Persistence Gwanyanya
Correspondent
It is commendable that after the successful launch of a structured currency in April 2024, ZiG, Treasury, through the 2024 mid term fiscal policy review, weighed in with measures to support and sustain the stability ushered by this currency.
Equally comforting is the timeous response by the exchequer to the external shocks, notably drought and depressed commodity prices, currently gripping the economy and threatening the recovery progress made so far.
However, importantly, reflecting policy makers' prioritisation of stability, there is need to trade off growth as external shocks take a toll on the economy. Unsurprisingly, Treasury reviewed down its 2024 growth projection from 3.5 percent to 2 percent and it is only advisable for market participants to adjust to this new reality.
Given the volatilities that characterised our economy from the last half of 2023 to the first quarter of this year, it is tempting to view the revised growth projection as mere right sizing or downsizing of the economy as stability sets in.
The market's disposition to offload the local currency at every opportunity, which was driving sales, is dissipating with the setting in of stability.
Admittedly, without supportive fiscal and monetary measures mere adoption of structured currency is meaningless. It is the measures to drive demand for ZiG, to contain monetary expansion and to foster judiciously management of liquidity, which are contained in the mid term fiscal policy review that give true meaning to the efficiency of the structured currency.
While monetary expansion and projected budget deficit pose a risk to stability, the commitment by the Minister of Finance, Economic Development and Investment Promotion, Professor Mthuli Ncube, to resist every temptation to monetise the deficit is reassuring.
Both reserve money (Mo) and broad money recorded significant increase after the launch of ZiG.
The reserve money grew by ZiG0.1 billion in May 2024 from ZiG6.5 billion the previous month, while broad money increased by 5.9 percent to ZiG41billion in May 2024 from ZiG38.8 billion in April 2024. While at face value this growth could be concerning, it is largely a reflection of normalisation of the ZiG monetary aggregates after their decimation by volatilities in the first quarter of this year.
This normalisation factor could be the explanation for the sharp increase in the debt stock to ZiG287.2 billion -- itself largely driven by domestic debt.
Owing to volatilities, domestic debt has been decimated to insignificant levels, and the return to stability sparked accelerated credit expansion, thus restoring the health balance between domestic and external debt levels.
The ratio of external: domestic debt is now 58.7: 41.3, which is healthier than 2019 ratio of less than 92.31:7.69 in favour of external debt. Despite the sharp increase in debt stock to US$21 billion, from US$8.1 billion in 2019, there has been an improvement in debt to GDP ratio from 84 percent. Also driving growth of the domestic debt stock is compensation of farm owners amounting to ZiG66.39 billion (US$4.95bn @ US$1:ZWG13.4). However, it is advisable for Treasury to closely manage growth in debt by considering alternative sources for funding deficits, including disposal of assets. Debt restructuring is highly recommended.
As monetary aggregates normalise, dedollarisation unravels. Treasury indicated that ZiG deposits constitute 19.6 percent of the broad money supply of ZiG41 billion in May compared to 13 percent in April when the currency was launched and RBZ Governor, Dr John Mushayavanhu, highlighted that this ratio had further improved to 30 percent, which is clear testimony to the reversal of dollarisation.
Now, dedollarisation is not without its challenges. Increased ZiG circulation exerts additional pressure on forex, resulting in resurgence of volatilities. This is why the Finance Minister implored the Monetary Policy Committee (MPC) to stay abreast of changes in the monetary space, and make necessary interventions to manage stability.
This call is especially important in light of the structural weaknesses of the multiple currency regime currently in operation in Zimbabwe.
The multiple currency system is characterised by market failure as the interbank market (willing buyer, willing seller), which anchors it, naturally tends to be a seller's market, typified by dominance of RBZ as the supplier of forex against excessive demand for the same. Because the multiple currency system permits usage of forex for domestic transaction, there is really no incentive for voluntary liquidation of forex beyond statutory export surrender liquidations. That is why for a long time now banks have been sitting on forex deposit averaging US$1.4-2 billion, with limited liquidations by the holders of the same.
As such, to sustain the stability, RBZ should normalise timeous intervention in the interbank market by injecting forex to liquify the market, which only demonstrates the need to expand the sources of forex and increase the demand for ZiG. This is why measures to pivot towards ZiG taxes and customs as well as user fees by Government department and agencies are plausible.
Commendably, Treasury entrenched into law payment of 50 percent of corporate taxes, commonly known as Quarterly Payment Dates (QPDs), in ZiG for businesses that generate more than 50 percent of their revenue in forex. Due to high levels of dollarisation, most formal businesses, including fuel dealers, fit in this category, which makes the measures effective in increasing demand for ZiG, starting this third quarter when the law is expected to take effect. The operation of legal requirement is expected to see some fuel dealers warming up to selling fuel in ZiG as they try to raise funds for QPDs. Equally major exporters, who constitute the bulky of forex deposits are expected to liquidate beyond export surrender, thus increasing activity on the interbank market.
The removal of a couple of products from exclusive foreign currency duty payments is also seen as driving demand for ZiG. Similarly, the directive to Government departments and agencies to charge for their goods and services in ZiG unless specifically excluded by authorities, does not prop up the demand for ZiG but confidence in the currency. Going forward, as indicated by the Minister of Finance, more measures to drive ZiG demand will be seen and this is necessary to support dedollarisation.
Importantly, the acknowledgement of the need to drive production and productivity as a permanent solution to stability, is commendable. In this regard significant progress has been made in transforming the agriculture sector mainly maize and wheat production. After attaining food self sufficiency and surpassing the National Development Strategy 1 (NDS 1) target US$8.2 billion, it is important to minimise the vagaries of drought, which requires investment in irrigation, conservative farming methods, and many other support initiatives. The agriculture sector, which was initially projected to contract by 4.8 percent is now expected to contract by 21.7 percent as the effects of El Nino induced drought are felt. This only demonstrates why funding for the proposed increase of functional irrigable land to 496 000 ha by 2025 is a serious commitment. The target is to increase functional irrigable land by 6 684 ha this year and Treasury has already expended ZiG19.6 billion towards this initiative in the first half of the year.
The depressed global commodities emphasises why Treasury regards mining sector transformation through beneficiation and value addition among top priorities. Given the concentration of the economy on the mining sector, volatile international commodity markets demonstrate why diversification of revenue as well as forex sources is equally important. Despite the downward revision of expected mining sector growth to 5.2 percent from 7.8 percent depressed prices of PGMs, is worrying as it poses significant risk to foreign inflows. Despite a historic fall in PGM prices, revenue was supported by volume increases, demonstrating the urgent need to expedite the setting up of a platinum smelting plant. Needless to mention that the drive for beneficiation and value addition makes addressing the electricity situation an urgent requirement.
While gold is expected to benefit from firm international price, its contribution to fiscus remains minimum, which is worrisome, and thus calls for a review of industry including pricing and marketing of the product. The adoption of structured currency, which is supported by international reserves including precious metals naturally increases interest in the contribution of the gold subsector, not only to currency stability, but the economy at large. At a time when the country is estimated to be losing significant amounts of gold to smuggling, gold production has been revised down to from 35 tonnes to 39 tonnes, weighing down mining sector performance, which is worrying.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
As the global tourism economy recovers, Zimbabwe is expected to continue benefiting from increased number of tourists, which will drive the sector by 12 percent. The United Nations World Tourism Organisation (UNWTO) projects the global tourism sector to fully recover by 2024.
Despite the upward revision of manufacturing sector growth to 2.5 percent from 1.6 percent, the average growth of the sector is still low to support the targeted contribution to GDP of 25 percent.
While there has been some notable investments in the manufacturing sector space, the US$1.5 billion Dinson Iron and Steel company is seen as a signature mining sector investment which will drive the downward and upward industry. Current infrastructure projects are seen as attracting investment not only in the manufacturing sector, but the economy at large.
Forex receipts for the first six months increased by 9.5 percent to US$6.2 billion from US$5.6 billion during the same comperative period last year, driven by export receipts and diaspora remittances. Preliminary estimates show improvement in current account surplus for the first half to US$19.2million from US$13.8 million recorded the same period last year. However, the current account surplus is expected to narrow down to US$44.5million by year end from US$133.9 million in 2023, reflecting the effects of depressed global commodity prices, importation of food to close the deficit and low export growth.
Persistence Gwanyanya is member of the Monetary Policy Committee. He is also founder and group CEO of Bullion Group International. For feedback e-mail +263 773 030 691
