Former Delta boss urges US must lift sanctions on Zimbabwe to propel the country forward

QUESTION #3

Is President Emmerson Mnangagwa making any Reform efforts, and if so, what progress is being made? What are some for the hurdles to making economic reforms?

1. Overview

My considered view is that there is a crisis of expectations in Zimbabwe.

The ordinary person expected a very quick turnaround of the economy following the July 2018 elections. These expectations are misplaced. Zimbabwe has been in the grip of misrule for 37 years and the damage done to the economy to the country’s reputation and its institutions will take many years, if not, decades to repair.

It is from this perspective that I evaluate what President Mnangagwa has achieved since the July 2018 elections.

2. Evaluation of Progress

2.1. What has been achieved to date?

1. i) Cabinet Composition

There was wide support for President Mnangagwa’s decision to let go long-serving party loyalists and bring in fresh talent into a significantly trimmed cabinet. Key new appointments were made in the ministries of Finance, Industry, Mines and Transport-all now headed by technocrats. The private sector in Zimbabwe welcomed these appointments.

This cabinet has only been in office since September 2018. It is too early to objectively evaluate their performance after just three months in office.

1. ii) Opening up of Political Space

• The Political Space has been opened up significantly. Zimbabweans now express themselves much more openly than during the Mugabe era. Press freedoms are in place for the print media while the state electronic media is still to be reformed and liberalized.
• Political demonstrations are allowed and the recent demonstration by the main opposition on November 29, 2018 is a case in point.
• The move to open to the public and to broadcast live on national television the proceedings of the Constitutional Court electoral challenge hearings as well as the public hearings held by the Commission on the post-election violence of August 1, 2018 are both major milestones in establishing transparency in Zimbabwe.

iii) Anti-corruption drive

• Several prosecutions of high level people are currently underway. While there is perceptions in some quarters that there is political bias in the selection of those to be targeted –the prosecutions indicate a toughening of the President’s stance against corruption.
• Legislation has recently been passed to toughen measures against money laundering and illicit transactions on the parallel markets.

1. iv) Change of leadership narratives from focus on politics to focus on the economy

The current government has moved sharply to refocus on economic matters. The mantra “Zimbabwe is Open for Business” is now the mantra of Government. However, the private sector wants to see more action than rhetoric on the ground and continues to press government for accelerated reforms especially in the areas of fiscal reforms and ease of doing business.

1. v) Articulation of a National Vision and Economic Road Map for Zimbabwe.

The President has articulated Vision 2030 whose goal is to turn Zimbabwe into an Upper Middle Class Economy by 2030 with a per capita GDP exceeding US$3 500 per annum. Zimbabwe is currently a lower middle class economy.

President Mnangagwa’s Government in October, 2018, launched the Transitional Stabilization Plan (TSP) which provides a road map to economic recovery for the next three years. Subsequent to the launch of the TSP the government put together a National Budget under the theme “Austerity for Prosperity”. This budget –announced on November 22, 2018 puts the attainment of fiscal balance as the centre-price of the recovery plan. The key goals are well-articulated and include: –

• Reducing the fiscal deficit to 5% of GDP by 31 December 2018 from a projected 11.6% by 31 December 2018. The intention is to achieve this through cuts in Government expenditure, drastically curtailing issuance of Treasury Bills and desisting from resorting to Central Bank Overdraft Facilities.
• Expanding revenues through taxation measures. Two very significant taxation measures have already been implemented.
• Reducing the current account deficit by compressing imports and collecting import duties on luxuries in hard currencies.
• Shifting expenditure from consumption to capital or productive spending.
• A GDP growth target of 3.1% in 2019 down from a projected 4% growth in 2018.
• An average inflation of 10% by end of 2019 down from 20.9% in October 2018.
• An aggressive timetable for reforming state owned enterprises has been announced.
• Implementation of Debt Resolution Program with international lenders before the end of 2019.
• The Government has embraced the proposal for an IMF Staff Monitored Program ( SMP) which is about to commence.

1. vi) Aligning Zimbabwe`s Laws to the 2013 Constitution

The perception of most observers is that Zimbabwe is moving too slowly on the road to aligning its statutes to the new constitution.

My investigations revealed that of Zimbabwe`s 299 pieces of legislation 255 of these needed to be aligned to the constitution. To date, I am told, 206 of these statutes have been aligned to the new constitution with only 49 outstanding. Among the outstanding ones are the two controversial pieces of legislation namely, POSA (Public Order and Security Act) and AIPPA (Access to Information and Protection of Privacy Act) which are widely regarded as being curtailing civil liberties.

On enquiring what the way forward is with these statutes I learnt that the reform of these statutes is on the agenda of the current Zimbabwean Parliament.

2.2 Where has progress been less than expected from a business perspective?

1. i) Reduction in Government Bureaucracy

• While the size of the cabinet was reduced, it is the private sector`s view that much more needed to be done to reduce head-count at the top – at both ministerial and civil service levels.
• Although the President, Cabinet and senior civil servants and executives of state enterprises will take a 5% pay cut from January 2019, the public wants to see more sacrifices borne by top government leaders than is currently the case. This is necessary so as to make the hardships endured by the ordinary citizen more bearable.

1. ii) Implementation of measures to improve Country Competitiveness.

• Very high operating costs driven by currency distortions, high cost of utilities and generally high cost of doing business still prevail.
• Although the Government has established a one-stop-investment authority (ZIDA – Zimbabwe Development Agency), its operationalization is still unclear to the private sector.
• Policy co-ordination across Government agencies requires optimization so as to minimize frustration for prospective investors due to regulatory bottlenecks.

Iii) The Sequencing of Policy Measures has been less than optimal.

• The implementation of taxation measures ahead of government expenditure cuts was very badly received by an already overtaxed population that wanted to see the benefits of the privileged elites in the public sector reduced first before new taxes were imposed.
• The private sector understands the need for Government to create fiscal space through taxation if it is to curtail printing of money. However the sequencing of the measures could have been handled better.

1. iv) Anti-corruption Drive needs to be more vigorous

The private sector views both private sector and public sector corruption as cancers that need to vigorously attacked otherwise they will frustrate economic reform efforts.

1. v) Currency Reforms

• There is a significant section of the private sector that wants to see currency reforms done immediately so as to remove the current pricing distortions as well as the system of allocating foreign currency which is prone to abuse.
• Another view, however, is that currency reforms cannot be undertaken without two major issues being tackled first. These two issues are; the need for fiscal discipline on the part of government, and the need to have in place a Foreign Currency Stabilization Fund to stabilize any domestic currency which may be introduced as part of the currency reforms.

2.3 What are some of the hurdles to making economic reforms?

There are two major categories of hurdles that face the Government of Zimbabwe as it embarks upon economic reforms. The first category is that of Economic Sanctions imposed on Zimbabwe by the USA (ZIDERA Act of 2001 as amended in 2018); Canada and the European Union. The second category is to do with the potential adverse consequences of Economic Reforms. Let me address each in turn.

2.3.1 The Impact of Economic Sanctions on the Post-Election Economic Reform Agenda in Zimbabwe

Sanctions continue to retard economic recovery in Zimbabwe in a number of important ways.

1. i) Trade Sanctions

In Zimbabwe, trade sanctions impact negatively on economic growth through denying the country access to foreign lines of credit, which ordinarily finance external trade and access to markets, particularly the USA market, through exclusion from AGOA. Furthermore, the country’s export competitiveness is adversely affected by negative perceptions of the country resulting in high country risk profile translating into higher country risk premiums.

Due to the above the private sector in Zimbabwe finds it very difficult to access affordable external financing to retool and modernize plant and equipment and access technology.

1. ii) Financial Sanctions

The Zimbabwe Democracy and Economic Recovery Act (ZIDERA) has proved to be a great obstacle for Zimbabwe to access foreign finance. USA financial institutions are not at liberty to provide well-structured financial support against Zimbabwe’s minerals (gold, platinum, cobalt, lithium, etc.,) due to OFAC compliance rules. The same it for banks in Europe due to compliance, reputation and association risks.

As a result of the impact of ZIDERA on the financial sector, the Zimbabwe banks have lost more than 100 corresponding banking relationships over the past 10 years.

The strong view of the private sector in Zimbabwe is that the imposition of sanctions on Zimbabwe by the US and the EU have branded Zimbabwe and its entire financial linkages with the rest of the world as representing high risk thereby making the country a compelling target for de-risking interventions by leading correspondent banks in the USA and Europe.

iii) Economic Sanctions

Due to a combination of sanctions and its own bad track record of debt servicing Zimbabwe is unable to access balance of payments support and credit and technical support from most of the major multi-lateral Financial Institutions (MFIs).

The private sector’s view is that the country’s failure to access long term concessionary funding from developmental institutions such as the World Bank and the African Development Bank (AfDB)-among others, has created an unsustainably large deficit in infrastructure development in Zimbabwe – in particular the rail, road and water related infrastructure. The dilapidated state of all these constitutes a real tax on business by hard-wiring inefficiencies into the entire economy.

Businesses in Agriculture, Manufacturing, Mining, Tourism, Financial Services and others all desire to see sanctions removed so that country risk is reduced and access to affordable long-term credit is restored while access to global markets is opened up.

The private sector’s strong view is that sanctions – although they are supposed to be targeted at certain individuals and entities – have the unintended effect of pulling down the entire economy of Zimbabwe and the welfare of all its citizens. Sanctions do constitute a real stumbling block to the efforts of the current Government to get the country’s economy moving forward again.

2.3.2 The Unintended Potential Consequences of Economic Reforms

In embarking upon Economic reforms that are driven by a desire to restore fiscal and current account balance, and to liberalize the economy through currency and regulatory reforms, the government is caught between a rock and hard place.

While tough economic reforms are unavoidable and long overdue, their impact will cause significant pain on the intended beneficiaries – the citizens – at least in the short to medium term.

Four potential unintended risks stand out: –

Recession Risk

Will the Government’s reversal of expansionary fiscal policies (printing money to support agriculture, for example) tip the country into a contraction phase? If so, for how long?

Will increased taxes (2% on financial transactions and increased fuel duties) suck out too much from people’s disposable incomes precipitating a form of recession?

Inflation Risk

If market forces are allowed to prevail in the allocation of the scarce foreign currency will there by a deep devaluation causing local prices to run and pushing the country into an inflationary spiral?

To some extent this has already happened as informal markets took a position on the currency. Should the Government mobilize a stabilization fund to support a local currency first before introduction currency reforms. Where does this stabilization fund come from given the current international isolation of the country and the existing sanctions?

Will the reforms cause socio-political instability?

There is no doubt that in the short term (12-18 months) the reforms will cause a great deal of hardships among Zimbabwean citizens – particularly the vulnerable. Will this cause civil strife in the form of riots and escalating political tensions.

Will the reforms lead to increased company failures?

As the reforms begin to bite there is every possibility that some companies may fail as disposable incomes drop, as liquidity tightens and as interest rates rise.

All the above pose a significant hurdle to the policy makers in President Mnangagwa’s administration. The observation of the private sector is that because of the above risks, the proper sequencing and pacing of the reform programme becomes crucial.

A ‘big bang’ approach to economic reforms may have dire unintended consequences given the fragility of the economy. In the absence of significant international financial support, a gradual and nuanced reform process may be more appropriate.

Continued next page

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