Friday, June 15, 2018

Navigating Zimbabwe’s debt ‘hangover’

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It is Tuesday, June 5, 2018 in the morning. Al Jazeera is reporting business news. The Turkish currency, the lira, has fallen against the greenback, once again.
The central bank had responded, raising interest rates to an all-time high, despite the president having described high interest rates as “the mother of all evil”.
By Tapiwa Nyandoro
The remark had sparked even more capital flight from Turkey, the news channel reported, resulting in even higher interest rates than would have been the case had the president kept his mouth shut.
Thankfully, it was observed, he had soon given up the fight, allowing the bank, or rather the market, to have its own way.
The reporter attributes the lira crisis, to Turkey’s ballooning domestic debt that now stands at 70% of gross domestic product (GDP). He notes, however, that China’s debt level is double that, but has no such problem. The reason, he proposes, could be due to the pace of debt accumulation, rather than its level. [Could this Turkish phenomenon be what they call an overheating economy, I wondered?
At the back of my mind was the question: At what pace of borrowing could Zimbabwe’s economy grow, without going up in flames? Exuberant, but reckless talk of $18 billion in foreign direct investment (FDI) lined up for Zimbabwe was triggering the concern, though common sense suggests it is electioneering behind the wild exaggerations. To be fair, however, without stating the period covered by the $18 billion in FDI, the claim is meaningless.
Worryingly, though, the profile of the investors that had appeared in public with President Emmerson Mnangagwa, and the capital intensive, long term nature and low returns associated the projects, suggested that as much as 80% or more of the $18 billion would be debt finance.
Next on the news was Greece. It has been in an economic crisis for the past eight years. During the period it had been made to swallow a bitter austerity pill, in return for a huge bail out after a huge bail, but all rewarded by debt relief.
Salaries had gone down by 15% over the period, and the minimum monthly wage was now just over $600, an embarrassment for a European country. But nothing seemed to have worked. And Greece was getting ready for yet another bail out. This time, the anchor reported, it will be the biggest in the world’s history.
Greece is lucky to be in the European Union, I thought. No such bailouts are likely for Zimbabwe. A sense of desperation and sadness looked like it was overtaking me as I left home for the Passport Office. For the mood I was, it was the wrong destination. Dirty, overcrowded, narrow corridors, low ceilings, despairing and desperate faces, dark and dingy describe the environment and place.
I conclude that a country with a Passport Office like that cannot be open for business as Mnangagwa would like to think. The office could be more efficient and friendly. But it is not. It is cold, dark, inefficient and hostile. It looks neglected and angry too. It leaves you ashamed of being a Zimbabwean.
Ashamed and sad, I trudge on to the office and to the morning’s papers. The papers have good news. The police had allowed the main opposition to demonstrate. Zanu PF’s so-called youth league, which had intended to disrupt the demonstration, had seen the light. Most likely, however, it was the uncompromising mood of the police and the President, that had opened eyes and minds, making the usually rabid youth league see sense.
To add to the good news, the day’s Press also reported of a British business delegation meeting the Zimbabwean Cabinet in Harare the previous day. The British businesses in the meeting, a delighted Zimbabwean International Relations and Trade notes, have a combined market capitalisation in excess of a trillion dollars. As I read, my mind goes back to Greece and Turkey. And, of course, Malaysia too, for apparently Malaysia, according to the Al Jazeera business bulletin, had shunned piling on debt in its own economic recovery after the 2008 global financial crisis. The strategy, funded from domestic resources and grit, had worked far better than debt financing led strategies adopted by the other two countries.
According to NewsDay of the following day [June 6, 2018], it is a point the Zimbabwean Finance minister accepted. The nation was already defaulting on its external debt. Its Treasury was now looking for equity FDI rather debt FDI. The truth was the country, as currently structured, was no longer bankable. It has an $11 billion external debt, ballooning budget and current account deficits. Most of that $18 billion FDI wishlist would go up in smoke as promoters would fail to secure co-investors and off shore loans. The country was well trapped in a so called “doom loop” thanks to years of atrocious governance.
The Turkish story, appears again later in the day, as I switch from the local stories to a global one. According to The Economist [April 14, 2018], the Turkish lira (then) had fallen “to another low against the dollar because of concerns about Turkey’s push for [economic] growth at any cost.”
Recep Tayyip Erdogan, the Turkish President, had unveiled an investment package that week, calling, in the process, for interest rates to remain subdued. That, like now, had spooked investors, “who were already worried that Erdogan’s pronouncements on monetary policy were hampering the central bank’s freedom to raise rates.
In conclusion, the British weekly noted that Turkey’s inflation had remained stubbornly high at 10%, and the current account deficit had risen on an annual basis.
Even before it has started its economic revival program in earnest, Zimbabwe’s inflation rate may be at least thrice that of Turkey, and no one knows who in town is formulating the monetary policy, if indeed, without a local currency, there is one.
Darkness, mistrust, ignorance, lack of imagination and fear, also shroud the fiscal policy. But wait a moment. There is the Malaysian model.
Zimbabwe has around $12 billion, give or take $2 billion, that its chaotic land reform programme froze out of the economy. That could be unlocked, as the tradable value of land in the communal farming areas.
Suddenly, looked at this way the $18 billion in investment over 10 to 12 years, appears plausible, if not an under-estimation. The middle income status that is ED’s vision 2030 looks within reach, especially if the British are partners in resolving all legacy issues pertaining to the land reform programme. But this is not enough. The same amount, even virgin then, was available before colonisation and at independence. Two key ingredients were missing.
These intangibles assets, worth even more billions are knowledge and the rule of law. The world’s financial centres, such as London, Washington, Frankfurt and Hong Kong, thrive on these two assets. Add land to these two, and the sky is the limit for Zimbabwe’s economic revival. The trio of assets should see productivity in agriculture increase at least seven fold in agriculture within 10 to 12 years.
With that realisation, the feeling of desperation and the sensation of sinking recedes as the day came to a close.
Away on the campaign trails the political leadership talked of bullet trains and $18 billion in FDI pledges. Maybe someone should have taken the British business delegation on a tour of Harare’s Passport Office before they left the country.