Zim could get a sponsor creditor to clear Paris Club arrears

• Govt to launch pension fund for civil servants
• Prefers PPP arrangement over Command Agriculture
• Maximum external borrowing for an infrastructure project should be at 20%

We publish a transcript of a conversation with the Minister of Finance and Economic Development Mthuli Ncube on his diagnosis and solutions to the current economic challenges.

In trying to find a solution for the Zimbabwean problem, we need to start with the diagnosis of the problem. What is the patient suffering from? We need to understand the symptoms that the patient is suffering from. What exactly is the nature of the illness?  There are several illnesses in this patient, if you think about it.

State of government finances

I have been open and transparent about the state of Government finances. We are living beyond our means where expenditure far exceeds our resources. We are doing well in collections but there is still a gap. Our budget deficit is high and I am desirous that we narrow it down to lower single digits over the next three years. Because of that high budget deficit, we had a large issuance of treasury bills, which led to the ballooning of domestic debt. We are in the process of making sure that going forward the treasury bills are subjected to a market mechanism. That way, we can get a better interest rate through an auction based market system. There is a link between that to monetary policy issues and money creation…what we call the monetization of debt and this impacts the exchange rate.

There is also a link on the external side in terms of the current account deficit. Again we are living beyond our means in terms of what we are buying abroad against what we are selling. That gap is in the negative. It’s not surprising therefore that we have a shortage of foreign currency. What makes it worse is that our industry is not competitive in external markets. We lost foreign currency earnings from agriculture as you all know. And that has not been restored fully. There is a gap in our forex earnings to support the demand for currency.

(As you can see we now have a whole understanding about the economy. You were asking about the short term wins.) I figured that I could move faster on revenue collection than on austerity. We can argue and say whether it was the right strategy or not, but it’s done. …The 2 percent intermediated money transfer tax with exemptions…. It’s amazing how people are not talking about the exemptions …there are so many exemptions and the cap. But the 2 percent tax is part of the plan. We are dealing with the revenue side, expanding the net in terms of tax payment because the economy has become more informalised. We figured that everyone is using some kind of electronic payment for basic things and that’s probably the best way to net everyone in. There could be other strategies, other means, other countries do things differently but we have chosen this route.

The tax shows resolve and that we are determined to make sure we close the budget deficit. It’s (the deficit) causing inflation, its squeezing out the private sector. Banks are buying treasury bills and not lending. We are determined that we see through all the reforms. I don’t think people in Zimbabwe don’t want to pay their taxes. I think it’s about Government demonstrating that we can meet them halfway by controlling expenditure. We forecast to close the year with a double digit deficit even when we incorporate the tax. So in the upcoming budget, I will be doing that. This includes reducing government waste and to spend money on things that people can feel and touch, whether its schools, hospitals or good roads. We would like to show that as Government we are putting all hands on deck and dealing with the wage bill. This has to be done now. In fact, within the next three months.  We cannot afford a double digit deficit. We need to bring sanity to our fiscal situation.

In terms of mechanisms, we have to make sure we don’t print many TBs. There has been a significant slowdown. You can never stop completely…. but there has been a slowdown. We have no choice otherwise domestic debt would go out of control. We came out and were transparent with the amount of TBs which Government had released.

State enterprises privatisation push

We want to make sure that we privatize some of the state-owned enterprises. We want to see that this process moves fast. In fact, we have given some of them three months to finalise transactions. I need to see deals signed. There have been at this forever. (Go back in history, you were once editor of Business Herald, when did they start talking about privatisation?) If you don’t put timelines, nothing happens. You have to push and push hard. I am also insisting that some of the entities must be listed on the stock exchange. It’s good for deepening capital markets and financial conclusion. It’s also an opportunity to use the proceeds from privatisation to compensate pensioners who lost money when we dollarized. That’s a big issue that…remember the Smith Commission.

But also that some of the proceeds of privatisation should be used to recapitalise the new pension fund that Government will soon be launching for its employees. This privatisation is very important to fix certain things that are troubling us. We have a lot of assets as Government… We should use them.  We want efficiently functioning parastatals, which are well capitalised with proper governance. The pension fund will be launched this financial year. But of course it’s not being driven by Treasury. It’s a wider Government programme to be led by the Ministry of Labour. We are copying what other countries have done (South Africa for example) and therefore it’s not going to be placed under NSSA. We want to start with something clean. Something to be managed professionally with a board of trustees.

The doing business environment

Already we are saying Zimbabwe is Open for Business in line with the Vision 2030. Under this, the Zimbabwe Investment Development Authority (ZIDA) will be key as it creates a one stop centre, providing convenience for investors. There’s a lot to learn from other countries in the region on how to do this. The Bill for this has already been approved in Cabinet. This is within the 100-day execution plan.

We continue to give support to agriculture. Already our grain reserves are at 500 000 tonnes for maize. So the support to agriculture is yielding results as far as the staple crop is concerned. El Nino is on the way so those grain reserves will go a long way in terms of food security. I think over time (more broadly) we want to move to a proper, sustainable financing model for our agriculture so that it plays its vital role of keeping our people out of poverty, ensuring food security and promoting an inclusive growth agenda. We will do whatever we can to make sure its sustainable. Think about it; while the GMB price is well above purchasing power parity prices, it provides a much better option than importing maize for the grain reserves. How do you want to pay; through imports (which requires forex) or through incentivizing farmers. There has to be a tradeoff. But of course we can argue about the price level used to incentivize those farmers but the principle is not a bad one.

I believe the way forward on command agriculture, is to crowd in the private sector so that Government gets partners to fund the sector; a PPP model. That’s the most sustainable way. Why? Because the money is in the private sector. Banks are sitting on $6 billion of funds available for deployment in various areas. The issue then is on what guarantees can Government provide. I have proposed actually that for some of the banks, at least where we have shareholding, we could offer guarantees for them to on-lend to the sector. And also see how we can work with some of the companies like oil expressers on their soya bean schemes. We should protect the gains made under command agriculture.

Another elephant in the room…farmers’ compensation?

This is still a big issue. We have to make sure we do it.  Former commercial farmers have already indicated a figure in terms of how much they want as compensation. What we are doing as Government is to finalise our own valuation model. A comprehensive valuation. I know some have already been paid, it’s good that they have paid. From what I hear, there was actually a stampede to get compensation, but this has since slowed down. One figure has to be agreed on by all partied involved. And that one figure hasn’t been agreed on. Hopefully we will do so in the next few months. The constitution is clear that Bippa farms will get full compensation while the rest of the farms will only get compensated for improvements.

We have ideas of how best to structure the compensation model. For a start it will become part of our domestic debt. Several billions will just show up in our balance sheet and that’s a liability. We need to then organise the asset side, which is the land. With that kind of balance sheet, it will be easier to manage the size of the liability because we have an asset to balance it out. On the asset we have farmers using the land and paying rent and lease fees so that income stream can be used to service the interest on a loan because we will probably borrow to pay off the farmers. I’m pretty sure we will come up with a workable structure to deal with the issue.

External debt and lack of FDI

Externally it is the absence of credit lines. Why are we having difficulties in accessing credit lines…as many as we like.  If you notice most of the credit lines tend to be arranged through the Reserve Bank of Zimbabwe which ordinarily should be arranged by the banks. The challenge is on the arrears. We owe the World Bank, African Development bank and other creditor nations. Clearing arrears is very critical in unlocking credit lines.

There are three stages on the arrears clearance roadmap. Stage 1 is having an acceptable, credible economic reform programme. And we have done this through the Transitional Stabilisation Programme, which I presented in Bali to the partners. It received overwhelming support. Stage 2 is clearing the ADB and World Bank arrears…we are working on that parallel to the budget. It is my intention that by this time next year, we should have initiated Stage 3, which is the Paris Club negotiations.   On the Paris Club negotiations all options are on the table, so it could be straight HIPC, HIPC-Like or an ad-hoc arrangement…something that’s customised for Zimbabwe with a specific creditor being a sponsor or all the G7 countries for instance being sponsors. We are clear in terms of the steps and the roadmap that we will take on this. I will be traveling to Livingstone in mid-November for a meeting of (World Bank’s) IDA deputies (reps from various countries). The idea is to continue the discussions I had with them in Bali.

Secondly we need to deal with the impact of Zidera. My view is that we must embrace the principles of Zidera. The issues raised are the things that as Zimbabweans we would want to do anyway as part of certain institutional progress towards Vision 2030. This is normal.

Creation of equity funds for industry

Coming to industry, I think what I can do, which is within my remit as Minister of Finance is to encourage the creation of equity funds in addition to credit that the industry sources from the banking system. We need to ask how we work our way around collateral issues if you want to set up a business now. It’s very hard to do it on an overdraft facility. What you need is equity. I’m desirous to push a national venture fund. My view however is that it must be private sector led. I believe in the idea. In fact, I have written about it in the past. We only have one venture capital fund in the country at the moment, which is Takura. The Venture Capital Company has since closed. So we need more. Industry needs to capitalise and retool.

Infrastructure can be pushed by locals

We need to promote PPPs. There is capacity for locals to do some of the roads. That capacity can partner with foreign partners. My view is that we should make progress on that. Toll the roads to get user fees. We need to minimise external borrowing. The maximum amount in my view of external borrowing should be no more than 20%. We need to use domestic capital. There’s a lot of this currently. See there is a tradeoff between FDI and foreign debt. A lot of these BOTs are debt funded and as Government we need to be careful not to contract the debt. However, the SPV that would have been created by the project promoters must take up the debt and then user fees to pay off the debt. It should not be on Government books.

Financial sector needs capitalisation

Banks were given till 2020 for them to meet their minimum capital requirements. However, we want to make use of the financial sector to deepen capital markets. Our low hanging fruits is the infrastructure bonds, where we raise capital domestically to finance roads, schools, hospitals etc. The bonds can be listed. We want to create more investment instruments away from property. We also need to deepen the culture of savings. We also want to create products for the diaspora.

Currency?

We have made the first step in dealing with the currency situation by opening the capital account through the separation of RTGS and FCA accounts. This is a good thing because we believe there is foreign currency out there, but there is typical disintermediation – bypassing of the banking system – that’s why we have to scrounge around for it. At the same time exporters have to give up currency and only to get back into the queue when they want. We need to make sure that everyone has access to forex.

Banks would all be ready for this separation. Come November 1, you and me should have FCA accounts. This would bring back confidence into the system. There should be ease of transferability. Banks are already asking about that but we have to make sure that we move around money with ease. I can’t predict anything with regards the phasing out of RTGS accounts eventually as most shift to the use of FCA. All we can do is to give guarantees so that the process is orderly. Of course it’s the beginning of reforms…this is the beginning and it will constantly evolve.

Government had put in place a guarantee on value of 1: 1 through the Afreximbank’s $500 million nostro stabilisation facility. We are guaranteeing value at 1:1. It’s amazing how you get the same question all the time. I have already said I am guaranteeing the parity conversion. We have put in place a facility….