Ncube has a plan, but is it gobbledegook?

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Bloomberg News

Zimbabwean finance minister Mthuli Ncube has laid out a plan to end the nation’s two-decade stand-off with international creditors and has dismissed rapidly accelerating inflation as “wage compression.”

Ncube also said the country would establish a monetary policy committee within a month that will cut interest rates, begin selling bonds with maturities of as long as 30 years, and proceed with a plan to privatise everything from state telecoms companies to timber plantations.

By settling arrears with multilateral lenders, the nation hopes to access the finance it needs to revive the economy.

Ncube, a Cambridge University-trained economics professor, has reined in state spending and boosted tax revenue. Still, the introduction of a new currency in June, accompanied by a ban on the use of the dollar, has seen the rapid erosion of spending power with the Zimbabwe dollar (Zim dollar) now trading at almost 10 to the dollar after its predecessor, a quasi-currency known as bond notes, was officially said to be at parity as recently as February.

Now many of the country’s 400,000 civil servants, who form the bulk of the middle-class, are earning less than the $1.90 a day defined by the World Bank as the line below which people are living in extreme poverty.

Annual inflation, the release of which has been suspended for six months, is officially 176% and shortages of fuel and bread are widespread. The government’s inability to pay for adequate electricity imports has crippled the economy with power outages of as long as 18 hours a day. The measures, which Ncube conceded are painful for citizens, are necessary if the country is to regain a sound economic footing, he said.

Fiscal victory

“We can declare victory on the fiscal front,” Ncube said in an interview on Thursday in Harare. “Everything that I say, I implement.”

Under a debt-settlement plan, which Ncube said he’s discussing with creditors, Zimbabwe would complete an International Monetary Fund (IMF) staff-monitored programme in January. It would then:

Borrow the $1.9bn it owes the World Bank and the African Development Bank from the G7 industrialised nations.

Immediately win $1bn in relief from the two lenders, which would be paid back to the G7 creditors.

Expect so-called Paris Club creditors, to whom it owes $3.8bn in bilateral debt, to take a “haircut”.

Zimbabwe’s total external debt is $9bn, which includes commercial loans.

IMF resident representative Patrick Imam said conditions are not yet in place for the fund to provide financial support for Zimbabwe. The IMF’s staff-monitored programme is being used to support economic and governance reforms in the country.

“Zimbabwe needs to build a track record to prove it can implement reforms to tackle deep-rooted problems, as the hurdle rate for a financially supported programme is high,” Imam said in an e-mailed response to questions.

To regularise the nation’s monetary system, Ncube said the authorities will establish a nine-member monetary policy committee within a month that will reduce interest rates from 50%. Within 12 to 18 months, the nation plans to sell domestic bonds with a duration of as long as 30 years to fund infrastructure. In time, it will approach international markets, he said.

‘Economic gobbledegook’

While Ncube has won praise for imposing financial discipline on a notoriously profligate government, his statements on inflation strained the credulity of some analysts. He said annual inflation data showed that wages haven’t adjusted quickly enough to the new exchange rate, and not that the country is heading for hyperinflation.

“What people are feeling is really wage compression,” he said. “Prices adjusted instantly to the exchange rate, but wages have been too slow to catch up with the adjustment. The issue is about wage adjustment and I’m a big champion of wage adjustment.”

The finance minister is talking “economic gobbledegook”, said Steve H Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore. “By my measure, Zimbabwe’s inflation is the second highest in the world at 570%.”

Even his supporters say that if his measures work, there is a lot of hardship in store for Zimbabweans.

“This situation is something that can persist for anywhere between three and five years of pain,” said Lloyd Mlotshwa, head of equities at IH Securities in Zimbabwe, who praised the finance minister for raising fuel and power prices that were previously subsidised by the government. “What can shorten this period is if there are funds poured in to plug the gap.”