Finance and Economic Development Minister Mthuli Ncube, through the National Development Strategy Phase 1 launched this week by President Mnangagwa, did not provide details for how the NDS1 programmes and projects investments would be financed.
The overarching goal of the NDS1, which is a successor to the Transitional Stabilisation Programme, is to ensure high, accelerated, inclusive and sustainable economic growth as well as socio-economic transformation and development as we move towards an upper middle-income society by 2030.
However, while it can be argued that the NDS1 is just a strategy and not a budget, there is risk that the strategy will become a mere vision until resources are made available to enable its implementation.
The NDS1 acknowledges this fact as it reads:
“Successful implementation of the NDS1 including attainment of the targeted national and sectoral outcomes hinges on the ability to mobilise financial resources required for the execution of planned programmes and projects.”
Despite this acknowledgment, the NDS1 offers little in terms of providing a financing plan that is realistic and credible.
A financing plan, especially one that tells us how much is expected to come from the public sector and how much is going to come from the private sector, is important. But the NDS1 does not tell us how much will be needed at all.
The NDS1 says various financing strategies and options will be aggressively pursued to ensure timely availability of resources during the Strategy Period, but apart from mentioning some of the financing options, it comes short in spelling out how these options can be reliable and credible sources of finance.
Fiscal revenues are put as the first option for financing. Indeed, using own resources could be the cheapest way of financing NDS1, but there is need to put into consideration the fact that the country suffers from serious fiscal constraints.
While we have seen local resources being used for national projects such as dams (Marovanyati) and roads (Beitbridge Highway), we have seen that the pace can be painfully slow and we might run the full course of NDS1 before we have achieve much. An upper middle-income economy can only make sense after addressing all cross cutting issues.
However, when asked about how NDS1 will be funded, in an interview with ZTN, Minister Mthuli, hinted that domestic resource mobilisation will be critical with taxation being the main source.
“We know exactly where to search for this revenue,” he said.
He spoke about expanding the tax base and plugging leakages around minerals, a story line we have heard before. Maybe the setting up of a Special Unit targeted at the informal sector could be the solution.
There is mention of loans as a financing option. Indeed, loans can be leveraged on to provide resources required for the execution of planned programmes and projects.
Just last year, Zimbabwe obtained three separate loans of over US$108,3 million from the Export-Import Bank of China and Export-Import Bank of India to be used for power generation projects and broadband expansion.
While this is testimony that loans can be indeed a source of financing for NDS1, there is need to watch out on the cost of borrowing which could be quite high given the country’s present international debt and arrears burden. In order to reduce the cost of borrowing and deepen the capital markets, Government said it will target the issuance of medium-to-long term securities and listing of Bonds on the Securities Exchange Market during the NDS1 Period. This will reduce the costs of domestic borrowing and create fiscal space for social expenditures and the capital budget, reads part of NDS1.
Public entities’ own resources are put as an option for financing. However, public entities have been an Achilles heel for the country draining Treasury for financial resources. According to the NDS1, public entities are a source of “high moral hazard, as many of them continue to approach Government for debt assumption.”
In 2017, Chief Secretary to the President and Cabinet Misheck Sibanda revealed that 70 percent of 93 state owned enterprises were either “technically insolvent” or “illiquid”.
Audited financial statistics for 2016 for 93 state enterprises and parastatals (SEPs) revealed an overall loss of US$270 million dollars by the 38 surveyed commercial entities. It would take broad-based public sector reforms in terms of how they are run if they are to make meaningful contribution towards self-sustenance and development in line with NDS1.
The other financing option put forward in the NDS1 is private sector owned resources.
The potential for the private sector to finance projects is there, given how Caledonia sold shares to raise US$13 million needed to put up a 12MW solar photovoltaic power plant at Blanket Mine. Last month, Prospect Resources raised US$6 million to advance the Arcadia Lithium Project. The NDS1 says during its 5-year period, establishment of a gold reserve fund will be prioritised as a vehicle to mobilise finance, but it’s yet to be seen how this will be done given that the country is living from hand-to-mouth using the gold earnings, where output is on the decline.
Away from mining, fast-moving consumer goods distribution company, Mega Market is on course to commission a US$25 million wheat and maize-meal plant. Nestle this week commissions a new plant valued at US$25 million, which is testimony that the private sector can indeed be a source of funding. But is the country seeing enough of these new projects? What are the levels of local production? How many business opportunities have failed to take off because of limited access to capital?
All it takes for the private sector to inject capital and capitalise on opportunities is an enabling operating environment where the ease and cost of doing business is not a perennial challenge. While Zimbabwe improved its Ease of Doing Business rankings by 15 places to 140 in 2019, driven by good performances on starting a business, streamlining approvals for construction permits and a reduction of the business licensing fee by Harare Municipality, the operating environment still has challenges such as limited access to capital, intermittent electricity and water supply among other challenges that might keep capital away.
While the NDS1 says financing of its programmes and projects is premised on the efficiency of the financial sector, the question that remains is whether local financial institutions have enough in their coffers (deposits and equity were valued at just below US$2 billion in August 2020) to meet long term projects and whether they are willing to take the associated risks that they are currently shunning away from with loan to deposit ratios below 40 percent. The NDS1 does not offer clear measures that would be put in place to create conditions for bankability of projects.
In the agriculture sector, the NDS1 talks of plans to implement a Commodity Value Chain Financing Model where private sector players are expected to finance up to 40 percent of their raw material requirements. There is, however, need to put in place proper measures to address issues of high cost of input by the contracting private sector as well as side marketing by other players. Contract farming in the tobacco sector, as well as the cotton sector, is under threat from expensively priced inputs and side marketing.
NDS1 plans to establish an agricultural revolving fund with appropriately structured lines of credit, as well as strengthening the use of Public-Private Partnerships. Government says it will adequately capitalise the Land Bank to deliver on the mandate for agriculture financing and development.
The Land Bank will advance short, medium and long term capital for agriculture irrigation and infrastructure.
The NDS1 also says various strategies under Image Building, Engagement and Re-Engagement drive and initiatives on arrears clearance, are critical in unlocking resources from Development Partners and the Private sector.
That this is critical, without doubt, but judging from experience, unlocking external resources given the sanctions and the arrears might outlive the lifespan of the NDS1. Given how “critical” accessing external financing is, this calls for going beyond accelerated engagement and re-engagement efforts with the international community to resolve the country’s unsustainable external debt position.
The NDS1 says sustained bad publicity heightened the country’s risk factor and undermined investor confidence, while politically the Zimbabwean society became and has remained highly polarised.
“The situation was exacerbated by lack of a clear commitment and actual redress of external debt arrears, a critical factor slowing the re-engagement process with the International Financial Institutions and bilateral partners,” reads part of NDS1.
This calls for accelerated reforms that the international community have called for but also in line with the country’s sovereign status.
What is thus clear is that the country is likely to be on its own in making NDS1 a success. Implementation of macro-economic stabilisation measures, as well as accelerated and intensified implementation of the ease and cost of doing business reforms is the only way of providing a solid foundation for resource mobilisation that allow efficient and effective implementation of programmes and projects under NDS1.