The Minister of Finance and Economic Development Prof Mthuli Ncube has received a huge backlash from the opposition and the general public for not enforcing swift measures to remove Bond Notes. Questions have arisen as to why the Minister is not scrapping off such an “evil currency.” The preferred solution by the opposition has been to join the Rand Union and dollarize the economy. Well, considering the “face value” impact that dollarization had in 2009, it seems plausible to make such a move. It’s a valid and strong proposition. I then became curious to know why the Finance Minister is “arrogant” to maintain the status quo with regards to Bond Notes. Is it because he wants to allow the economy to gradually re-dollarize? or he aims to achieve certain macroeconomic targets that might be oblivious to the general population.
His theme “austerity for prosperity” has resulted in him being typically labelled clueless and captured. Conceivably he is clueless, but somehow, I still feel the weight of his CV needs us to avoid judging him too early. The man is not perfect, he has had his failures in his career, but would he also be totally wrong about the Zimbabwean economy, Maybe. Despite all that, I recognized something interesting on the Bond Notes saga and why they aren’t being scrapped off yet. I will put forward my reasonable argument by objectively analyzing the complex dilemma between the informal sector, government revenue maximization, trade deficit and foreign debt repayment plan. I will refer to this economic dilemma as the national fiscus complex quadrant.
Informal Sector: Zimstat report states that 94.5% of the 6.3 million people defined as employed are working in the informal economy. The most significant number (4.16m) is made up of smallholder farmers in communal agriculture, followed by those in trade and commerce. Some are said to occupy informal jobs in manufacturing, mining, education and transport (Economist Intelligent Unit, 2018). Taken at face value, these figures put formal-sector paid employment at only 350,000 people. Adopting a narrower definition of informality increases the number to 970,000 and lowers the informal percentage from 94.5% to 86%. Whichever estimate is used, however, the size of the informal sector is exceedingly greater than perceived (EIU, 2018). Such an economic structure results in many economic activity being carried out outside the formal regulatory and monitoring economic system, in the process having a huge impact on government tax revenue.
External Debt: When Prof Mthuli Ncube was sworn in, at the heart of its economic problems was a $17bn domestic and foreign debt, a $1.8bn trade deficit. The deficit has worsened dollar shortages and lack of confidence in the governing party by citizens still traumatized by hyperinflation. This came as the country’s debt is now well over $13 billion, a violation of provisions of the Debt Management Act stipulating that government debt should not exceed 70% of GDP, with the debt now estimated at 79%. These are the fundamental challenges that the Minister is faced with, and he must discover ways to maneuver around that, without the help of any multilateral organization or foreign government.
Trade Deficit: Zimbabwe suffers one of the lowest capacity utilization rates of less than 50% in the SADC region. Industrial capacity utilization only peaked at 57,2% in 2011 and started sliding to 44,2% in 2012 and 39,6% in 2013 and even after Hon. Biti left, it continued to slide to 36,3 % in 2014 and 34,3% in 2015. This trend resulted in local products being in short supply and expensive, which ultimately exerted an upward pressure on cheaper imports.
Zimbabwe’s trade deficit has considerably been on the negative side, with its all-time high being recorded a year after dollarization in 2010. In a bid to reduce the trade deficit, the government subsequently introduced the bond notes in 2016. The policy move was aimed at reducing illicit flows of money, reduce imports whilst promoting exports and also encourage necessary local spending with anticipated economic ripple effects of spurring productive capacity and export growth in local firms. It was a great idea on paper, but many issues where not factored in, chief among them being the “perception risk” of government public policies by Zimbabweans in general.
Government Tax Revenue: Government revenue steeply increased in 2009 after the dollarization of the economy before stabilizing since 2010. However, the government has struggled to support its bloated civil service, pursue debt repayment and invest in infrastructure and social services such as education and health. Hon. Biti did extremely well in ensuring that the government revenue meets its expenditure. During his tenure, Zimbabwe recorded its lowest budget deficits.
However, the shortfall was in the failure to generate enough revenue for other key areas i highlighted above. Most of the revenue received went towards supporting the government bloated wage bill. The situation was made worse after 2013 when the budget deficit ballooned under Hon. Patrick Chinamasa. So the challenge facing Mthuli Ncube is to simultaneously ensure the government collects enough revenue to support the civil service, pay back loans and invest in other key government sectors such as health and education.
Therefore, the following questions need to be answered:
How can Mthuli Ncube ensure the government collects enough revenue to support the civil service, pay back loans and invest in other key government sectors with such a highly "nontaxable" informal sector ?How can the Bond Notes contribute towards maximizing tax revenue ?
The hate towards Bond Notes is justifiable and is primarily driven by lack of public trust in the ability of the government to objectively control money supply especially after the hyper-inflationary period of 2008. Furthermore, most informally employed Zimbabweans depend on cross-border trading hence the introduction of a “currency” which is not accepted as a legal tender outside Zimbabwe was going to adversely affect their businesses. Also, the pressing need for foreign currency by local businesses as well to purchase equipment, raw materials etc, inevitably led to the development of the forex illegal market. The rates in the black market differs from the 1:1 government narrative since black market rates are primarily dependent on the local demand for forex or on the supply side dynamics. Having appreciated these challenges, the government then made strides in expanding and promoting electronic money supply as an alternative and compliment to Bond Notes.
So, what will happen if Prof Mthuli Ncube dollarizes ?
The adoption of cash as the preferred payment method in the informal sector implying a decline in the usage of electronic money;Reduction in tax-based government revenue as cash payments to VAT unregistered informal businesses increase;A huge set back in debt repayment program preventing new lines of credit being opened;An increase in imports (widening trade deficit) since it will be easier to convert USD to ZAR;Decline in the purchase of local products (severely affecting recovery trajectory for local firms);Lastly, increase in illicit flows as more money will be easily pumped outside by foreign businesses.
Such a dilemma explains why Tendai Biti (Minister of Finance 2009-2013), told debt cancellation campaigners at a conference in 2009,
"Zimbabwe does not have the capacity to pay the debt and we will not pay this debt”
In 2017 Biti also said,
“repaying loans to the World Bank is criminally irresponsible and treasonous.”
Since 2009, Hon. Biti has argued that Zimbabwe’s economic indicators reflect that of a low-income country and therefore Zimbabwe should qualify for the Heavily Indebted Poor Countries Initiative (HIPC). He has hammered on that point since countries that fall under the classification of HIPC benefit from exceptional arrears clearance support from the IFIs. In many countries however, huge external debts have been largely associated with low economic growth hence clearing, the debts will represent an encouraging start.
What I then realized is that, Hon. Biti didn’t provide a logical plan on ways to maximize government revenue when faced with a highly informal economy which is driven by cash payments. It was therefore sensible for Hon. Biti to push for HIPC classification whilst using the little government revenue available for what he termed “national development” initiatives whilst neglecting the external debt and the expanding trade deficit. Hon. Biti is more of a populist so there was no way that he was going to pursue austerity.
Therefore, it seems Prof Mthuli Ncube is adopting the sustainable yet tough route that Biti was scared to take, which involves prioritizing debt repayment first in the short-term through high electronic money transaction tax of 2%. The size and volume of transactions carried out through electronic money transactions is huge enough to all Prof Ncube to be confident about the country’s ability to repay its debt to IFIs by November 2019. In his 2018 Monetary Policy Statement, Mangudya said more than 96% of the 1 billion transactions processed in the entire country in 2017 were through electronic and mobile banking systems.
Ultimately, Prof Mthuli Ncube “reluctance” of urgently removing Bond Notes is underpinned by the following factors:
Bond Notes create continuous demand for foreign currency and usage of electronic money;Electronic money is used by both informal & formal sectors enabling easier transactional taxing;The volume of transactions is immense hence more revenue can be obtained;The challenges in obtaining foreign currency will limit illicit flows whilst suppressing imports and stimulating local products demand;Allowing duty to be paid in forex will also imply that the government has the enough forex it needs for its various key expenditure;Lastly, 2% electronic money transactional taxing will promote faster accumulation of revenue needed for external debt clearance by end of 2019.
From such an objective perspective, it seems plausible for Prof Mthuli Ncube to typically take such an unpopular objective stance. In his own words, the Minister said that,
“The economy has been informalised, so measures that were effective before in broadening the tax base are no longer effective. We need to come up with new measures for that and this is one such measure. That is the norm. I know it is a shock to people, but we do need austerity now. We need to fix our country together.”
In such a unique case, why would he seek to dollarize the economy? The critical goal of stabilizing the economy won’t be achieved if the government doesn’t get enough revenue. Taxing electronic money transfers whilst complimented using the Bond Note is the solitary way the economy can stabilize.
Conclusively I would say that, the Bond Notes were introduced to resolve certain issues I have highlighted in this text but to a broader extent, have stifled business growth in Zimbabwe. Several key issues were neglected and overlooked in their practical implementation. Regardless of their net effect, Bond notes might be serving Prof Mthuli interests better than they did to Patrick Chinamasa.
His most daunting challenge is undoubtedly the local opposition that has advanced a narrative of labeling Prof Ncube as a tool for to robbing innocent citizens. Politically, worsening “public trust” and “perception risk” of the government remain the solitary ways that the opposition can use to affect the policy objectives of the current government. Besides, it is well known that opposition parties in young democracies thrive from the failures of the ruling government. So why would you objectively evaluate the policies and not trash them altogether.
In as much as the Finance Minister would genuinely want the economy to re-dollarize as soon as possible, he knows precisely that it’s rather too premature as this will affect the short-term stabilization goals as stated in the Transitional Stabilization Program (TSP) policy document.
If you have any comments please feel free to comment below. Any feedback will be greatly appreciated.
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