By Angels Sibindi CDFA, HARARE, December 12 (The Source) – “Those who defy the markets will eventually lose. They may lose slowly, or lose in a spectacular collapse, but they will lose.” Mark S. Lawson opined in 2011. Historically, bad policies have been a telling harbinger of a disastrous economic trajectory, and it is in that light that the ideological and political positions adopted by brand Zimbabwe in the past two decades and half should be considered the explanation behind the prevailing disempowering, alienating, and impoverishing economic reality.
Zimbabweans in Zimbabwe worked hard; Zimbabweans in the diaspora supported their kith and kin back home but their wealth was debased, both on an individual and national scale. Then come December 7, 2017, the day on which Patrick Anthony Chinamasa, the old ‘new’ finance and economic development minister presented Zimbabwe’s budget for 2018 under the theme the ‘New Economic Order’. Is the budget a boon communicating the beginning of better times?
Is brand Zimbabwe, under the new administration of Emmerson Dambudzo Mnangagwa still made up of old wine, going to usher in better days? The challenges are huge, but the starting point is relatively very low because the Zimbabwe economy has contracted significantly. The budget deficit for 2017 is expected to be 11.2% of GDP; unemployment levels are estimated to be over 90%; industrial production & productivity is at its lowest in almost five decades; the foreign currency reserves are negligible to non-existent, foreign capital has been hesitant to come to Zimbabwe; there is a biting liquidity crisis; among other metrics. In that regard, the Mnangagwa administration, albeit its probable short life (it will have to win the harmonised elections scheduled for August 2018 at the latest), has an apparently easier task. But, did the budget adequately address the challenges faced by Zimbabwe, and if so, is it convincing?
The 2018 budget by Chinamasa is a double-edged sword that could usher in either sunshine or more of the same darkness hitherto experienced. It emphasizes repeatedly the dawn of a ‘New Economic Order’ built on the vision of the president but ignores the fact that it implicitly predicates its success on the goodwill of custodians of foreign capital. It claims that Zimbabwe is now open for business and makes a commitment to address the causes that rank Zimbabwe number 159 out of 190 on the World Bank’s Doing Business Index for 2018; (Zimbabwe is also ranked 124 out of 137 on the World Economic Forum Competitiveness Index for 2017 – 2018). Zimbabwe did not get that ranking because of speeches: it got there because of institutional dysfunctionality driven by consistently bad ideological and policy positions over the years. In reflection, it will take years to modernise the functionality and investor friendliness of those pertinent institutions. It is important to note that the current foreign capital being courted is not going to base their decision on the strong profile and goodwill of the yesteryear Zimbabwe. They will focus on the here and now!
Institutions and Corruption
The transformation and modernisation of government institutions needs to go beyond the budget speech, the impact of such changes should be felt and experienced by the investors, both local and foreign. Most of these changes are political in nature, and the institutional and systematic weaknesses had become systemic to ZANU-PF, which is still the steward of the same government organisations and departments responsible for those institutions and processes.
In that regard, it would be helpful to consider the words of the European Union Ambassador to Zimbabwe Phillipe van Damme in the Sunday Mail of 10 December 2017. He outlined the contributions by the EU to Zimbabwe where he emphasises the importance of political, electoral, judicial reforms and constitutionalism before additional funding is availed to Zimbabwe. These conditions could prove to be an albatross to the ZANU-PF administration especially given its well-documented stance against any reforms that may threaten its hold on power. This is particularly so in the wake of the ‘coup but not a coup’ which enabled Mnangagwa to ascend to presidency.
In essence, the same ZANU-PF machinery and personnel that have been at work in the past 37 years, hitherto aided covertly by the military, is still at the helm. Different result? Let’s give them the benefit of the doubt. The markets demand such reforms and the new administration will defy them to predictable results. However, the stated intention to address such inefficiencies is a commendable step towards enhanced competitiveness of brand Zimbabwe.
The budget rightly identified the imperative and overdue need to “…deal with corruption in the economy…” as one of the major policy pursuits of the ‘New Economic Order’. This is an age-old promise whose half-hearted bite can be traced back to the Willowgate Scandal of 1988 and the Sandura Commission, and is symptomatic of how institutional failure has abetted endemic corruption. Even the new constitution has an express provision for dedicated Chapter 13 Institutions in the form of the Zimbabwe Anti-Corruption Commission (ZACC) and the National Prosecuting Authority (NPA) but these have failed to address the scourge of corruption. The Auditor-General has repeatedly and consistently raised red flags over irregularities and corruption in the supply chain management by various government and quasi-government bodies to no decisive or corrective effect. Transparent International Zimbabwe reported in October 2016 that Zimbabwe loses $1 billion annually to corruption.
In a study on the effect of corruption on economic growth, Pak Hung Mo (2000) concluded that a 1% increase in the corruption level reduces the growth rate by about 0.72%. The expected response by the budget considering such pervasive corruption and the stated commitment to fight corruption in the New Economic Order should have been one of seeking to strengthen the Chapter 13 and other related institutions, the independence of the Judiciary, the cleansing and strengthening of the law enforcement arm.
Instead, the New Economic Order has opted to weaken the independent Commissions by allowing for ‘…only the Chairperson to be full time and leaving the rest of commissioners to be part time…devolving responsibility for day to day operations to Secretariat staff…’. Viewed from superficial cost management efforts this can be considered progressive but, the hidden long-term costs in terms of the chosen trade-off for weakened Chapter 13 Institutions will derail the ambitious drive to economic growth.
Comparatively, the budget allocation to the Office of the President and Cabinet grew by 31.25% ($55m) year on year; from $176m in 2017 to $231 in 2018! This undoes the perceived cost savings elsewhere especially of the said wage bill for Commissioners which the budget puts at $3,8 million for full time engagement. Effectively, the acclaimed cost savings will be very expensive to the nation eventually. There seems to be a preference for the consolidation of power around an individual and not institutions, and corruption thrives where the institutions are weak but run by larger-than-life office bearers. The economy and investors give meticulous attention to such detail.
The call by the 2018 budget to either eliminate, commercialise, or privatise some parastatals is as yester-year as the Economic Structural Adjustment Programme (ESAP 1991 – 1995) but a very welcome development. Better late than never, they say. The Zimbabwe United Passenger Company (ZUPCO) is an example of a parastatal that should not have been created at all. It provided all the opportunities for and examples of rent-seeking and personalisation of state, but more essentially, taxpayers resources. To a comparable degree, other parastatals were abused to bankruptcy like the Zimbabwe Iron and Steel Company (ZISCO), the National Railways of Zimbabwe (NRZ), to mention just a few, but these may still be critical to the nation state called Zimbabwe.
From an emotional patriotic assessment, one would prefer to see them remain parastatals but not in the old format: it is not competitive. Inevitably, these and other similar parastatals still have an asset base that would be critical to their revival. It is now an era of ‘Business Unusual’ and they should be commercialised at the minimum and government involvement in their management should be arms-length and minimal. As promised in the budget, the government should just focus on creating an enabling environment through guaranteeing institutional, systems and process integrity. Chinamasa, should provide a detailed breakdown of the affected parastatals, their current state and potential fate. This will be an enabler for institutional transparency and accountability especially insofar as potential capital raising and restructuring of the respective and affected parastatals may be necessary.
Infrastructure and Energy Development
Infrastructure and energy are key to the development objectives of any nation. For Zimbabwe the infrastructural and energy generation backbone is still present but is the infrastructure adequately serviced to provide the spur required for recovery? And by extension, can the same infrastructure be the launchpad for competitive and sustained economic growth with the potential to drive inclusive and equitable wealth creation? Zimbabwe’s infrastructure has suffered sustained degeneration and neglect such that bold commitment to infrastructure regeneration would have been the minimum acceptable.
But, that can only be possible with funding which is Zimbabwe’s major weakness at the moment. Unless Zimbabwe becomes a safe destination to capital, unless its liquidity and foreign currency repatriation legislation becomes fluid, and until business is freed from the shackles of political patronage, Zimbabwe will continue to run on the Rhodesia legacy infrastructure, plus arguably token additions done in the past 37 years. But, the present level of infrastructure development will not be sufficient for sustainable growth, because it was not even sufficient for the economy in 1980.
The 2018 budget was emphatic in its lack of such a bold infrastructural development vision. It seemed hamstrung by the need to issue assurances that this is a ‘New Economic Order’ without spelling out the decisive steps that could propel Zimbabwe onto the growth trajectory typified by South Korea from the 1960s or Portugal upon its integration into the European Union. By way of an e
xample, it is noteworthy that capital expenditure provision for the health sector is $26,7 million. Additionally, the budget did not substantiate the much-talked about vision of dualizing the major roads in Zimbabwe by laying out the foundation of a multi-year framework for the dualization. An improved road network is a critical driver for domestic and international trade. The proposed changes to the Beitbridge Border post are welcome, and given the inefficiencies characteristic of that port of entry, any improvement would be defining.
The budget projects a 14.6% year on year increase in electricity generation in 2018 and committed to support the projected growth through the mobilisation of $649.1 million for infrastructure spending on energy projects. This is highly critical and is commendable. However, this is for the implementation of projects that will “…ensure security, stability and affordability in energy supply…p167”. It must be noted this is mere focus on recovery, and even in that regard, a 14.6% improvement on 2017 levels is nothing to celebrate: the 2017 levels are abysmal. This is just a drop in the ocean and matches the corresponding projected growth in the manufacturing sector of 2.1%, and on 2017 levels! The 2018 budget under the banner the ‘New Economic Order’ should have been boldly ambitious and set the framework for trebling our current energy generation and transmission capacity in the next seven to ten years. That way, the scope of development would have provided the context and laid the framework for capital raising.
The budget duly recognises the importance of agriculture as an anchor to the revival of Zimbabwe’s economy. It makes a commitment to address the land tenure issue especially for the beneficiaries of the Land Reform Programme, and it seeks to address the scourge of multiple land ownership, idle land, and underutilisation of land through audits. If followed through, this will be a critical step towards providing a basis for improving agricultural production and productivity.
Improved production and productivity may promote import substitution especially where food imports are in question. This budget does not address the issue of agro-processing, input production and agricultural mechanization in the same breath as previous budgets. In view of the 2017 import bill which was $6,8 billion, it would have been informative if the critical components making up the import bill were broken down in detail. This would have been handy is isolating the lowest hanging fruits for quick gains by the new administration.
The quick gains would have been through targeted high impact solutions to import cost categories like agricultural input procurement and agro-processing through local production enhancement. Ballpark savings could be between $200 – $400 million on the 2017 import bill but with potential additional downstream earnings or savings resulting from improved local manufacturing, job creation and possible export revenue. This could enhance foreign currency reserves contributing to the alleviation of the liquidity crisis.
The Command Agriculture Programme, the flagship programme being promoted by the budget should, in alignment with the manufacturing sector revival strategy, give primacy to input production, agro-processing and mechanisation as well. The results of the Command Agriculture Programme reflect some movement in the right direction but cannot be considered satisfactory: a loan recovery rate of 66% ($47.4 million) on $72 million advanced could be decisive on whether the programme will progress as a revolving fund in the medium to long term. The budget takes further steps to extend it to other crops and livestock farming in the coming years, but this could be some ambitious investment into a fund or programme that could burn itself to insignificance if no corrective measures are not adopted.
It will be costly especially given that the funds are sourced from the private sector and backed by government guarantees. It may result in the twin burden of loan repayment plus interest by the government and lost potential economic growth through wasted investment into non-performing loans issued to non-productive farmers. The 33% potential default rate could be devastating if there is no improvement by the start of the next Command Agriculture loan cycle.
Overall, the tone of the budget was positive and deviated from the hitherto central message of previous budgets wherein there was no commitment to open the country to foreign investment and re-engage the international business community. This was usually on the pretext of the conditional demand for the removal of targeted sanctions. Among notable positive measures adopted were the following:
1. The commitment to service and re-schedule domestic and external public debt obligations: this is a critical primary step towards building investor confidence and setting the framework for re-engagement with the international community and multilateral funding agencies;
2. Fiscal Deficit Targeting which aims to halve the deficit for 2018 to 4% of GDP and subsequently capping it at 3%. The 2017 deficit is at 11.2%, and the commitment to halve it in 2018 could be a boon especially if it is a result of fiscal discipline. However, it remains to be seen if the measures proposed in the 2018 budget for implementation will drive such reduction of the deficit;
3. Setting baseline expenditures on infrastructure to 15% of the budget in 2018 and 25% in 2025. The thresholds should, however, be demand aligned and flexible. Budgetary allocations to infrastructure development must be congruent with the corresponding infrastructural gaps.
4. The expenditure management measures are a positive development especially in view of solutions aimed at containing the Civil Service wage bill. At $3.3 billion in 2017 (more than 80% of the budget), this was not sustainable and was largely consumptive. This left limited space for expanded capital expenditure. Measures to contain the wage bill will bear a progressive mark only when:
i. The ghost workers have been cleaned earnestly from the fiscal payroll. The removal of 3700 youth officers is positive but that will be negligible until the removal of about more than 75000 ghost workers in government reported by an Ernst & Young Report in 2014. This could save about $17,5 million per month.
ii. The issue of civil service bonuses should be addressed firmly. The New Economic Order can only be a success if the bonuses were suspended in part or total. By merely reducing the bonuses to 50% the government could have resulted in savings in the region of $100million in the current fiscal year. Alternatively, the bonus could be suspended for subsequent fiscal periods when the economy would have begun the recovery. However, this is a sensitive and emotive proposition especially for a year when harmonised elections are slotted.
5. The reduction in foreign business travel, related delegations, and cost drivers; the reduction of foreign service missions and their increased roles, are essential to cost management.
6. The commitment to uphold the Public Finance Management and other relevant Acts is noteworthy though it should be undertaken within the context of institutional reform and strengthening.
In the final analysis, the budget allowed Zimbabweans to heave some sigh of relief since, on the surface, it purports to address the issues contributory to the prevailing crisis. It enables a meeting of the minds between the governors and the governed on the fundamentals towards economic recovery: this was almost absent in the previous budgets but should not be viewed as the get-out-of-jail card. When analysed in isolation most policy measures are progressive but, when analysed in totality and juxtaposition, this budget may be just a false start to recovery, and lacks the required depth and congruency to putting Zimbabwe on the pathway to competitive development.
The vision that the budget espouses is nostalgic, it desires to bring back the old days of Zimbabwe; the budget should have defined the futuristic trajectory of where Zimbabwe should be in the Information Age! If the fundamentals of economics are adhered to, it will be a boon, if not, it will be a bane and Zimbabwe will lose, slowly or spectacularly. Our modern history dating back almost three decades has already taught us!
Angels Sibindi – a Chartered Development Finance Analyst (CDFA), Angels has exposure to and experience in development finance, especially country risk and return analysis, agricultural and environmental finance, and project management. His work footprint with international development cooperation and finance organisations spans the greater part of Southern Africa. He is an alumnus of the University of Zimbabwe (Accountancy) and the University of Stellenbosch Business School (Development Finance).