There has been a lot of hysteria since Reserve Bank of Zimbabwe Governor Dr John Mangudya formalised his ring-fencing of export earnings and Minister of Finance and Economic Development Professor Mthuli Ncube introduced a small tax on transfers to balance at the least the recurrent expenditure portion of Government spending and spread his tax net to just about everyone.
Conspiracy theories abound.
A total inability by far too many Zimbabweans to quantify the effects adds to the hysteria. Irresponsible opposition political grandstanding does far more harm than good.
As we, and anyone else who has even the basic knowledge of economics, has warned and made clear, Zimbabwe has two overriding economic problems: a Government that was needing to spend more than it raised in taxes and a population that wanted to import far more consumer goods than we earned in exports.
Last week’s interventions by the two people tasked with finding solutions were a big jump in solving the fundamentals.
Of greater importance was Prof Ncube’s new tax. No one likes it; no one ever likes a new tax. But the largest single source of instability in the economy was the Mugabe administration’s refusal to adhere to basic budgeting principles. Its high borrowings and desire to overspend on consumption in both local and foreign currency severely cramped productive investment in the first two decades of independence, keeping economic growth low after the first two years of a peace dividend. Then it tried to use the printing presses to finance State services and we had the hyperinflation crash.
An attempt to restore order with a switch to a de facto US dollar economy quickly ran into the old problem and treasury bills and overdrafts, short term instruments, became the way to pay civil servants till we reached the present ridiculous levels of over liquidity with all that entails, far too much local money chasing far too little foreign currency, again largely for consumption since productive forex is still being issued. Graphing the total of treasury bills in issue against the parallel market rate shows exactly what happened.
So President E.D. Mnangagwa and his administration bit the bullet; accepted the proposals, with modest modification, drafted by the new Finance Minister and his Treasury experts and will very soon be balancing the budget at least for recurrent expenditure with the Treasury wanting to go further and have a budget surplus to retire debt and finance capital expenditure. The 2 percent tax on most transactions is low, simply because just about everyone will pay it, but is very cheap to collect since this will be done automatically by the 19 banks and three mobile money services. The tax is backed by a strong determination to reign in Government spending so that the new tax, added to all the other taxes, does what it is supposed to do, pay for the Government’s services without any gaps.
The RBZ will have to step in as this is done and start cleaning up the domestic debt, converting a good chunk of short-term debt into medium and longer-term conventional debt and so reducing liquidity. This will be possible because the markets will not be flooded with new debt every time the Government needs to pay salaries.
The order last week by Dr Mangudya to banks to have separate accounts for each business for its export and local earnings is not anything dramatically new. For some time banks were supposed to be ring-fencing a business’s export earnings and allocating foreign currency when it wanted to buy materials or capital goods. Some banks did this well; some did it badly. The Governor wants them all to do it well and has set up a system that makes cheating impossible. This helps exporters get ahead, and that is exceptionally desirable.
It also opens new opportunities for non-traditional exporters. Rules of the World Trade Organisation prohibit dumping, that is selling exports below cost, but do not prohibit very tight margins. So we think a lot of manufacturers for the local market should do some very careful sums. If, for example, 25 percent of their costs are imported materials then exporting 20 percent plus of output at low margins, even if this involves toll manufacturing, can make them independent of the RBZ and even their own bankers while still making a profit on normal margins in the local market.
What is not an option is the one being peddled by little businesses run by people with short memories and zero economic knowledge: returning to the US dollar cash model of 2008.
They forget that about 80 percent of industry was shut or hardly ticking with imported goods filling the shelves and disposable incomes were trivial. The same would happen again and once again we would borrow our way out of trouble and once again crash. We have to do it the hard way.
The third condition for those willing to help, as Zambia recently discovered, is a squeaky clean administration. Here President Mnangagwa has once again taken the lead. He cannot order prosecutions but has made it clear that there are no protected people or entities. Whenever the National Prosecution Authority has assembled enough evidence for a trial it can go ahead, and anyone interfering can join the accused in the dock.
With a balanced budget, the corrupt in cells and effective methods being put in place to at least ameliorate the balance of payments deficit, the Government will find opportunities. Even the hard choices will impress those who were appalled at how Zimbabwe converted productive loans in the 1990s to consumption. We have the debts without the benefits. Any progress relies on the global financial communities recognising that this time it is different, and the Government will not cave in to short-term tears.
The President is well-known over the decades, by both his supporters and his opponents, for his very strong nerves. He has made it clear his leading financial advisors have his full confidence and that low-life in the Zimbabwean swamps can go. He will not be backtracking. The economy has to be fixed. And Zimbabweans should take his word, and the words of his economic advisors, at their face value, rather than try and create a conspiracy theory out of a sentence.