eBusiness Weekly
Misheck Ugaro
Two days before the expiry of the first extended lockdown period on May 1, 2020, President Mnangangwa announced an economic stimulus package for the country. This is aimed at assisting the various socio-economic sectors to recover the post-pandemic and revive the economy by providing some relief to individuals, families up to the corporate sector. In a subsequent statement released by the Ministry of Finance and Economic Development further details were provided for clarification.
The package unveiled will assist in providing the much required liquidity to all productive sectors. A particular focus is placed on manufacturing, mining, agriculture and tourism.
The Government hopes that the provision of this package will help protect employment by preventing pandemic induced layoffs. In addition to protecting employment, the social sector is being supported by receiving direct income support towards all vulnerable groups and individuals.
On the small to micro enterprises the Government has directed assistance towards recovery of the operators and individuals. This is of particular importance given the Zimbabwean economy’s skew towards the SMEs sector. The pandemic has forced the Government to take advantage and enhance social safety nets.
The Government will use existing structures such as banks, micro-finance institutions and mobile network operators as well as some civic societies to expand its reach of the public with assistance.
This will enhance a systematic and quick implementation and distribution of the assistance. The package is also aimed at upgrading infrastructure including that which was badly affected by Cyclone Idai.
A total package of $18 billion, being nine percent of the country’s Gross Domestic Product (GDP), has been set aside. The summary distribution of the package is:
Agriculture $6,08 billion
Working Capital Fund $3,02 billion
Mining sector $1 billion
SME sector $500 million
Tourism sector $500 million
Arts $20 million
Statutory reserves liquidity release $2 billion
Health $1 billion
Food grant $2,4 billion
Broad relief measures $1,5 billion
The agricultural sector has been allocated the biggest portion amounting to $6 billion, which is broken into two parts, one being the winter wheat programme and the other half earmarked for summer cropping.
It is expected that a turnaround of the economy will be based on the agricultural sector rising into full swing. Another notable allocation is that for the social and health sectors where a combined total of $3,4 billion has been allocated.
This is an essential allocation, which is hoped to directly ameliorate the suffering of the vulnerable sections of the population arising from the effects of the pandemic. Indeed, the country has seen an upsurge in the upgrading of many health facilities to raise their capacity to handle Covid-19 cases, which infrastructure will remain in place after the pandemic.
The working capital facility of $3,02 billion will be welcome by industry, which must take advantage to finance their short term needs including restocking and meeting immediate salaries and wages and hence reduce the likelihood of employee layoffs.
This requires an active participation by the banks which have so far been disappointing in their lack of presence towards activities aimed at fighting the pandemic. The Central Bank has, however, provided an additional capacity through the Bank Accommodation window amounting to $500 million, while the recent Monetary Policy Committee meeting reduced the interest rate on that window to 10 percent per annum.
This is good news to industry provided banks play their part. The facility is granted through Government guarantees.
The mining sector has been granted $1 billion to assist in maintaining momentum towards the drive to achieve a US$12 billion industry by 2023. Various other important sectors have also been provided with assistance notable of which is the tourism sector ($500 million) and is the most affected sector (outside health) given that travel around the world has virtually come to a stop.
While the above package is a laudable effort by the Government and indeed all governments around the world are implementing similar stimulus packages in order to kick start their economies after the pandemic, there is a potential downside risk which needs a prudent approach in order to minimise slippages.
The biggest concern is the potential of an inappropriate funding structure for the package which may exert pressure on the budget deficit. An innovative approach is required from the Treasury in order to avoid financing the package by relying on increased money supply. The dislocation that may be caused by increasing money supply is the resultant impact on the exchange rate followed by inflation which is already unsustainably high at 676 percent as at the end of March.
The official exchange rate is pegged at US$1: $25 and the parallel rate has already jumped from US$1:$33 at the beginning of the lockdown period to US$1: 50 only six weeks later by the end of April. This is a serious risk that needs a careful management.
The authorities are therefore urged to harness other means of funding chief of which comes from a reallocation of resources from the original budget allocations. The biggest opportunity lies on the postponement of some planned expenditures that can be held by a year or until the country recovers.
Examples of this may include the launch of the satellite, foreign trips, the removal of unnecessary subsidies in particular on the petroleum sector given now that petroleum prices are falling. These should provide relief to the economy and provides room to manoeuvre for the authorities.
Fortunately, the working capital facility is in the form of guarantees which does not equate to a direct impact on the budget deficit as this is provided in the form of guarantees to the manufacturing sector’s borrowing needs from the banks. It is hoped the banks will play their part of providing funding for this requirement as this is technically risk free lending and hence the fees should be at a concessionary levels.
However, the banking sector in Zimbabwe has already shown their lack of social responsibility and several calls have been made towards their almost speculative and profiteering approach to the current economic malaise facing the country. Typically banking institutions have not been visible on their participation towards the fighting if this pandemic.
In addition, the country has already received significant foreign donor assistance for the provision of healthcare equipment for the fight against the pandemic. If handled carefully in a transparent manner that generates more confidence from the donor community, this could attract more foreign assistance which will obviate the need to rely on budget deficit.
Lastly, there is still an unknown variable in the sense that the duration of lock down is not known hence the quantum of the package is based on the assumption that the country has significantly covered the risk of any further drastic rise in the infection rates.
We have already seen the nation move onto a relaxed stage two with industry and commerce allowed to open and operate. This will minimise the duration of loss making closure for the companies. However, should there be a turn in events and infections start rising again, that might require reversing the relaxation.
For now the relaxation of the lockdown conditions has been accompanied by an instruction by the Government for employers to take charge of the responsibility to test their employees. Unfortunately this has shifted the cost burden from the Government to the employer which, while having positive impact on reducing the budget deficit, is a burden to the employers.
We acknowledge that the Government has on the other hand provided assistance in the form of the stimulus package. The pandemic is everyone’s responsibility so it is expected and hoped that the country can move positively towards a complete removal of the clock down.
