Economy: Chinamasa’s reasons for optimism

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ZIMBABWE’S economy is on the verge of recession, with low consumer demand and a liquidity crunch putting its businesses under plenty of strain. Against this backdrop, Finance Minister Patrick Chinamasa explains how he has started to rebuild its ties with multilateral lenders in a bid to access new credit. 
The country’s recent economic history makes for torrid reading. In the eight years following the start of land expropriations in 2000 – a time when most of the rest of Africa was growing rapidly – gross domestic product (GDP) shrunk by more than 30% and hyperinflation wreaked havoc on the lives of Zimbabweans.
The inflationary woes ended in 2009 when the country abandoned its local currency for a multi-currency system in which the US dollar predominates. This ushered in a few years of quick recovery.
Return to struggles
However, this buoyancy proved short-lived. Zimbabwe is once again struggling, with a liquidity crunch depressing consumer demand and causing factories to close on a weekly basis. A fall in mineral exports has left the country with a gaping trade imbalance.
The International Monetary Fund (IMF) says the government lacks enough foreign reserves to cover two weeks of imports and believes the current account registered a deficit of 29% of GDP last year. The World Bank forecasts growth of just 2% in 2014 and half that in 2015.
Zimbabwe got a new government after President Robert Mugabe won elections in July 2013, ending a four-year coalition between his Zanu PF party and the Movement for Democratic Change (MDC).
Patrick Chinamasa, previously justice minister, took over as finance minister from the MDC’s Tendai Biti, who was widely praised internationally for his efforts to turn the country around.
Some analysts feared that Chinamasa, a long-time ally of Mugabe, would start his tenure by reintroducing the Zimbabwe dollar. But he insists that will not happen.
“The multi-currency regime will remain,” he says. “I would be suicidal to reintroduce our currency at this stage. We would be out of our minds to introduce it now without any reserves. The currency would collapse overnight.
“There’s no way we can introduce our own currency until the macroeconomic fundamentals are right. That would include building some reserves to act as a buffer [and reducing our debt].”Advertisement

Courting the IMF
Chinamasa has sought to improve ties with the IMF, which launched a staff-monitored programme for Zimbabwe in June last year.
He cites the IMF’s recent appointment of its first resident representative in the country for 10 years as evidence that relations are strengthening and says the two sides broadly agree on what structural reforms Zimbabwe needs.
“We’ve had a very constructive engagement,” he says. “There are some challenges, which are talked about openly. The ratio of wages in the budget is too high, for instance. It’s 85%. We’ve indicated to the IMF that we can’t correct it overnight.”
The discussions are part of attempts by Zimbabwe to get its roughly $12bn of external debt, amounting to almost 100% of GDP, written down and pave the way for it to access new loans.
That process will be a long one. In the meantime, Chinamasa knows it will be tough to revive the economy.
He admits it is in a weak state, but lays the blame on Western sanctions, despite them mainly targeting individuals linked to the government and doing little to prevent foreign companies operating in Zimbabwe.
“Over the past 15 years our economy has been battered by the imposition of sanctions by Western countries,” he tells The Banker. “Because of the sanctions, we are basically on our own. We have to look inward to see what we can do to leverage our own resources and mobilise fresh money.”
Some sanctions could be lifted soon. Since 2002, the EU has halted direct payments of aid to the government under so-called Article 96 sanctions. Chinamasa says these will be removed this year.
“The EU has indicated to us that come November 1, it will lift Article 96,” he says. “In anticipation, we have commenced discussions to prepare for aid assistance. [The EU has] indicated the size of the envelope we should expect. It is [likely to be] €234m.”
This would mark significant progress for Zimbabwe and perhaps lead to other sanctions, including those imposed by the US and former colonial power the UK, to be lifted as well.
Infrastructure drive
Zanu PF launched a five-year economic plan last year called the Zimbabwe Agenda for Sustainable Socioeconomic Transformation, or ZimAsset.
Although derided by opposition politicians for offering few realistic solutions, a core part of ZimAsset is to rehabilitate Zimbabwe’s power and transport networks, which, while still fairly good by African standards, have suffered from a lack of investment in the past two decades.
“We have focused on putting infrastructure right,” says Chinamasa. “Our roads are run down. Our water systems and railways are also run down.
“We have a huge power deficit. We produce 1200 megawatts and our demand is 2200 megawatts. We want to ramp up generation to 3000 megawatts or 5000 megawatts.”
Chinamasa visited China earlier this year to lure investment in the energy sector. He says China EximBank has agreed to put $320m towards a 300-megawatt hydro project on the Zambezi River and that discussions are under way for financing two big thermal power plants.
The mining sector is a priority for the government, which is desperate to boost exports.  Chinamasa says a geological survey needs to be completed to help attract foreign investment into Zimbabwe’s reserves of, among others, gold, platinum and diamonds.
“If we do this survey, we hope to be in a position to approach would-be funders to leverage new resources,” he says.
But one of the main concerns for foreign investors looking at Zimbabwe is its indigenisation laws. These have caused mining investment to fall in recent years, with the government still wrangling with miners over its stipulation that they cede 51% of their equity to black Zimbabweans or state entities.
Chinamasa claims other industries, including finance, will be treated differently.
We have been misunderstood, misinterpreted and misquoted on this vital policy,” he says. “The bottom line of our policy on indigenisation is to scale up local participation in all sectors. In sectors [other than mining], we have never said that if you bring your money… we will have 51% of your money.
“We have always said to all would-be investors: ‘Have in mind to include local investors. They can be of your choosing and they must pay for what you sell to them. There’s nothing that will go for free. But be cognisant that your investments are safer if there is greater local participation’.”
UK banks criticised
Recent reports in Zimbabwe have suggested that a legal amendment will restrict foreign investors to holding no more than 25% of any bank, something that could affect the subsidiaries of UK lenders Barclays and Standard Chartered, and Standard Bank and Nedbank of South Africa.
Chinamasa plays down the possibility of such a change and says Zanu PF wants foreign investment in the banking sector, which is suffering from low capitalisation and non-performing loans running at 17%, according to the IMF.
He points to the government welcoming the takeover this March of Botswana-based BancABC, which has a big subsidiary in Zimbabwe, by Atlas Mara, a London-listed cash shell set up by former Barclays chief executive Bob Diamond.
Yet he is critical of UK banks in Zimbabwe, claiming they do not do enough for the economy.
“I am quite happy for them to stay [in Zimbabwe],” he says. “But we would want them to stay and contribute to the development of the country.
“I observe that they have scaled down considerably. They’ve lost pole position. They don’t participate in any financial instruments that we issue, indicating that they don’t want to make a contribution to the country.
“Barclays and Standard Chartered look through colonial eyes. They only do London’s bidding. If they are told that Mugabe must go, they also take that position.”
Standard Chartered Zimbabwe’s chief executive, Ralph Watungwa, says that the bank has no intention of closing its operations in the country and that it increased its lending to businesses last year. Barclays did not comment.
Chinamasa says a crucial part of rejuvenating the liquidity-strapped financial sector is to recapitalise the central bank.
In November 2013, the government agreed to take on its $1.4bn of debt, which had effectively made the institution insolvent. There is still plenty to do, however, before it can perform its stated duties.
“I’m trying to restore the Reserve Bank,” says the minister. “My policies are to restore it as a lender of last resort, to restore interbank lending and to recapitalise it.
“We’re looking at about $150m to $200m to capitalise it. It won’t be the banker to government or lender of last resort until we’ve capitalised it.”
Asked where the government will find the money, he simply says: “We’ll find ways.”
Given Zimbabwe’s economic position, such funds are likely only to be found abroad.
Chinamasa will be hoping that his efforts to rebuild ties with multilateral lenders and the likes of the EU soon start to reap dividends in the form of new lines of credit.
Otherwise, Zimbabwe could well enter another recession. And unlike in 2009, when it opted to take on the US dollar, this time it will not have any easy options to get out of it.
This article was originally published by The Banker