Economy languishes on sickbed
k of Zimbabwe governor Gideon Gono this week painted a picture of Zimbabwe’s economy redolent with optimism that it was on the mend. Such is the enthusiasm besetting Gono that he insisted the target of 200% inflation by the end of the year was achievable.
He even announced that the timeframe for his economic turnaround plan would be brought forward from end-2008 to 2007.
He however said the country, which registered negative gross domestic product (GDP) of minus 9% last year, would again this year see a contraction of minus 5%.
In reality while Gono may have staunched the haemorrhaging, the patient is still on his sickbed. Even for the most optimistic, it is still too early to talk about jobs created, the number of direct foreign investors, hefty export receipts let alone positive GDP.
Gono all the same was upbeat this week. Like most business leaders he understands what needs to be done. His optimism should therefore be tempered by a good look at Zimbabwe’s political environment which is bound to deteriorate as the government gets into election mode.
Gono announced new measures to attract foreign investment including a guarantee to pay back the entire capital within three months if investors decide to leave.
The success of any investment programme will depend heavily on how Zimbabwe is viewed by source markets of new money. All the evidence, from the IMF to the World Economic Forum, suggests that the country is seen as one given to arbitrary and unpredictable measures, and to selective enforcement of the law.
The governor has promised to crack down on the black market by monitoring foreign currency bought at auctions. He said forex sent from the diaspora would no longer be availed to recipients in hard currency.
He raised the diaspora rate to US$:$5 600 from $5 300. The greenback is now trading at US$:$7 500 on the parallel market, a rate 30% higher than the controlled auction. The tight leash on the value of the dollar designed to keep it in the range of the diaspora rate might see more trading on the parallel market which threatens the Homelink scheme.
This sort of tinkering won’t do the trick. There is need for long-term measures which address the supply side of foreign currency. This should in turn determine the real value of the Zimbabwe dollar. Currently Zimbabwe has an overvalued currency that is not enough to go round — as the markets are signalling.
Gono said the central bank was putting together financial instruments to facilitate profitable investments by Zimbabweans living abroad. One such facility is the Homelink Housing Development Scheme to encourage investment in real estate. He also introduced the “Carrot and Stick Export Retention Scheme” through which he wants to encourage exporters to remit their export proceeds early. The scheme reduces the surrender requirement from the mandatory 25% to lower rates commensurate with timeframes of repatriation.
Gono did not however revise the US$:$824 rate which exporters are paid for surrendered foreign currency. He has insisted on pegging the dollar when the rate has galloped off over the past six months. Zimbabwe is not exporting enough to traditional markets to earn forex and Gono’s statement has not pumped new life into exporting companies, especially those requiring forex to import inputs and machinery.
The central bank governor introduced measures to encourage the setting up of Export Processing Zone (EPZ) companies. In the past EPZ companies with a foreign component of 40% and above were exempted from exchange control regulation. Under the new measures the foreign ownership threshold has been revised downwards to 25%. Companies covered by the new measures will not be subject to surrender requirements.
While it is apparent that the measures are meant to encourage joint ventures between foreign companies and local firms, EPZs — especially those in the agro-processing sector — no longer constitute safe business ventures. The lowering of the foreign ownership threshold will not achieve much as long as there is no stability or security for those still owning agro-businesses.
Charleswood and Kondozi farms with EPZ status were expropriated violently. The latest amendment to the Land Acquisition Act empowers government to acquire farms with EPZ status. And the confiscation of farm equipment will send a very discouraging message to investors of any sort who see it as theft.
It is such policy aberrations that will invariably sabotage Gono’s monetary policy whose success hinges on the creation of a sound environment where business leaders can make long-term decisions without fear of a predatory political elite.
The raft of measures in Gono’s 120-page presentation, pregnant with detail, was a more thorough job than the wafer-thin Mid-Term Fiscal Policy Review statement by the Acting Finance minister Herbert Murerwa on Monday. Murerwa, who appears to have abdicated his responsibility to chart a way for the country’s economy to Gono, did not go very far in telling us the pattern of expenditure by government. He presented a table that showed that the spendfest by ministries was over. But that is no guarantee that the money allocated has been expended judiciously. That breakdown was crucial in detailing what funds were used for — especially by ministries carrying out capital projects.
Gono’s statement may however turn out to be a good dance outside the arena as the country needs a strong fiscal policy which ensures there is supervision of measures being implemented, especially by government departments and leaky parastatals.
Gono for example announced as of June 30 the central bank had disbursed $1,7 trillion as a rescue package for productive sectors, with agriculture getting $744,5 billion, or 42,4% of the total sum. But giving money to the sector will not alone be the panacea to dealing with depressed production.
Gono commended government’s fiscal discipline — invisible to many observers — and implored ministries to operate within their budgets. But government’s appetite to spend what it does not have is likely to be whetted as next year’s general election looms and benevolence will scale new heights. Gono will have to find the money. At which point his good intentions will be subject to a severe test.