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Big Saturday Read: Zimbabwe’s bad economy needs good politics

October 5, 2018

 

 

Déjà vu moment

 

Zimbabwe’s economy is in terrible shape and that is an understatement. There’s panic, uncertainty and spculation. Prices of basic commodities are rising. Fuel is in short supply. Millers are rationing flour so that bread is prioritised ahead of luxuries like biscuits for the limited supplies. There is a serious medical drugs shortage, with pharmaceutical wholesalers reported to have suspended operations. A cash shortage which has been a problem for few years has worsened.

 

All these shortages are largely because Zimbabwe has run out of foreign currency. Zimbabwe may be open for business, as President Mnangagwa is fond of saying, but signs indicate that the country is broke. It cannot pay its debts. If it were a company, it would probably be under administration, a halfway for ailing corporates, during which it is ring-fenced from creditors while it gets breathing space to recover.   

 

For a country fresh from an election, these are odious circumstances. The election was supposed to be a rebirth of Zimbabwe following 37 years under Robert Mugabe’s authoritarian rule and a coup which toppled him last November. It was plain then, even as they promised a new democratic era, that those who took over from Mugabe had no intention of handing over power through an election. The sole purpose of the election was to legitimate the new regime led by Mnangagwa. However, it all went up in smoke.

 

The election turned out to be another déjà vu moment for Zimbabweans. Just like in 2013 and previous elections, the national mood after the elections is sombre. They had seen it all before. And just like after previous elections, they have to carry the cost of electoral theft and the consequent legitimacy deficit. If Zimbabwe’s election had been properly conducted, it would have been widely accepted and the process of legitimation of the regime would have been a lot easier.  

 

ZANU PF and its band of apologists might refuse to accept it but Zimbabwe’s primary problem is political. A careful study of the economic crisis would show that its origins pre-date the current adversarial relationship between ZANU PF and the MDC. The seeds were sown well before the arrival of the current political dynamics, whose effect has been to worsen it. We have a problem of bad politics and atrocious governance. The current set of problems and a looming economic Armageddon is only the latest manifestation of bad politics and bad governance.    

 

Delinquent regime

 

This week, in attempts to fix the new Finance Minister, Mthuli Ncube issued a Fiscal Policy Statement while the central bank Governor, John Mangundya issued a Monetary Policy Statement. Both statements were bleak, reflecting a severely distressed economy. The country is in a serious debt crisis. The total public debt is $16.9bln, with $7.4bln of it being foreign debt while £9.5bln is owed to local creditors. This domestic debt has risen from just $275.8mln in 2012. This means the country has been on a borrowing spree, although there is nothing significant to show for it.

 

A lot of the domestic debt was accrued through issuance of treasury bills (TBs). In 2016, the value of borrowings via treasury bills was $2.1bln. By August 2018, the value had risen to $7.6bln. This means $5.5bln worth of TBs were issued in just under two years.

 

Zimbabweans wonder what the government did with the $9.5bln borrowed in the last 6 years. That’s because much of it has been used up to finance recurrent expenditure. According to the Finance Minister, the civil service wage bill takes up at least 90% of government revenue. There is a huge budget deficit, which the government has had to finance through borrowing. Now the Minister wants to cut the deficit through growing the tax base and cutting spending. Reuters reports that there was a spending spree in the run-up to elections which is worrying.  

 

Some of the spending was totally unnecessary for a government facing a serious economic crisis – hundreds of imported vehicles for traditional chiefs are hardly a priority in a country failing to buy medical drugs. But that’s the moral hazard of depending on donors. More than 90% of drugs in public hospitals come from donors. The government has no incentive to prioritise buying drugs because there is someone doing it for them. Donor dependency simply fuels recklessness on the part of our governments.  

 

In credit terms, the country is a delinquent debtor. It first defaulted on its repayments to the International Monetary Fund in 1999. That’s almost 20 years ago. It managed to repay the IMF arrears in recent years but arrears to the World Bank, African Development Bank and the Paris Club remain. Unable to satisfy creditors, lines of credit remain firmly shut.

 

The new Minister must break with the past and start publishing all loans taken and guarantees given by the government in accordance with the Constitution. His predecessor was not transparent in this regard and citizens are in the dark over the nature of the obligations that Zimbabwe has taken in the past. Some of this could be odious debt. The Minister must publish all loans and guarantees – past, present and future. It’s part of the social contract with citizens as enshrined in section 300 of the Constitution. Zimbabweans deserve to know whom they owe and on what terms. After all they are being heavily taxed to meet these bills.  

 

Caesar’s demands  

 

In a bid to fix the problems bedevilling the economy, the Finance Minister took a bold but controversial step. He raised an existing tax on electronic money transfers from 5 cents per transaction to 2 cents for every dollar per transaction – it amounts to a 3900% increase. Economists have calculated that it will deliver between $2bln and $3bln in tax revenues to government, raising much needed funds to finance the budget deficit. But the concern is that it will hurt many people and businesses.  

 

Tax is never a popular thing at the best of times. Throughout history, unjust taxes have sparked protests and on occasions, revolutions and rebellions. Tax collectors have been reviled. That’s why crowds were not happy at all when the Son of Man offered to be a guest of Zacchaeus, the chief tax collector of Jericho. How could he dine with a sinner, they asked in disbelief. For his part, his gesture was to save a lost soul. This revulsion against the taxman has endured throughout the centuries, especially when the taxman is acting on behalf of an unpopular regime.

 

But the wisdom that what belongs to Caesar must be given to Caesar has also endured. People understand it, but they prefer low taxes. The leaders know it too. A quick audit of their wealth would show that most of it is stashed away in low-tax jurisdictions. Having just arrived from Switzerland, a low tax jurisdiction renowned for its bank secrecy rules, the new man at the treasury shouldn’t be surprised by the level of resistance to the tax increase. To be sure, it is likely to raise a lot of money for the government but it will hurt many people.  

 

Most taxpayers are also sympathetic to the principle of expanding the tax base so that the burden is shared. They understand the need for creative ways to tax the informal sector. However, they disagree with the route taken by the Minister because the net does not discriminate. It wasn’t just an expansion of the tax base but an increase in the tax for everyone, including those already contributing direct taxes. It punishes everyone and hurts formal businesses which are already heavily taxed.

 

That’s why the Confederation of Zimbabwe Industries (CZI), which represents industry, weighed in with a polite but disapproving opinion. The CZI’s letter is a severe indictment on the government because it means there was no consultation before the tax was raised or if there was consultation, the government simply ignored advice prior to the announcement.

 

The problem is that both business and the ordinary Zimbabwean are faced with Hobson’s choice – since the country has inadequate cash circulating in the economy, they are stuck in the electronic payments system. This means they cannot avoid the exorbitant tax even if they wanted to. It’s a cruel piece of irony that having been encouraged by the government to use electronic payments, they are now being punished with a heavy tax. This is why the CZI has proposed an alternative way of dealing with the matter – a cap of $2 per transaction rather than 2 cents per dollar. It would still be a big increase – but at least it would be capped.  

 

Quick revision

 

Late on Friday, as we finalised this article, our attention was drawn to a press statement issued by the Finance Minister in which he explained the operation of the proposed tax. He explained that it will apply to transactions of at least $10 and there is a cap of $10,000 on the tax to be paid, which means transactions above $500,000 will attract a flat tax of $10,000. He also listed types of transactions that are exempt from the tax - this includes payment of salaries and transfer of funds by government.

 

The fact that he has had to issue this update and explanation suggests that the outcry over the effect of the tax has been heard. But worryingly, it shows that not enough thought or consultation was invested in the proposition before it was first announced. It suggests policy inconsistency, one of the weaknesses of the Mugabe regime. Investors worry when they see policies changing by the day.  

 

It is also important to note that instead of insisting that the tax applies with immediate effect, he has revised and correctly notes that it will only come into effect when regulations are gazetted. It was improper and illegal to raise the tax via a directive that has no force of law. The Minister’s misstep in this regard may be forgiven as a teething problem for someone new to the corridors of authority but hopefully, lessons have been learnt. The rule of law matters.     

 

Cost of profligacy

 

What hurts the most for the ordinary citizen is that they are being asked to carry the costs of political elites’ profligacy and reckless behaviour. In recent years, the government has taken over debts owed by state entities such as the central bank. Yet those debts include unpaid loans that were incurred by political elites. For example, at the height of the land reform programme, the central bank gave political elites farm equipment under the Farm Mechanisation Scheme, which they never paid for.

 

The debt was then taken over by the central bank which stubbornly refused to name the beneficiaries. It reflected the arrogance of political elites - they took the equipment, refused to pay and passed on the debt to the central bank. Then the state took over the central bank's debt. The assumption of the central bank’s debt by the government effectively meant ordinary taxpayers had subsidized wealthy political elites’ businesses and lifestyles. Now they are being asked to pay for it through the tax increase.

 

The new administration should at the very least name and shame beneficiaries of the Farm Mechanisation Scheme who were protected by the Mugabe regime. More importantly, the government should demand repayment from those political elites. They are still alive and they should take responsibility for their deeds. This is unlikely to happen because those beneficiaries are still part of the current political establishment and turkeys are not expected to vote for Christmas.

 

Yet this is the problem at the heart of Zimbabwe’s economic crisis: political elites are greedy and irresponsible. It is their bad politics and bad economics that has landed Zimbabwe in the lurch and yet they expect everyone else to carry the cross on their behalf. It is immoral and despicable.The same people have the audacity to accuse ordinary citizens forced into the informal sector and living from hand to mouth of not paying taxes. 

 

Declare tax returns

 

If the government is serious about its claims of expanding the tax base, then the president, his ministers, senior public officers and their associated businesses must lead by example and declare their tax returns. The irony is that the public officers are exempted from paying taxes like toll-gate fees on the roads that ordinary citizens are required to pay. Many don’t pay duty at the country’s gateways. The “shefu” mentality means they get away with it and junior officers won’t even challenge them.

 

The attitude of political elites is evident in the way they treat utility bills to state-owned companies. They owe hundreds of thousands in bills to energy, telephone and water companies. Only recently, a former Minister, Sydney Sekeramayi was taken to court by the energy utility for an unpaid electricity bill of more than $300,000. How does one accrue such a bill and still receive a service? That’s the culture that ZANU PF’s poor governance has nurtured. Sekeramayi is not alone. He has only been targeted because he has fallen out of favour and his political fortunes have dimmed.

 

This is why the political elites lack the moral authority to demand payment from ordinary citizens when they themselves don’t even pay taxes. It’s a culture that must change but it requires leaders who are prepared to take responsibility.     

 

Wrong signal

 

Apart from the direct impact on citizens, the tax increase sends a wrong message to potential investors. For obvious reasons, a high tax environment is generally unattractive to investors. Multinational companies often get around taxes by arranging their corporate groups in complex webs spanning several jurisdictions and using strategies like transfer pricing. An environment in which taxes are raised arbitrarily is hardly encouraging.

 

Likewise, a government with an appetite to increase taxes to fund reckless behaviour is a turn-off to investors. Who knows when it might decide to impose or increase a tax? Investors look at how a government treats its citizens and will ask: if it can impose its powers of taxation in such an arbitrary fashion towards its citizens, what would it do towards foreigners? The government can mitigate the damage by listening to the pleas and revising the tax increase.

 

The fallacy continues

 

Another significant measure is the introduction of silo accounts which effectively downgrade the value of public deposits and savings. Banks were directed to create RTGS FCAs and NOSTRO FCAs, which essentially means only the latter will be real foreign currency accounts while the former will merely have a surrogate currency which is only nominally equivalent to the USD but in reality it’s different. Previously, the official line was that the RTGS and Bond Notes were at par with the USD. That fallacy was debunked long back by the market. The government’s directive to separate the accounts suggests an acknowledgement of this fact. This is how the banks have read it, with one sending a notice to its customers to the effect that while transfers could be made from the NOSTRO FCA to the RTGS FCA, the reverse transaction was not permitted.

 

Incredibly, despite directing banks to separate the RTGS FCA and the NOSTRO FCA, officially, the government maintains the fallacy that officially there is no difference. The government is living in cloud cuckoo land, just like it did in 2008. Eventually, it will have to face reality just like it did ten years ago, when it followed the market which had long discarded the local currency because it was worthless. To call it an “RTGS FCA” is grossly misleading because it suggests that it is a foreign currency account because it is not. It is a surrogate currency which is not equivalent to the USD.

 

This is the reason why there is a flourishing black market in which traders are doing brisk business buying and selling currency. Now, as in 2008, there is a lot of corruption, with rent-seekers among the politically connected running large networks in the black market while getting foreign currency on the cheap from the official sources. Even then, the government continues with its vacuous gospel against corruption, which only targets those who have fallen out of favour with the establishment. This corruption, which is happening right under its nose, has to go. But does the government have the courage to fight it when it is the politically-connected elites who are benefitting?  

 

The trouble is that with the scarcity of USDs, and as more businesses demand USDs only for their products, this will increase the cost of getting them. The gap between the USD and RTGS will continue to grow, probably at an exponential rate, until the latter become virtually useless, just like the Zimbabwe Dollar before it. The only difference is that instead of Zimbabweans holding on to wads of worthless paper as was the case in 2008, it is their balances which may reflect large but worthless RTGS balances.

 

It is doubtful that government will curb its appetite for spending but since that will require funds, it is also doubtful that they will stop printing bond notes and worse, creating more RTGS balances. All Zimbabweans were once the world’s poorest millionaires. The odds on that happening again, ten years later have shortened.   

 

Micro-managing resource allocation

 

When you see central government and related agencies micro-managing prices and allocation of basic resources like flour and fuel and when commands replace market forces, it’s a sign that the problems have escalated beyond control.  

 

The shortage of fuel on the market is a telling factor. Given that fuel is controlled by a politically connected cartel, things must be really bad. The government has picked on foreign truck operators as scapegoats. They stand accused of taking advantage of Zimbabwe’s currency situation to buy fuel on the cheap. It’s hard to believe that truckers are the key cause of the fuel problem. More likely is that the country simply doesn’t have adequate foreign currency for imports. But in typical fashion, the Zimbabwean government must find someone to blame.  

 

For the fuel challenge, the Governor has also issued a micro-managing directive, to the effect that all foreign truck operators should pay for fuel in foreign currency. It’s unlikely to work. Instead, it opens up a new rent-seeking opportunity for local runners who will simply buy fuel on behalf of foreign truck operators. Alternatively, there is no guarantee that staff at fuel stations will remit the foreign currency received, unless they record the name, plates and passport details of every person who buys fuel like they do in the hospitality industry. In short, the enforcement of the directive is likely to be a nightmare.

 

The measures are either short-sighted or punitive. But more significantly, they do not go to the source of the problem. They are, at best, attempts to deal with the symptoms, but they skirt around the cause. In devising solutions, it is important to identify why the election failed to jumpstart Zimbabwe’s flat economy. Zimbabwe’s original problems emanated from bad politics. That bad politics was supposed to end at the election in July 2018. However, the bad politics did not end. It is the bad politics that continue to impede Zimbabwe’s economic revival. To his credit, the Finance Minister seems to get it, which is why he went beyond his remit to talk about reforming or even repealing repressive legislation such as AIPPA and POSA. These political reforms are critical.

 

Bad politics

 

As I have stated before in these pages, Zimbabwe has for a long time suffered a legitimacy-deficit. With its election outcomes not being accepted locally and internationally because they lacked the basic democratic qualities that would render them free and fair, successive government since the early 2000s have operated as outcasts on the international scene. Those who make investment decisions in these countries look at what their countries are thinking and saying. After all, they look up to them for protection in their overseas investments should things go wrong. Investors will not normally go where their governments are avoiding. Zimbabwe’s pariah status politically has also extended to the economic realm.

 

The recent election could have changed Zimbabwe’s circumstances, but it was so badly conducted that it failed to persuade even those on the international scene who had appeared more sympathetic. Even as she bade farewell, last week, Catriona Laing, the outgoing British Ambassador whom many thought had positioned herself too close to the Mnangagwa administration admitted that the electoral playing ground had been uneven.

 

International observers from the EU and the US, back for the first time since 2002, have also been critical in their preliminary reports. The post-election violence in which civilians were killed by armed soldiers was the last straw. Even those who had been prepared to give them the benefit of the doubt had to retreat and reassess their positions.

 

Even before the elections were conducted, the Americans had already given a vote of no confidence in the process, when the US Congress passed an amendment to the of the Zimbabwe Democracy and Economic Recovery Act (ZIDERA). This meant the sanctions regime was remaining in place. A few days after the elections, the Bill was signed into law. This makes it hard for the new administration to work its way through the international financial institutions. One obvious solution is for the Zimbabwean government to show a demonstrable effort to meet the conditions of ZIDERA.

 

One area which was chief among the motivations of ZIDERA was the violation of property rights during the land reform programme. Many agree that land reform was a just cause, but it was seen as an affront to the venerated institution of private property. The Mnangagwa administration knows that the compensation question is critical to unlocking support from the West. This was echoed by the President of the Commercial Farmers Union, Peter van Zyl, who recently told South Africa’s Business Day newspaper, “We are convinced that the settling of this issue will be one of the major keys to unlock the door to the international assistance we so desperately need to help our economy recover”. The trouble is the government is broke. Where will it get the money for compensation?

 

Britain could be one source of help given that the land issue was at the centre of the bilateral dispute between the two countries since the late 1990s. Many see Britain as warming up to the Mnangagwa regime. Before she left after completing her tour of duty, Ms Laing said Britain is prepared to help Zimbabwe get back into the IMF Staff-monitored Programme which was abandoned after Zimbabwe refused to follow counsel when it introduced the ill-fated bond notes in 2016. Britain might have been more willing and ready to help but for the military crackdown on August 1 which busted the façade of a reformed regime. Besides, the British have their own challenges with Brexit. It will be hard for the under-pressure Conservative government to justify any rescue efforts at a time when its own future is uncertain.  

 

Where’s the all-weather friend?

 

But where is China, the all-weather friend, at a time when the Mnangagwa administration is in desperate need of help? China was the first country that Mnangagwa visited upon his appointment as Vice President in 2014. During that trip in 2015, he gave his first international television interview to the Chinese state broadcaster. His deputy, former military general Constantino Chiwenga was in China just before the coup and some drew links between the coup and that trip. China did not object to the elections but that is not new. Mnangagwa also visited China after the coup responding to an official invitation. He took his Finance Minister and central bank governor but they returned with no more than promises.

 

In September, Mnangagwa joined other African leaders at the China-Africa Summit. He was in buoyant mood, as it was just after his inauguration following the controversial elections. Others like South Africa reported multibillion dollar deals with China but again Zimbabwe returned without the rescue package they so badly need. The authorities had spoken of needing at least $2 billion to kick-start the economy. China may be biding its time, waiting for the right moment, which could be when Zimbabwe is at its most vulnerable and has no choice but to accept whatever terms the Chinese impose on the package. If the loans come, they will be very expensive and might involve Zimbabwe mortgaging its most valuable assets. Then again, China tends to strike deals that ensure its own companies benefit first before the countries they invest in.

 

China is already facing criticism over its dealings in neighbouring Zambia, which has become heavily indebted just over a decade since its old debts were written off as part of the debt relief for heavily indebted poor countries. It’s a classic case of moral hazard of debt forgiveness. The moral hazard is that the forgiven will behave recklessly believing that there will be similar relief in future. No wonder Zambia has gone on to accumulate more debt and is at risk of becoming delinquent again. Such cases may cause China to revise its approach.

 

Conclusion

 

The precarious nature of Zimbabwe’s economic situation cannot be overstated. For many Zimbabweans, they are literally staring into the abyss. The government is broke and with no-one to lend any money, it has resorted to mopping up whatever it can get from its long-suffering citizens. The Finance Minister says it will be painful, but that this is necessary and unavoidable pain. It’s a gamble. People can only take pain up to a certain point and they expect results. If results don’t come soon, the Minister will be under more pressure. People also want to see their leaders taking the pain prescription too. Too much money is wasted on unnecessary ceremonies. It makes no sense that the ruling party will soon be spending millions of dollars on a conference, most likely using state resources, while the government is failing to provide import cover for medical drugs and other essentials. The Minister has to persuade his political superiors that it can’t be business usual. The trouble is old habits die hard.

 

Some recommendations

  • Fix the legitimacy deficit through serious political engagement and political reforms

  • Set out a clear, just and consistent tax policy - consult widely before announcing major policies

  • Get the leadership to declare tax returns - lead by example

  • Recover all debts owed by political elites to the state or its entities

  • Curb unnecessary spending - austerity must apply at the highest level

  • Enforce limits on government borrowing

  • Transparency: Comply with the Constitution and publish all loans and guarantees in the Government Gazette and report to Parliament

  • Show clarity on the currency situation – the Bond Note has failed; the RTGS FCA is not a foreign currency account and debunk the fallacy that these surrogate currencies are at par with the USD

  • Plug the rent-seeking opportunities fuelling in the currency market  

  • Demonstrate seriousness in protecting the rule of law and property rights

  • Above all, be honest and transparent. Citizens are not stupid. They know when they are being taken for a ride. Show them some respect.

 

WaMagaisa     

 

wamagaisa@me.com

 

  

 

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