Last week, the #BSR dealt with the important matter of public debt. It built on and adds to the discourse on public debt, itself a major handicap on the Zimbabwean economy. If you haven’t read it yet, please make time for it. You can find it here. I must, however, reiterate some key points, because the matter of public debt is relevant to the issues discussed in this #BSR.
The last #BSR made the following points:
Besides, it is highly likely that Zimbabwe is still contracting odious debt given the lack of transparency and accountability in the way that government is contracting external and domestic debt, most of it in violation of the national constitution
Regrettably, the current government is failing and/or refusing to abide by these provisions. It was hoped that with a Minister of Finance who was regarded as a technocrat there would be more professionalism and adherence to the laws, but secrecy is the order of the day. In the circumstances, no one knows the exact amount of public debt let alone the terms of contracting. It may well be that future generations will be burdened with odious debt from this dark era.
I re-emphasise these points from the last #BSR because they are fundamental to the recovery of our economy.
Command by another name
One of the hallmarks of the current government is deception. The art of deception is on a grand scale. This week the government tried, yet again, to deceive the nation into believing that it was launching a “transformed” program to finance agriculture. In effect, however, nothing has changed. As we will see, the government is contracting more domestic debt. It’s important to support farmers, but the government is failing to devise a sustainable model. The purportedly new model has the same moral hazard as the previous model.
In a notice in national newspapers, the Ministry of Agriculture states that Command Agriculture has been “transformed” in that it now involves “commercial banks and Private Sector Out-Grower Schemes working jointly with the government on a Public-Private Partnership (PPP)”
The banks mentioned in the statement are CBZ, Agribank and Stanbic. “We look forward to working with the private sector on a PPP basis capacitating our agricultural sector and raising productivity,” says the government statement.
The government is at pains to present the funding scheme as new and different by the involvement of commercial banks and the private sector. But is there any material difference? To answer this, it’s useful to see how the funding scheme will work.
According to the Government statement, “In the main government will provide guarantees to banks in order for them to lend to farmers on a commercial basis”. In short, under the scheme banks will provide finance to farmers and the government will be the guarantor for those loans. We will come back to this because it is this part which shows the distinction being drawn between the old and so-called new funding scheme is a distinction without a difference.
First, it’s important to appreciate that the so-called involvement of the private sector is not new. When Command Agriculture was first introduced, the nation was told that it was being financed by Sakunda Holdings, a private company.
Of course, it turned out that this was just a ruse because it was taxpayers’ funds which were channelled through and to Sakunda. Sakunda which is closely associated with Dutch-based multinational company Trafigura, is also a heavily politically exposed company, with its key figure Kuda Tagwireyi being one of the advisers to President Mnangagwa.
Sakunda’s role in Command Agriculture has a history of murkiness. In the process, huge amounts of public funds were unaccounted for in acts of grand corruption. This much was revealed by the Auditor General and by the Biti-chaired Parliamentary Public Accounts Committee. Sakunda was initially presented as providing the finance but from the Auditor General’s reports, it played a middleman role, receiving funds from the government and buying agricultural inputs which it then distributed to farmers via the GMB. The AG was critical of the lack of transparency and accountability.
Senior public officers in the Ministry of Finance who appeared before the Parliamentary Public Account Committee could not explain large payments made to companies under Command Agriculture. In short, the old Command Agriculture scheme was a hub of corruption in which privileged private companies like Sakunda were involved. There is no reason to believe that this will not happen again.
Curiously, the statement published in newspapers does not mention Sakunda, preferring only to refer to the “private sector”. But elsewhere, it has already been revealed that Sakunda is an integral part of it. All this is happening without accounting for previous shortcomings identified by the AG. There is no guarantee that the looting spree that happened last time will not happen again. It’s a sign of madness when a man uses the same can to carry water when he already knows it leaks. The omission of Sakunda in that notice is disingenuous and dishonest.
What about the idea that loans to farmers will be on a “commercial basis”?
This is what the government says: “In the main government will provide guarantees to banks in order for them to lend to farmers on a commercial basis”. This means the government will guarantee that if the farmer fails to repay the loan, it will pay the bank. A government guarantee is, therefore, security for the loan.
A government guarantee is a contingent liability because it can be called by the lender when the borrower fails to repay the loan. Now, considering the well-known history of high rates of loan defaults by farmers, it’s fair to predict that the government will be called upon to pay up in terms of the guarantee under this “new” scheme. The truth is that as long as the government stands as the guarantor in this manner, the “commercial” nature of these bank loans to farmers is no more than a myth.
This presents a moral hazard in two parts. First, because they know they have the safety net of the government guarantee, commercial banks are unlikely to carry out risk assessments before lending to farmers. The government guarantee means they are not carrying any risk from lending to farmers so they have no incentive to invest in risk assessments or monitoring the borrower. The risk of failing to pay is not on the bank but the government.
Second, because the farmer knows they are covered by the government guarantee, they have no incentive to repay the loan to the bank. Unlike a truly commercial loan in which they put their land or other possessions at risk, the farmers getting loans under this scheme are risking nothing. Are they risking the reputation and future access to loans? They know they have defaulted before and the government always comes back with more “loans”. After all the ruling party wants their votes in future elections so it will hardly exclude them from future largesse.
The net effect is that it is the government, not commercial banks that are funding Command Agriculture and banks are merely conduits in that process. The best way to describe it is that if the banks are doing any lending, they are doing so on behalf of the government, which will compensate them in the highly likely event of default by farmers.
The best incentive for farmers to be more productive is putting up what they value the most, their land, as security for loans from the banks. If a farmer knows he risks losing his land he will invest more to produce and make a profit. However, the government must stop command economics of punitively controlling the marketing of agricultural produce, a point that I will touch on shortly. The government must only intervene to save farmers from losing their land for defaulting in exceptional circumstances where farmers’ inability to repay loans is on account of an Act of God such as droughts or devastating cyclones. After all the government does sometimes intervene to save banks when they fail.
The present arrangement where the government is guaranteeing all loans to farmers has huge implications on public debt, which is already enormous. As we have observed, government guarantees constitute public debt. This means this scheme represents an increase in the domestic element of Zimbabwe’s public debt. We know from experience that the government has invariably taken over debt through debt assumption schemes.
Nothing is going to change even as commercial banks are involved. The government might as well have a draft debt assumption bill, ready for when the defaults happen and it assumes the debt owed to commercial banks.
Maize farmers: Killing the goose that lays the golden eggs
For an economy to grow, it is important to look after the rights and interests of producers. Mistreating producers simply frustrates production. In Zimbabwe, producers are generally stifled by inconsistent and punitive public policies. This is evident in the case of tobacco farmers and gold producers. Each season, tobacco farmers are mistreated through such policies. It’s not surprising that gold deliveries to the state. They are still producing but they are now simply avoiding and circumventing the official channels.
Like other areas where the government’s punitive hand is present, the black market in gold flourishes. The same can also be said of maize, the country’s staple crop. This is because of the government’s heavy hand which has left farmers flummoxed and frustrated.
At the end of June, the government issued a decree banning the free market in maize. The trading of maize between private parties was effectively prohibited. All maize must be sold to the Grain Marketing Board, the State-owned entity. Section 5(1) of SI 145 of 2019 states, “No person or statutory body or company or entity shall sell or otherwise dispose of any maize except to a contractor or to the Grain Marketing Board.” Another provision prohibits everyone from buying or maize from another person except through the Grain Marketing Board.
Also, only producers or contractors are permitted to sell maize to the Grain Marketing Board, essentially removing the middleman. The decree makes it a criminal offence to even “possess” maize in contravention of the regulations, which puts farmers who keep their maize to hedge against currency depreciation at risk of committing an offence. It creates a ridiculous situation where a farmer who has toiled all year to produce her crop is criminalised for making an economically rational decision to hedge against losses. It makes no sense.
SI 145/19 essentially creates a monopoly in the maize market for the GMB. The decree established a command economy in maize in place of the then existing free market. For the farmers, this meant the price of maize was now in the hands of the state, through the GMB, and they could no longer rely on market forces.
The ostensible purpose is to ensure food security so that the state has control over the trading of the staple crop in a time of severe drought. The scarcity of the product would raise the price. But this meant everyone was now subject to the whims of the notoriously inefficient GMB. The grain millers who should have been aghast at this new directive succumbed. But the parties affected the most were the farmers, especially peasant farmers.
This may have worked if the government was fair to farmers – paying them fair prices for their maize and paying on or within a reasonable time. Now however, the currency has tumbled against the US dollar. Did the farmers resist? No, they did not. They too succumbed and sold their stocks of maize to the GMB as per the Command system. The wiser ones may have held on to some of the stock but by so doing they risk violating SI 145/19 for merely "possessing" the maize against the GMB's demands.
Did the government pay? Three months later, the government is failing to meet its commitments. Farmers delivered their stocks of maize to the GMB but they have not been paid. The currency rates have been tumbling. But the time they get their payment it will be minuscule compared to their efforts and investments. All this was foreseeable. They were warned. But they thought critics were unpatriotic.
Now they are crying foul. Did they not foresee this calamity? Do they not know their government? If they did not, they are gullible. These same people have voted for a ZANU PF Government. They have trusted it when reason should have instructed them not to. Did they resist? No, they did not. The adage applies: a government gets the government it deserves.
Yet the consequences are damaging for the government. Will a farmer be motivated to produce maize commercially when after all the effort and investment they get almost nothing in return because of command economics? They will have to buy inputs for the next season at exorbitant prices which the government does not control. Even if they get the inputs under Command Agriculture, their labour is not compensated. Farming is a time consuming and labour-intensive enterprise.
They will think twice before investing in maize production other than for subsistence. The result is less investment in maize production and less output and consequently more shortages in the staple crop. It’s a vicious cycle. This is a result of a lack of leadership. Meanwhile, the middleman companies like Sakunda reap enormous profits – it’s obscene. The government has done a lot to frustrate tobacco farmers and now it has shifted the stick to maize farmers. It's self-defeating.
A captured state
On Friday 20 September, a memorandum emerged from the RBZ directing banks to freeze the accounts of four businesses which have previously appeared untouchable. The Financial Intelligence Unit of the financial regulator which is responsible for anti-money laundering rules directed banks to freeze the accounts of Sakunda Holdings, Croco Motors, Spartan Investments and Access Finance.
These entities are owned or connected to politically exposed persons and have long been the subject of suspicious activities. Sakunda is connected to Kuda Tagwireyi who is also a presidential adviser. Spartan is connected to David Mnangagwa who is the president’s nephew. Croco Motors is a major supplier of luxury vehicles to the government.
The move was seen as a response to the currency markets in which the local currency unit had plummeted over the previous few days. Within hours the rates had fallen after reaching 1:25 to the US Dollar. This suggests these organisations were key players in the black market.
Yet, if that is true, it’s a sign of how the Zimbabwean State is heavily captured and how the economy is in the hands of a few oligarchs when movements in the currency markets are determined by the freezing of bank accounts of a handful of companies that are connected to political elites. It is scandalous that individuals who control these companies have an intimate relationship with the president – either as family, advisers or business associates. How much more of the economy do they control?
Critics remain sceptical of the move against the oligarchs, preferring to see it as a dummy; a momentary distraction which will soon pass. They have seen too many dramas over the past two years to take things at face value. The freezing of these accounts will give President Mnangagwa and his delegation a convenient line to sell to the media that they are doing something about corruption.
If the move against Sakunda is genuine, how come it is still involved in Command Agriculture? How come this move is only coming over troubles in the currency market and not long back after revelations of grand corruption in Command Agriculture by the Auditor General and the Parliamentary Public Accounts Committee? If the government is serious, the major areas of investigation are not in the currency markets but in these areas where there has been egregious looting. If the measures against Sakunda are serious, this means those involved in Command Agriculture did not do enough due diligence. Otherwise how and why would it still be involved in any government project? How is the face of Sakunda still a presidential adviser when his company is being accused of money-laundering?
If it’s not a dummy, people expect a more comprehensive investigation covering all areas. The fear is that it’s yet another “catch and release” where the big news is generated by what appears to be a bold move before the state declares that there is nothing amiss following an “investigation”. It would instead be a cleansing process for the businesses and individuals associated with them. Indeed, one would expect moves by the Zimbabwe Anti-Corruption Commission which is responsible for cases of high corruption and abuse of office.
The Zimbabwe Morning Post has an interesting revelation over the freezing of assets, which shows the ever-present political hand in matters that should not require political interference. According to the online paper, the regulator had sought clearance from President Mnangagwa before freezing the accounts. It’s source said “The President was consulted given that Tagwireyi is one of his advisors ... RBZ officials thought the president was going to say no but he simply ordered that it was our duty to implement monetary policies” The Zimbabwe Morning Post presents this as a triumph for Mnangagwa who “allowed” the RBZ to go ahead.
In reality, this process is worthy of condemnation. In a normal system, the regulator should not have to seek the consent or permission of the president before taking regulatory action. What if Mnangagwa had refused permission? The alleged offenders would have been allowed to go on.
How often has the regulator censored itself in the past and not taken action in fear of any offence it might cause the president? Has the president refused them permission to act in the past? What guarantee is there that he will grant permission in future cases where he does not want action to be taken? Will they disobey him if he tells them to stop?
These questions suggest that while the revelation that Mnangagwa allowed the RBZ to act is presented as a positive thing, it is a demonstration of what is grossly wrong with the system. The “godfather” mentality looms large in Mnangagwa’s Zimbabwe just as it did under the Mugabe regime.