A look at Zimbabwe’s recovery odds

A look at Zimbabwe’s recovery odds
Government plunged into deep crisis in 2017 after its fiscal deficit guzzled a significant chunk of gross domestic product (GDP) ― more than 10 percent― a margin way above both the official target of 2,3 percent and the standard ceiling of 2,5 to 3 percent of GDP.

Government plunged into deep crisis in 2017 after its fiscal deficit guzzled a significant chunk of gross domestic product  more than 10 percent― a margin way above both the official target of 2,3 percent and the standard ceiling of 2,5 to 3 percent of GDP.

By Munyaradzi Mugowo

IT is only in Zimbabwe where an economy that has suffered a 10-year economic depression, succeeded by eight years of liquidity and solvency crises, can be expected to turn around in 100 days.
Even in giant economies like the US, China and the European Union (EU), recessions and recoveries usually take around one to two years. The most recent global recession, that initially manifested as a US financial crisis, stretched from mid-2007 to mid-2009 and only began to ease after two years of intense fire-fighting involving all the big boys of the world from the US, the EU, China and Japan.
The syndicated response comprised historically unprecedented fiscal and monetary policy measures such as government bailouts, quantitative easing, tax rebates for households, tax cuts for businesses and interest rate cuts. Before then, the Great Depression battered the economies of Europe and the US for four straight years from 1929-1933 and was only brought to an end through a combination of austerity monetary policy and exchange rate liberalisation.
Today, seven years after the great recession, the economies of the US, China and Europe have barely returned to pre-crisis levels of growth.
What is worth noting is the US government’s response to the recession. Under the Obama administration, the world’s largest economy spent $787 billion on bailouts comprising $286 billion in tax cuts to businesses.
Before George W Bush left, Treasury approved $120 billion in tax rebates to households while the Federal Reserve Bank poured about $1,4 trillion into financial markets through the purchase of securities. An additional $700 billion was also put up to purchase toxic assets from troubled banks.
It has been suggested that the global recession would have been longer and probably deeper than the Great Depression had it not been for these extraordinary interventions coupled with the EU’s aggressive interest rate cuts and quantitative easing programme through which the European Central Bank flooded markets with cash.
Although the effects are more localised compared to giant economies that sit at the centre of the global economy, Zimbabwe’s problems are much deeper than a recession, which is primarily triggered by a slump in demand. Over the last three years, economic growth has been constricted within a low and narrow band of between zero and one percent.
In the outlook, the economy’s recovery odds run high, stoked by several structural bottlenecks — those deep-seated and more persistent challenges whose origins can be traced back to either government policy, the structure of markets or the structure of the economy and its institutions.
The list of structural constraints to recovery includes fiscal crisis; sovereign debt overhang; depressed Foreign Direct Investment (FDI); high and unstable inflation; foreign currency liquidity crisis and underinvestment in infrastructure.
I will just look at the first two policy issues and consider the rest later.
Zimbabwe’s economic and financial difficulties have actually worsened since Robert Mugabe resigned as President in November 2017.
Widespread price pressures have literally overrun the economy, with month-on-month food inflation surging to 6,6 percent in December 2017 from a deflationary position of -0,3 percent at the beginning of that year. Foreign currency rationing measures and import restrictions imposed in 2015 and 2016 respectively, are still in place.
Cash and foreign currency are still being sold at a premium in shadow markets while concerns have also increased about rising unemployment, an old problem that haunted Mugabe’s government for over two decades.
People who are baffled by this deterioration seem to suggest that the anaemic economic and financial conditions created by Mugabe’s administration disappeared together with him.
As this paper will show, the inflation and cash crises plaguing the economy today are actually a manifestation of the imprudent actions of the Mugabe government over the period 2016 to 2017.
It normally takes a year or more for cracks in the economy to begin to show after a severe strain. In the US, it took about a year for the financial crisis to aggravate to a recession and roughly another year for the slowdown to spread across the globe.
Unlike the US and the EU, which responded to the recession with massive cash injections, the transitional government is actually stuck in a deep solvency crisis that on its own requires billions of dollars to correct.
An assessment report of the African Development Bank last estimated Zimbabwe’s infrastructure bill at US$14 billion in 2012.
Evidence reviewed below demonstrates that the economy has collapsed to a point where it cannot fund its own recovery, putting the transitional government in a policy dilemma in terms of selecting an appropriate policy response.

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Fiscal crisis
Government plunged into deep crisis in 2017 after its fiscal deficit guzzled a significant chunk of gross domestic product (GDP) ― more than 10 percent― a margin way above both the official target of 2,3 percent and the standard ceiling of 2,5 to 3 percent of GDP.
Until government drifted from cash budgeting in 2013, deficits under dollarisaton had remained in balance or close to balance.
In the absence of aid and multilateral budget support, the fiscal deficit indicates the amount borrowed from domestic markets and the margin by which the stock of public domestic debt has increased.
For government to be able to service current and future domestic debt, future fiscal revenue would have to rise substantially and haul the National Budget into a surplus position.
Unfortunately, government spending and fiscal deficits are moving in an opposite direction with revenue, in persistent contraction since 2015. As government spending increased in 2016, Zimbabwe’s annual revenues dropped six percent in nominal terms, according to the IMF.
The 2018 Monetary Policy Statement released by the RBZ in February shows that government financed its 2017 expenditure overrun partly through Treasury Bills and bonds amounting to about US$2 billion and partly through an RBZ overdraft facility under which the central bank simply credited the accounts of government payees by way of real time gross settlement transfers without injecting the corresponding cash dollars into the financial system.
The real policy challenge for ED’s transitional government is not fiscal solvency but the solvency of mounting government debt. Public domestic debt was estimated to reach US$4,8 billion, about 28 percent of GDP, at the end of 2017 from US$4 billion, almost 25 percent of GDP, at the end of 2016, adding further strain to Zimbabwe’s sovereign debt overhang.
The fiscal crisis and debt distress have worsened amid efforts to clear all arrears with multilateral lenders in order to qualify for fresh lending. After clearing arrears with the International Monetary Fund (IMF) in 2016, Zimbabwe is under pressure to meet its obligations with the World Bank as well and has had to borrow to reduce its arrears.
What is particularly upsetting about Zimbabwe’s fiscal crisis is the fact that the budget overruns have originated from economically irrational expenditure decisions made in 2016 and 2017.
In 2016, unbudgeted civil service bonus payments, agricultural input outlays, support to the Grain Marketing Board and grain purchases to mitigate the effects of drought drove the overall budget deficit to nine percent of GDP.
It is difficult to understand why government decided to spend about five percent of GDP on bonus payments, which also raised employment costs to over 90 percent of total fiscal revenues.
In 2017, the fiscal crisis escalated to a public debt crisis through an unbudgeted Command Agriculture programme under which government issued Treasury Bills and bonds to provide end-to-end financing, from input support to grain purchases through the GMB. Contrary to government claims, Command Agriculture has been one big economic mess.
The national grain commodity board purchased a tonne of maize grain from farmers at more than double the world market price, yet millers could only pay about half that price. The losses were threefold: interest costs of debt; inflated grain purchase costs and grain sales losses.
Although Mugabe’s government tried to defend the folly on food security grounds amidst rising food import prices, the results of the unbudgeted outlay is tantamount to mass murder, particularly if considered against its inflationary impact and the shortage of foreign currency and cash dollars.
The RBZ is equally concerned and has suggested that deficit financing under dollarisation “should ideally be from foreign sources to mitigate the domestic creation of money which is not matched by foreign exchange”.
There seems to be no immediate end to the fiscal crisis as government has already committed itself to off-budget payments of civil service bonuses this year without regard for fiscal solvency considerations.
The fiscal decision is not consistent with current economic stabilisation agenda.
To avoid this kind of fiscal indiscipline, many countries have imposed statutory fiscal debt limits on their national budget frameworks.
For nine straight years, Zimbabwe’s trade position has been in perpetual deficit, forcing authorities to impose foreign currency rationing and import restrictions in 2015 and 2016 respectively. In 2017, imports exceeded merchandise exports by US$1,456.7 million, despite a 36,8 percent surge in merchandise exports.
When the fiscal deficit and public debt are compared to exports, it can be shown that Zimbabwe is wallowing in a balance of payments crisis. Whenever fiscal deficit and public debt occur simultaneously with trade deficit in a dollarised economy, they result in a rapid depletion of the country’s foreign currency reserves, eroding its capacity to pay for imports and meet debt servicing costs. Since 2011, import cover has fallen to under a month from around 1,2 months in 2009 when dollarisation commenced, according to IMF reports.
Given the sustainability issues around public debt, fiscal deficit and trade imbalances, there is no room under the transitional period to continue with typical Mugabe reckless budget deficits.

Finance and Economic Development, Minister Patrick Chinamasa

Finance and Economic Planning, Minister Patrick Chinamasa

Sovereign debt distress
Zimbabwe’s public debt has reached a level where the country is forced to commit a significant share of fiscal revenues to debt servicing, crowding out infrastructure and social spending on education, healthcare, housing, water and sanitation.
The country’s total outstanding Public and Publicly Guaranteed (PPG) external debt hit US$9,348 billion at the end of 2016, about 58 percent of GDP, from US$8,728 billion in 2015, approximately 54 percent of GDP.
In present value terms, Zimbabwe’s PPG external debt was estimated at 42 percent of GDP, 192 percent of government revenue and 168 percent of exports in 2016.
The figures mean that Zimbabwe is unable to meet its external debt obligations from current revenue or exports.
The sovereign risk is more clearly seen when the liabilities of both local authorities and State-Owned Enterprises (SOEs) are factored in.
According to an IMF report on Zimbabwe’s debt sustainability position released in July 2017, “the debt stock of local governments reached an estimated $555 million in 2015 (3,4 percent of GDP), while the debt of non-financial public corporations stood at around $440 million as of end-2016 (2,7 percent of GDP)”.
Already, government is under excessive pressure from internal debt maturities as most TBs had a tenor of 365 days. The RBZ has had to roll over some of the TBs issued last year to give government more time to pay back.
The likelihood that government will be able raise up to US$2 billion in foreign currency to settle its obligations to domestic creditors within a year is uncertain, given that fiscal revenue is falling while foreign currency reserves are insufficient to cover one month of imports. This figure does not include new debt accruals and outstanding obligations to multilateral lenders.
Either government will have to raise taxes or embark on austerity cutbacks in expenditure or sell some of its assets to reduce public debt level to sustainable levels.
From the point of view of the IMF, the scope for further tax increases is limited in view of rising economic informality and a tax-to-GDP ratio which is already too high by low-income country standards. Furthermore, over 70 percent of State-owned ernterprises are insolvent.
The sad truth is that there is no real solution to Zimbabwe’s public debt overhang. In the outlook, we should expect the fiscal solvency crisis and the sovereign solvency crisis to continue reinforcing each other since the prospects of budget surpluses in the future are weak.

Munyaradzi Mugowo is an economist, researcher and consultant on mineral economics, industrial policy, development economics and social policy. He is the managing consultant of Ziopra Consulting P/L and can be reached at munya.mugowo@gmail.com.

 

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