so long to do this thing and why don't we just go to the ideal situation?

GG: The ideal situation is really transparent and you need an electronic system that cannot be manipulated for you to monitor the system and that is what the RBZ governor announced. That we are actually moving to a real trading system that cannot be manipulated because there is real time.

As the market is trading, the exchange rates are monitored.

What we have heard now is that the market is trading at some kind of rate whilst the RBZ is reporting another.

Once we have an electronic platform to trade, this will increase the level of transparency, but at the moment there is so much information asymmetry in the market and that is really a recipe for inefficiency and abuse, which is what we have actually seen.

TN: Any specific time as to when the Reuters system is going to start operating?

GG: I think the central bank is working towards a time that is before the end of this year.

TN: Let us move on to whether there is a new currency that is coming out?

GG: We already have a new currency, which is specified by the law called the Zimbabwean dollar with a simple ZWL, which is the local currency. So there is no new currency that is coming in. We brought in the new currency when we introduced the local currency. What we are now simply doing is to alleviate the problem and challenge of notes and coins because when the new currency was introduced it was not supported by its own notes and coins and we adopted the bond notes and coins as a form of the physical cash to support the new currency and we are saying that the time is right to bring in notes and coins, which support the currency that is already there.

So that is what we are now simply doing by bringing in notes and coins, which are proper money.

TN: So the ZWL is going to be a note that is not going to look like a bond, but will look like a new note, which formalises what has already been put in place.

GG: Yes, we will then expect that those who were trading in cash that their business is going to die and those who were actually working on having one price for cash and another one for electronic money and mobile money transfer, that will no longer work because the cash will be available in the bank, on ATMs and we want to normalise the situation again.

TN: Obviously you are not going to be telling the viewers when this is going to happen otherwise there is going to be a stampede.

GG: No, I think if there is going to be a stampede this time around, it is going to be a good one because the one that can happen now is one that as government we will be happy to see. We will be happy to see everyone now going under their mattresses and bringing our bond notes back into the banking system.

The bond note will still be working though. So I am not saying rush in buying or using it.

Initially the bond notes and the new notes will be working side by side and they will be having the same value. At some point we will cut them off and we will not tell you when we will be removing them. At some point we will decide to just to remain with the new notes and coins. We are ready for that stampede.

TN: Let us move on now to the IMF staff monitored programme, my understanding is that the scheme that was there in September is being recommended to the new managing director that the SMP should be suspended, which could be dire for this country. Is that your understanding as well?

GG: That is not my understanding of that situation. We had a team in Washington during the annual meetings, which had extensive discussions with the IMF. I think in terms of the targets, which are also public, most of them according to the SMP are on course as we have met those targets. But we were off when it comes to the inflation, reserve money and the discussions we were having with IMF were around how we can recalibrate and get back on track, but our view actually is that we want to continue with the plan as it was.

TN: So you are comfortable with the plan that you have said is on course?

GG: We are comfortable with the plan. If we need to recalibrate, it may be one or two targets but everything else we do not want to change.

We want to remain on course and continue with the SMP. The point I am making -- the SMP is not some secret document, it is there on the IMF website and obviously in due time they can make an announcement in terms of how we have fared. When it comes to the performance and we do acknowledge that there were some mistakes, which the IMF was concerned about, but when you look at the overall programme if you were going to mark it, I think it's a pass.

TN: The minister of Finance has said that austerity is behind us and that now we should brace ourselves for growth. What are some of those changes that some of us are not seeing?

GG: We have been given the weather forecast for the 2019-2020, which seems to indicate that we will have from normal to below normal rainfall in certain areas. I think that Zimbabwe being an agricultural economy, we have taken adequate measures that there is availability of inputs so that people can grow crops. We should be able to grow our food and feed ourselves for starters.

At the moment we have been derailed because we had to import food and that required forex that we could have been using for other developmental issues within the economy. So with a good rainfall and agricultural preparation, we then expect that agriculture would pick up.

But we are also then saying on power generation, which is critical for production, we are now questioning where we are going to find power on a realistic level to say even if we have good rains, Kariba can only go back to normal levels of power generation around June/July because of the inflows, which will take time.

So if that is the case, where do we get additional power so the Ministry of Energy has been working hard to make sure that we have additional power, which can support both mining and agriculture?

Once we have taken care of those issues we believe we would have created a stable platform for growth and productivity.

*abridged version of the conversation

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