Finance minister in currency volte-face

0
515

PHILLIMON MHLANGA

Finance minister Mthuli Ncube, who two months ago indicated that he would prioritise currency reforms, including demonitising the country’s fiat currency last Wednesday made a huge climb down on the proposed move.

Zimbabwe abandoned its local currency for a basket of multiple currencies mainly dominated the United States dollar in 2009 to tame record inflation which officially peaked 231 million percent.

Sagging exports over the years piled pressure on the central bank which resulted in the introduction of bond notes – a fiat currency to ease cash shortages as well as act as an incentive for exporters. The initial proposal by the Treasury chief would have seen the removal of the bond notes before the end of this year through a demonetisation process.

Ncube also wanted to liberalise exchange controls. Options he had proposed were either to adopt the US dollar only or the rand by negotiating to join the Rand Monetary Area or adopt a new Zimbabwe dollar. But, Ncube cooled down on the idea saying currency reforms were not possible in the near future. He highlighted that these would only be implemented when the “fundamentals are strong” as part of efforts to heal the ailing economy. He said the value of a currency is driven by “strong “fundamentals. He indicated that there was need to deal with budget deficit, current account deficit, and inflation pressures before dealing with currency reforms.

He highlighted that there was need to follow a road map first to ensure that fundamentals are strong before enforcing currency reforms. Last month, Ncube said, government had dealt with budget deficit and achieved a “primary surplus” of $29 million.

Analysts told Business Times last week that government’s effort to transform the economy hinges on addressing the currency reform problem. President Emmerson Mnangagwa’s vision is to turn Zimbabwe into a middle-income economy by 2030. “The first order of the day is to deal with the build up to the currency reforms,” Ncube said.

“You will recall that the value of a currency is firstly driven by fundamentals. We have to balance the budget deficit first. Let me say that we have balanced the budget deficit in the month of September. In fact, in the month of October, we have a primary surplus of about $29 million. It’s for the first time it has happened. The budget is as good as balanced. We are walking the talk,”

Ncube continued: “The second key driver of a currency is reducing the value of money supply. Look at the growth of money supply in the last few weeks. It has slowed down, which is very important. “The other driver of currency is obviously inflation. We saw a huge jump in the month of October but I can tell you that it has fallen on a month on month basis. That jump was once off. So, we won’t have any pressure from that area (inflation).“The fourth driver is the current account deficit. I believe that the measures we have taken will go a long way in dealing with current account deficit. And of these put together, we will go a long way in stabilising the currency. So this is the road map.

“Therefore, we only need to do currency reforms when fundamentals are strong. This means budget deficit should be under control, current account deficit is under control, inflation is under control, and so forth. If we have a road map, like this, which is clear then it will become easier to deal with currency reforms,” Ncube added. Last week, Ncube presented a high sounding 2019 National Budget, but critics this week said it will be difficult to deal with a plethora of issues in Zimbabwe’s feeble economy.

They said the challenges facing the country’s economy would present the new Finance minister with the biggest test of his career. They said it was not so much about the credentials of Ncube, but rather the operating environment whose odds were currently staked against a properly functioning Treasury.

At least $140 million haemorrhaged out of the ailing Zimbabwean economy unaccounted from Treasury, highlighting an acute degree of mismanagement of public funds, according to Auditor General, Mildred Chiri’s latest report released recently.

Analysts said Ncube’s major battle will be to rein in widening current account deficit, triggered largely by the high import bill, which is likely to worsen the liquidity crunch in the economy and threatens the stability of the financial sector as well as the viability of local industries due to demand challenges created by lack of disposable income.

They painted a gloomy picture. “The issue of the exchange rate remains a puzzle,”
economist, Godfrey Kanyenze told Business Times. “On the one hand, by allowing duty to be paid in the currency of trade (USD), it’s already a tacit admission that the rate of real time gross settlement (RTGS)/ bond notes to the USD is not 1:1. But then insisting it is so is a contradiction.

He added: “Obviously, government is aware they created this conundrum and that making too much of it will further deepen the mistrust and confidence deficit.

“Pushing reforms of this nature that require austerity requires political will and clout, which the Minister (of Finance) as an invited technocrat will not have. He is already bruised following the circus around the appointment of Ace Lumumba and the revelations on the wrong doings at the Reserve Bank.

“That was uncouth for a Minister of Finance to do, especially given the minefield that our politics entails. Pushing through public sector and public enterprise reforms and frontloading arrears clearance is a big ask, especially given the pain involved and hence the importance of social cohesion and buy-in. He may be able to push through the public enterprise reforms given the state of these entities and the very fact that most were hardly making significant economic contributions. He also has goodwill with the international community,” said Kanyenze.

Other economists said Ncube would have to work within the realities of our economy. The proposed bonus, they said will inevitably create fiscal problems for Professor Ncube.

“Some of the issues will require a lot of money but the reality on the ground is that there is very little cash to fund the budget,” Nkosinathi Ncube, an economist said.

“The biggest challenge for this budget is lack of fiscal space. This will fall short because of lack of funding,” he added.

Indeed the challenge for Ncube will be enormous. The budget confirmed the bonus for civil servants, while also increasing fiscal support to the productive sectors, notably agriculture and manufacturing, both of which are hemorrhaging and desperate for recapitalisation.

Zimbabwe, which emerged from a decade-long recession in 2009, registered double -digit growth between 20102012 and began a reform process in consultation with the International Monetary Fund (IMF) in 2013 to restructure its public finances and debt in a bid to access fresh loans and multilateral lenders.

One of the key reforms was to reduce government spending, particularly on the wage bill, which eats up to 95 percent of total revenues.

Concerned about an increasing wage bill that is worsening the country’s fiscal position, the IMF has been haplessly imploring the Zimbabwe government to reduce its wage bill and freeze the recruitment of new staff.

But, Treasury has, however, not pressed on with job cuts, allowances and bonus entitlements. And the overall picture remains precarious, with government running up more than $2 billion budget deficit in 2018.

Permanent secretary in the Ministry of Finance and Economic Development, Gorge Guvamatanga, said it was not prudent for government to retrench workers.

“It’s misplaced (to say government should retrench its workers) because it will cost us money. Any retrenchment programme to viable should be paid back in two years, which is not the case at the moment,. In the case of removing workers allowances, we can’t because it’s a contribution of total cost. We believe it’s fair,” Guvamatanga said last Wednesday.

Analysts have also expressed skepticism about the government’s commitment to spending cuts. They said Treasury seems intent on proving the skeptics right. Government is currently battling underfunding, and Professor Ncube yesterday announced plans to defer payments of debt arrears to multilateral and bilateral financiers.

Analysts said there is also need to revamp the country’s collapsing infrastructure and utilities, particularly electricity generation which has also been a major constraint to productive in the country. Government spending has repeatedly been both too high and poorly targeted, with recurrent expenditure such as civil service salaries and State subsides taking up a significant chunk of its spend.

The burden for the budget will remain largely on the domestic taxpayer, who is equally cash-strapped.

Balance of payments support from offshore funders ceased more than a decade ago when Zimbabwe defaulted on its loan repayments, and credit lines from even neighbouring countries like South Africa and Botswana, which was promised soon after formation of the inclusive government and led to hurried signing of bilateral trade agreements, have not materialised.

Following the rebasing of the country’s GDP, some analysts have warned that Zimbabwe effectively disqualified itself from the International Monetary Fund’s highly-indebted poor country debt relief option.