Download ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH

STRUCTURAL BARRIERS FOR SUCCESSFUL
IMPLEMENTATION OF ZIM ASSET AND
HOW TO ADDRESS THEM
PRESENTATION AT THE CONFEDERATION OF
ZIMBABWE INDUSTRIES ANNUAL CONGRESS
BY
SMT MALABA
CHIEF EXECUTIVE AGRIBANK
August 2014
Presentation Format
Introduction
Real Sector
Inflation
Banking Sector
Balance of Payments;
Fiscal
Structural Barriers To Implementing ZIM ASSET
How To Address the Barriers
Introduction
 Real Sector Developments
 Over the past few years, economic activity has contracted
measurably with real GDP growth declining from 11.5% in 2010 to
3.0% in 2013. The economy is projected to achieve a marginal
rebound of about 3.3% growth in 2014 underpinned by maize and
tobacco growth in agriculture.
 Mining sector performance has weakened markedly due to weaker
international mineral prices and high domestic production costs.
Growth prospects in the mining sector remain subdued, but with
potential better prospects in 2015 and beyond, on the back of
envisaged recovery in international commodity prices.
 Agriculture performance has been greatly enhanced by the good
rains and improved availability of inputs. Key sub sectors such as
Tobacco, Maize, Cotton and sugar are projected to have better
performance. Preliminary estimates show agriculture growth of
about 20.1% driven mainly by both Maize and Tobacco
Real GDP Growth ( Actual & Projections
Real GDP Growth at Market Prices (yoy%)
14
11.4
12
11.9
10.6
10
8
6
5.4
4
3.1
3.5
3.6
2
0
2009 actual
2010 actual
2011 actual
2012 Est
• Source: Zimstats For Actuals
2013 Rev. Proj
2014 Proj.
2015 Proj.
Introduction
 Head Line Inflation
 The annual headline inflation improved to -0.08% in June
2014 from -0.19% in May 2014. The annual inflation rate is
forecast to be positive from July 2014, but will remain well
below 0.5% through to December 2014.
 Headline inflation is likely to be positive from July, though
forecast to remain below 0.5% in the near term although
the proposed increase in power and other tariffs and recent
adjustment in medical fees will result in upward price
pressures.
 This does not necessarily imply the end of deflationary
pressures as the economy still faces depressed aggregate
demand, against the background of falling disposable
incomes and tight domestic liquidity conditions.
Introduction
Inflation Forecasts: Outlook Scenarios
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
-1.50%
Scen.1
Scen. 2
 Positive inflation by July 2014
 Headline Inflation Forecast to remain below 0.5% by December 2014
Introduction
 Banking Sector Developments
 The Reserve Bank highlights in its May bulletin that annual
growth in broad money supply increased by 7.66% in May 2014,
from 6.65% in April 2014. In absolute terms, broad money rose
from US$4 018.14 million in May 2013 to US$4 325.73 million in
May 2014. Broad money registered a monthly increase of 2.25%
between April and May 2014. Expansions were registered in all
deposit classes with savings deposits recording the highest
annual growth of 12.5%. The growth in money supply continued
to be driven by tobacco sales. As at 18 July 2014, cumulative
tobacco sales amounted to over US$670 million.
 Deposits still remain largely short term with long term deposit
constituting only about 16% of total deposit in October 2013 .
Deposits held by banks largely emanated from utilities and local
authorities, 25.78%; households (individuals), 14.60%; financial
organizations, 20.08%; and distribution, 8.93%.
Introduction
4.8
M3 Annual Growth Rate
2.8
14%
1.8
4%
Trends in Broad Money
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
0.8
(0.2)
US$Bln
3.8
24%
-6%
•
M3 US$bln
Jul-12
Annual Growth Rate
34%
Structure of Banking Sector Deposits
Savings, 1
2.2%
Demand,
51.2%
•
Over 80% of deposits are short term
Under 30
day, 20.4
%
Long
term, 16.
1%
Introduction
 Balance of Payments Developments
 The economy has been experiencing an unsustainable current account
deficit, reflecting decline in domestic industrial capacity utilization. The
Current account deficit widened from US$3.6 billion in 2012 to about
US$4.2 billion in 2013.
 Since September 2013, the economy is showing signs of import
compression – the cumulative effects of declining domestic disposable
incomes and escalating company closures. As a result the trade
balance has been steadily improving over the past nine months – a
function of falling imports as domestic economy capacity to import
steadily dwindles progressively. In essence, imports are declining at a
rate faster than the decline in exports over the past nine months.
 A comparison of Zimstats Trade data for Jan- June 2013 and 2014
shows that the Trade balance improved by 25.3% from US$2.35 billion
in 2013 to US$1.755 billion in 2014 (First six months, excluding gold).
This trend is likely to persist, until a level is attained where the Trade
balance can be financed from long run stable sources of external
financing. Figure 3 below depicts this trend.
Introduction
Imports/ Exports & Trade Balance (US$) Jan - June
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
(200,000,000)
(400,000,000)
(600,000,000)
(800,000,000)
(1,000,000,000)
Imports
Exports(Excl. Gold)
Trade Balance
Linear ( Imports )
Poly. ( Trade Balance )
• Improving Trade Balance (due to import compression)
Introduction
Fiscal Developments
 Pressure on the Fiscus will continue for the remainder of
the year, with revenues in decline against the background
of increasing company closures.
 During the first 6 months to June 2014, total fiscal
revenues amounted to US$1.718 billion (7% below target)
against total expenditures and net lending amounting to
US$1.772 billion, giving rise to a cumulative deficit of
US$53.6 million.
 As much as US$1.65 billion was current expenditure (93%),
with employment costs and current transfers amounting to
US$1.53 billion (86.5%). Capital expenditure was US$107.9
million (6% of total expenditures).
Introduction
Fiscal Revenues: Jan-June 2014
other
12%
Customs Duty
8%
Individuals
26%
Corporate Tax
11%
VAT
28%
Excise Duties
15%
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
The following are some of the key structural
barriers to economic growth:
The Macroeconomic Policy Environment;
Banking Sector Vulnerabilities;
External Debt Overhang and Arrears;
Fiscal Budget;
Declining Capacity Utilization
Infrastructure Deficit and ICT
Declining Aggregate Demand
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 The Macroeconomic Policy Environment
 The Government adopted the Multicurrency regime in January
2009, against the backdrop of the hyperinflation episode. The
Multicurrency immediately resolved the problem of hyperinflation
and restored price stability.
 The Multicurrency, with US dollar dominance, however means that
the economy’s growth is constrained by an overvalued exchange
rate, as the US dollar strengthens against the rand. The US dollar
overvaluation is particularly pervasive in its effects on the
domestic economy as the rand continues to weaken against the US
dollar and Zimbabwe’s Multicurrency is anchored on the US dollar.
 The Government has no room for either Monetary or Fiscal
stimulus measures, as necessary to get the economy back on
growth path.
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 Banking Sector Vulnerabilities
The Banking sector faces vulnerabilities, in the main:
 Undercapitalization of banks;
 Rising Non Performing Loans;
 Liquidity Crunch
 Short Term deposits;
 Several Banking institutions are struggling to achieve adequate capitalization, particularly local
banking institutions. The Reserve Bank is to be commended for extending banking sector capitalization
deadlines to 2020, allowing more time for banks to achieve new capitalization thresholds.
 As part of addressing banking sector vulnerabilities, Government and RBZ are working on the
modalities for a Special Purpose Vehicle (SPV), to house Non Performing Loans, creating scope for
enhanced financial intermediation.
 The current liquidity crunch is a function of many intertwined factors:
 Rising NPLs;
 Poor Export Performance;
 Few Lines of Credit;
 Widening Current account deficit (hemorrhage through imports)
 Low FDI and Portfolio Flows; and
 Short Term deposits
 Total deposits, as at end of May 2014, amounted to US$4.33 billion, but over 80% of local deposits are
short term deposits, which are not readily available for long term funding – industry requires more
Liquidity & Non Performing Loans
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 External Debt Overhang
• Zimbabwe’s inability to borrow from abroad reflects the impact of external debt overhang
and accumulated external payment arrears. The total external debt overhang amounts to
US$8.9 billion and cumulative external debt payment arrears amount to US$4.9 billion. As
much as US$2.4 billion is owed to Multilateral Financial institutions.
•
Until this is addressed, Zimbabwe cannot access international capital markets like other
countries - Zambia, Mozambique, Mauritius or Kenya and liquidity changes are likely to
persist. That is why the Ministry of Finance is actively pursuing debt relief efforts through
engagement with the international community – first the Staff Monitored Program (SMP)
and thereafter a comprehensive debt relief program.
 Fiscal Budget
• The Fiscal Budget pressures are forecast to persist against the background of declining
revenue performance. During the first 6 months to June 2014, total fiscal revenues
amounted to US$1.718 billion (7% below target) against total expenditures and net
lending amounting to US$1.772 billion, giving rise to a cumulative deficit of US$53.6
million. The Government has outstanding arrears to local suppliers of goods and services
amounting to about US$400 million.
•
As much as US$1.65 billion was current expenditure (93%), with employment costs and
current transfers amounting to US$1.533 billion (86.5%). Capital expenditure was US$107.9
million (6% of total).
STRUCTURAL BARRIERS TO ECONOMIC GROWTH

Infrastructure Deficit
 The economy faces structural challenges in key enablers; viz
–
–
–
–
–
Energy and Power Challenges;
Transport and Communications
Water and Sanitation
Roads and Rail networks
Dams and Irrigation Infrastructure
 Declining Industrial Capacity Utilization
 Industry capacity utilization had progressively declined from
57% in 2011, to 44% in 2012 and further to 39% in 2013.
Industry capacity utilization continues to decline against the
background of rising company closures.
 Industry capacity utilization decline also reflects the impact of
the high domestic costs of doing business, hence the
uncompetitiveness of local industry. The high domestic costs
of production also reflect the high utilities and services costs.
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Major CPI Drivers (YOY%)
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
Electr+Water
HEALTH
EDUCATION
• High utilities and services costs
CPI
Why are our Business Costs high
High Services Costs
o Education Costs are 25% higher than All Items CPI
o Since Jan 2011, Education costs have cumulatively risen by 35%
above All Items CPI
o This is not sustainable for the country
o Electricity and Water utilities
Other Factors
o Periodic Power outages/Diesel Generators
o Interest costs
o Transport Costs
o Labor Costs
• Other Factors
– Corruption/Rent Seeking
– Border Post Delays
– Bureaucratic Delays
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
• An analysis of the CPI sub category trends shows
that some service costs remain as high as 25%
above all other goods in the economy. Coupled with
the rand depreciation against the US dollar – the
rand has depreciated against the US dollar by 17 20% between January 2013 to June 2014 - the
cumulative effects have been equivalent to a
massive appreciation of the US dollar (in excess of
40% in dollar terms) particularly as South Africa
remains Zimbabwe’s largest import and export
market, accounting for over 60% of imports and
over 50% of exports.
STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 So, for Zimbabwe, the US dollar, which brought much needed price
stability, has been the emblem of Zimbabwe’s uncompetitiveness with no recourse to internal exchange rate adjustment through
monetary policy. Accordingly, the only avenue for adjustment of
the economy remains wage adjustment (specifically wage decline)
and/or productivity gains. As productivity gains is a function of all
other factors such as energy availability; plausibly, the economy’s
only avenue for adjustment is wage decline. But this is constrained
by the current inflexible labor laws, hence the continuing quantity
adjustment – protracted real GDP decline, as currently obtains.
 Declining Aggregate Demand
 Rising unemployment due to corporate closures and the current
account hemorrhage have combined to undermine domestic
demand. Low disposable incomes and huge imports have
cumulatively weakened domestic aggregate demand.
Decline in Aggregate Demand
8.0%
Consumer Demand Growth (Actual & Forecasts)
Based on VAT on Domestic Goods
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
mom%
Moving Average mom%
Poly. (mom%)
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Addressing The Structural Challenges
 The above impediments to economic growth can be
addressed through a comprehensive package of
measures that are mutually reinforcing. Above all, the
economy requires substantial amounts of capital for
investment in infrastructure – energy and power,
transport communications, Roads and Rail networks,
water and sanitation as well as agriculture
infrastructure such as dams and irrigation
infrastructure. The capital requirements amount to
several billions of dollars. As such, it is imperative that
Zimbabwe creates an environment that attracts huge
flows of inward investment, typically FDIs, to catalyze
growth of the economy.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
The Macroeconomic Policy Environment
 Going forward, it is imperative that the Government retains
the current Multicurrency for the foreseeable future; in light
of the need to maintain price stability as necessary to
strengthen confidence in the banking sector for overall
economic growth.
 The public still retains residual fears regarding the early retain
of the local currency, following the experience of 2008. An
early re-introduction of the local currency is certain to cause
panic withdrawal of all US dollar deposits – a stampeded that
will occasion a banking sector crisis and an economy wide
meltdown will ensue. Once the economy reverts to ground
zero, as in 2008, it will be very difficult to engineer sustained
recovery. This may inadvertently trigger social instability due
to sustained contraction in economic activity.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Addressing Banking Sector Vulnerabilities
 The Government is making progress regarding addressing
banking sector vulnerabilities. This is critical for restoring
confidence in the banking sector. The major issues relate to:
o Capitalization of Banks;
o Rising NPLs;
o Recapitalization of RBZ; and
o Lender of Last Resort Function
 The Government is currently work in progress in respect of
capitalization of RBZ and also working on a Special Purpose
Vehicle (SPV) to deal with the problem of growing NPLs. The
Reserve Bank of Zimbabwe has already extended deadlines for
capitalization of banks to allow more time for banks to secure
adequate capital.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 Interbank Market
 The Government has also secured a US$100 million Afreximbank
facility to kick start the interbank market. Accordingly, interbank
market activity is envisaged to commence soon, once the
operational modalities have been finalized.
 The capitalization of the Reserve Bank will capacitate the Central
Bank to undertake the Lender of Last Resort function, which is
critical for effective functioning of the interbank market.
 Concurrently, de-monetisation of the Zimbabwe dollar will go a
long way towards re-establishing confidence in the banking sector,
particularly if the process is implemented transparently. This must
embed wide stakeholder consultations on the most optimal
methodology for all stakeholders. The process of de-monetisation
must not confer any special advantages to any particular group or
individuals, nor disadvantage others. The public must have
complete faith that the process is balanced, fair and transparent.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
External Debt Overhang and Arrears
 The Government is to be commended for continuing on the SMP
program with the IMF, which will lead to a comprehensive program to
deal with external debt and arrears. Beyond that Program, Zimbabwe
can access international capital markets to borrow at lower rates
critical for economic growth and development.
 This requires that the Government adheres to the SMP with the IMF
and thereafter adopt a comprehensive debt relief program. Such a
program typically requires that Zimbabwe clears her outstanding
arrears to multilateral institutions first (i.e. US$2 billion); thereafter
negotiate with the Paris Club for bilateral debt and the London Club
for Commercial debt resolution. It is a step by step process.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Fiscal Budget
 The Government has been on cash budgeting since 2009.
It is a difficult proposition but there is no alternative to
cash budgeting as the current situation prevails. It would
be prudent for Government to streamline its operations
and reduce recurrent expenditures so as to work towards
a balanced budget.
 At present, the Government has pending payments to
many local companies, including fertilizer and seed
companies and agro processors and many SMEs that have
supplied to Government. This has compounded the Cash
flow situation of these entities, with material effects on
their operations and going concern status.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 Infrastructure and ICT
 The Government must create an environment that attracts FDI in the
infrastructure sectors, in light of the huge capital demands. Already,
commendable progress has been made by Government in respect of the energy
and power projects – Kariba South and Hwange 7 & 8, which are likely to be
completed by 2017. The two power projects are expected to add an additional
300 MW and 600 MW respectively to the national grid.
 Similar arrangements have been made for roads rehabilitation, such as the
Plumtree – Mutare highway. The Beit Bridge – Chirundu Highway is also
expected to come on stream shortly. These arrangements need to be expanded
to include all infrastructures.
 In this regard, Government is to be commended for visible efforts underway to
create a conducive environment, in particular as this relates to IEE measures,
being reviewed, in line with the guidance given by H.E. in his independence
speech. Such a review is necessary to give clarity and direction on the
implementation of IEE vis a vis the need to attract FDI into the economy. The
review seeks to deal with the wide discretionary powers at the disposal of the
Minister responsible for implementing the IEE Act.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 A Visible Initiative For Inward Investment (FDI)
 There is need for Government to work together with Private sector –
a joint initiative to attract FDI in key sectors of the economy –
agriculture, mining, and Manufacturing. According to the business
member organizations, (CZI, ZNCC, Chamber of Mines);
 Agriculture requires about US$2 billion including for infrastructure
rehabilitation;
 Industry requires about $8 billion;
 Mining sector requires about $7 billion;
 Infrastructure (energy & power, Roads, and rail; Water and
Sanitation) about $10 billion
 In aggregate, this implies a total national requirement of about $27
billion – about, the amount that is required to finance ZIM ASSET as
per the Ministry of Finance and Economic Development.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 A Visible Initiative For Inward Investment (FDI)
 The economy requires substantial amounts of capital for recovery and growth.
The only viable alternative is FDI – there is need for a focused program/initiative
dedicated primarily for inward investment in key productive sectors.
 In respect of macroeconomic policies to attract inward investment, the following
are imperative:
 Review of Indigenization and Empowerment Measures;
 Strengthening Property Rights; and
 Reform of Labor Laws
 It is imperative that the Government reviews the current IEE measures to ensure
that they are aligned with the overall thrust to attract significant capital investment
in the economy, notably non debt creating FDI flows in key sectors of the economy.
 Similarly, there is need to signal to the international community that Zimbabwe is
strengthening Property rights protection and outstanding BIPPAs are being
rectified.
 Important also is the need to re-align the labor laws to ensure flexibility in the labor
markets. Current labor market rigidities are choking many companies and forcing
many that could survive into liquidation and insolvency.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Addressing the Cost of Doing Business
o The Minister of Industry and Commerce, Hon. Bimha has
instituted a study to examine the cost structures in business.
The findings of the study are critical in shedding light on the
cost of doing business in Zimbabwe. The cost of doing business
in Zimbabwe is very high and there are many factors
contributing to the high cost environment – unsustainably high
cost business environment. Among the key factors include:
o High wage costs;
o High utility costs – energy and power, water and Telecoms
Tariffs;
o High domestic interest rates;
o Antiquated equipment inefficiencies;
o Bureaucratic Red Tape/Border Delays; and
o Endemic Corruption
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
• In order to improve the doing business conditions in
Zimbabwe, there is need to address fundamental
structural factors giving rise to high domestic costs.
Principally there is need for Government to work jointly
with Private sector to achieve:
• Labor Market reforms as necessary to ensure flexibility
in labor market conditions and lower wages. Given the
absence of the exchange rate as an adjustment
mechanism, against the background of an appreciated
US dollar, the only avenue for adjustment in
Zimbabwe is wage adjustment or productivity gains or
both. Labor market flexibility is therefore critical;
otherwise the economy will continue to adjust to
imbalances through the current quantity adjustment –
which is real GDP contraction.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
 Cost of Doing Business
 There is need to examine the cost build up for utilities – our domestic
costing has residual influences of the Zim dollar era and this has been
carried over to the US Dollar environment. Whereas goods prices continue
to fall due to low aggregate demand, services and utilities remain high.
Some services, notably education are as much as 25% higher than the
overall CPI basket.
 High domestic interest rates are symptomatic of the shortage of money in
the economy and access to international capital markets and higher FDI
inflows can address the challenge of high domestic interest rates.
 Border delays and red tape have spawned corrupt tendencies. There is
need for Government, working with Private sector to deal decisively with all
red tape and bureaucratic delays. Similarly, Government must declare and
actively pursue Zero Tolerance for corruption, both public and private.

Modernization, factory retooling, new equipment and Technological
innovation are critical for addressing antiquated equipment related
inefficiencies.
ADRESSING STRUCTURAL BARRIERS TO ECONOMIC GROWTH
Declining Capacity Utilization
 Recovery in capacity utilization is a function of the
capitalization that is required by many companies across all
sectors of the economy. Such recovery is also enhanced by
energy and power availability, water, as well as reforms to
the labor laws, to allow greater flexibility for firms in wage
adjustment.
THANKSGIVING.