Tuesday, 15 November 2011

Delta Corporation continues to lead the way

Delta Corporation is a Zimbabwe based beverage manufacturer and the sole distributor of Coke products in the country also it is one of the country’s solid performers on the stock market. A few days ago Delta Corporation announced its financial results for the interim period ending 30 September 2011 and nearly every aspect of the company’s performance underlines why it is one of the most stable and best performing stocks on the Zimbabwe Stock Exchange.

 Major highlights include an increase in revenue from $181.29 million for the six months ending September 2010 to $254.81 million for the corresponding period ending 30 September 2011 an increase of 41%. In actual volume terms beverage volumes were up by 23% overall with lager beer and sparkling beers leading the way 30% and 33% respectively. Delta attributes this performance to the stable macro-economic environment that currently prevails. However interestingly Delta believes the communal and small scale farmers growing cash crops such as tobacco and cotton contributed significantly to its revenues as the increased disposable incomes resulted in more people in this category buying Delta’s products.
 In terms of profitability, the operating income grew by 48% to $40.4 million during the period under review as the company’s costs grew slower than revenues. Consequently the dividend during the period went up by some 66% to 0.83 cents while total assets grew by 32% due to expenditure of $82 million. While the stable economic environment ensured this kind of performance things could have been markedly better had the perennial problems which have afflicted the economy for years been dealt with.
 Power outages and shortages continue to be a challenge to Delta just like every other company causing disruptions to production and farming operations. Liquidity problems also continue to be a factor although in Delta’s case borrowings grew to $40 million at interest rates below 10% per annum which is significantly lower than current market rates of 30% to 40%. There is therefore a need for government to make real efforts towards ending or limiting the impact of these factors on economic activities because doing so may potentially accelerate the rate of economic recovery.

 On the stock market Delta Corporation is the most heavily capitalised stock at about $800 million and along with Econet and Innscor they are the well-recognised blue-chip counters that have annual revenues at or approaching $500 million. Delta Corporation believes with the current economic environment expected to remain in place, it will continue to drive profitable volume growth while focusing on the delivering on all its goals. For more information on these results you can log on to www.delta.co.zw

Saturday, 5 November 2011

Competitiveness and efficiency should inform policy

The question of ‘unfair’ trade practices by certain trading nations continues to dominate debate between competing interest groups here and with the finance ministry giving in to protectionist lobby when it reviewed the fiscal policy back in July 2011. At the time government said it was imposing modest measures to protect local producers or to at least help them to recover without having to face extreme competition. As a result imported foodstuffs like the edible cooking oil and mealie meal were slapped with an import duty effectively handing an advantage to local producers.
 Pressure has since been growing for the government to similarly intervene on behalf of industries in similar circumstances such as the textile which claims to be close to shutting down if nothing is done about these cheap from Asian imports which are sometimes heavily subsidised.
However is imperative to remember that soon after duty was reintroduced there was an outcry by consumer groups who felt that local producersabused this to make huge profits. In other words the whole campaign and pleas for cushioning from cheap imports was just a ruse to allowsome in the concerned industry to increase profits without necessarily improving productivity.That is the whole concept of rent seeking;  less efficient local producers will sometimes campaign for the government to impose some kind of anti-competition measures which helps them to earn higher profits.
Now because the government bought into this back in July 2011, more businesses have since felt encouraged to campaign for similar measures to be incorporated in the upcoming budget statement for the coming year. The textile industry which is one industry to really feel the impact of cheap Asian imports was in the news last week making its case that if nothing was done then the whole textile industry would simply collapse. Next the National Economic Consultative Forum made a presentation which basically advocated for an even more punitive duty on imported products like soyabean, cooking oil, palm cooking etc to ostensibly protect jobs.
However this argument is somehow flawed because it completely ignores the other side of the argument, the consumer’s welfare. Granted the competition facing local producers is sometimes not fair as they have to compete with heavily subsided importsand currencies of trading partners that are manipulated to give an unfair advantage. The textile industry is one industry that has really articulated well this position and they make a compelling case for the government to do something. However consumers too need recognition and the whole debate needs to accept that competition is the only way a correction of some of the anomalies can be made.

For instance just last week, the Commercial Bank of Zimbabwe announced that it was raising funds to help to revive the production of soyabean whose production plummeted when the government undertook its controversial land reform process a few years ago. This fund-raising initiative was necessitated by the fact that major consumers of this commodity National Foods, Olivine Industries currently have to import a major proportion of this commodity because there continues to be a shortage on the local market. So it clearly does not make sense for the government to impose stiffer duty on a product that is in short supply, if anything the present duty on this commodity should be scrapped.
That way these companies would actually create jobs as the cheap soyabean would in normal circumstances result in a cheaper finished product which would then increase its demand forcing these companies to hire more labourers to match the increased productivity. This is more palatable from the standpoint all stakeholders and more importantly this does not promote or encourage inefficiency especially when the actual commodity is in short supply. Duty on this commodity will not encourage farmers to produce more but it will only succeed in making the final product more expensive.
In any case agriculture output has not recovered since the land reform because the new farmers are still ‘learning’ hence the low output. So instead of seeking government protection these lobbying groups should seek government assistance in educating or training of farmers to produce other crops like soyabean. In the end an abundant supply of soyabean will lead to lower cost to producers who will then pass this onto consumers in the form of lower prices.
 Also the use taxation to undercut what may seem to be unfair competition should not be the only tool used to intervene in every circumstance, but each case should be examined on a case by case lest we run the risk of succumbing to the designs of protectionism advocates.

Tuesday, 18 October 2011


The informal economy has been credited for absorbing a number of the unemployed and for sustaining the economy during country’s most turbulent years. Information made available by ZEPARU reveals that 60% of economic activity is in the informal sector and thousands are earning a living within this informal setting. There is of course the famous Mbare Musika, Mupedzanhamo market, the flea markets across the country and within the ranks of informal traders or entrepreneurs are carpenters, welders, electricians, builders and the list goes on.
 In this article we highlight a very vibrant informal industry, the Glenview home industries located in the Glenview high density suburb of Harare. It is there where one can get a glimpse of what the informal economy is all about as well as to understand its importance to the greater or rest of the economy. There are probably hundreds of traders, entrepreneurs, workers involved in this vast furniture making complex. The foremost business there is the manufacture of home furniture units such as lounge suites, beds, televisions stands, wardrobes etc. and there is a number of different types of these on display. A good number of the entrepreneurs there are involved in the actual making of everything on display although in some cases they do employ workers to assist them.
 However that it is only the beginning because these are very busy entrepreneurs who do not have the time to go out and source materials and this is where the other group of enterprising individuals comes in. There are several stalls or retail outlets numbering in the hundreds and here everything that the furniture manufacturer needs he/she it will be found. These traders sell timber, the adhesives, paints, nails, all the hardware needed and all of them are located inside this teeming complex adding convenience to manufacturers. The other group in this value chain includes those individuals providing food to traders and workers, those selling airtime, those providing entertainment.
Now when customers purchase furniture there is ready transport that is provided for by over a 100 trucks waiting outside the complex. It gets even crazier because the congestion inside the complex makes it difficult for vehicles to go in and some enterprising youths have cashed in by offering to carry the sometimes heavy furniture with bare hands for a small fee. To round it off you then have the noisy yet very persuasive salespersons that will pounce on anyone showing even the most remote interest in their furniture. This Glenview complex is what one might refer to as the Silicon Valley of furniture albeit on a much smaller scale because you have every business that is directly or indirectly involved located at this place and this quite a novel for the country.
Business and activities normally spike when fellow informal entrepreneurs, that is the tobacco farmers descend on Harare to sell their produce. It is not clear why but most small scale tobacco farmers will visit this place each year to buy after selling their crop and it is during this period especially now in the era of dollarization that one can appreciate the significance of the informal economy to the formal economy. The furniture’s quality is quite good and a number of furniture retail outlets in Harare and outside Harare actually source their merchandise from here.

However clearly there are some problems that are inhibiting the flow of activities and perhaps the further growth of this industrial area. The sanitation is not presently very good and space seems to be getting less to allow for others to join in. The road network appears overwhelmed most of the time and recently there was a fire that destroyed furniture worth thousands of dollars since these traders were not insured they suffered the losses.  
There are no reliable statistics on the figures involved in the informal economy that may perhaps be the reason why government has not really come to the party in terms of supporting this informal economy. However what is happening there is real, people are earning a living from this and it is imperative that due recognition and support be accorded. In fact support should be accorded to all small scale traders throughout the economy as evidence on the ground suggest doing so drives the economy forward. 

Monday, 10 October 2011

gold or commodity currency for Zimbabwe

Since 2009 when the country officially adopted the so-called multiple currency system following the demise of the Zimdollar, there have been some muted calls for the return to a local currency because of certain obstacles associated with the use of foreign currency as legal tender in the country.  In fact a few months ago the central bank made a call for the introduction of what is known as gold backed Zimdollar, basically paper money backed by gold or other precious minerals.
A number of factors are motivating this kind of agitation and these range from the very sentimental reasons to arguments that could actually pass for valid economic rationale. To start with politicians, the so called nationalists or pan Africanists feel the use of foreign currency especially that of a major power as our own borders on neo colonialism. In the same vein they feel this takes away a country’s pride or prestige and as such this should not be allowed to continue. For consumers the nightmare of change continues to be the bane as the country does not have enough smaller denominations of these foreign currencies particularly coins forcing consumers to purchase what they do not want or lose the change.
 While the official position is that we use the multiple currency system, the truth is that we mainly use the American dollar in almost all transactions, the country’s budget is presented in the US dollars and banks use the greenback as the base currency. It is in this context that some may feel the need to move away from greenback especially now as that country’s debt has reached alarmingly high levels and of course the recent downgrade of the dollar from AAA to AA+ by Standards and Poor may have given ammunition to those against the use of the dollar.
Now according to the central bank chief, a gold backed Zimdollar could potentially work because the country has this resource in abundance not to mention diamonds so according to him the currency will be stable or even better than the greenback.
Now it is important to understand that prior to 1971 most countries used this sort of system where the currency in circulation was backed by gold in national vaults but that changed after the US abandoned this in favour of what is known as fiat money. With this sort of system the value of currency is determined by money supply and not the value of gold or some valuable commodity and this is what the rest of the world has since adopted. Even Switzerland dropped its gold system when it joined the IMF although the Swiss franc is still thought to be aligned with gold.
This system became the favoured one because it grants the government such an unbridled access to funds by simply issuing paper (treasury bonds) or the printing of currency which it then uses to finance its deficits. The government will not be limited as was the case with the gold backed currency system so for as long as people still have confidence in the system the government will still borrow.
The United States whose financial system presides over the world economy has used this fiat currency system extensively and apparently it may have now reached the end of its tether as its national debt currently stands at $14 trillion. According to the official count the amount of gold held by the US at Fort Knox and elsewhere is about 8100 tonnes which at current gold prices has a value of about $600 billion clearly this picture shows why the government favours this system. This system allows the state live outside its means  but from a pragmatic point of view this system appears increasingly unsustainable especially for the US economy whose GDP is currently $15 trillion and this is what has prompted dissenting voices like that of Congressman Ron Paul. He believes that the US should return to a gold backed currency if it is extricate itself from this financial mess it is currently in. A gold backed currency will rein in on government spending and possibly eradicate America’s obsession with debt. For the United States however the challenge of doing this is quite enormous especially as its financial system is still the trusted and safe despite the growing criticism and there is no alternative yet.
For a smaller country like Zimbabwe adopting a gold backed currency seems a plausible alternative however there are fundamental questions that must be answered first before any decision to go for this is made. Fundamentally the issuing of currency is founded on trust and confidence, very fragile attributes.  If we are going to adopt this gold backed currency, who exactly going to determine what amount of currency is to be printed or issued? Who is going to oversee that set down guidelines are followed? These concerns are borne out of the practices of the central bank over the last decade, practices that are blamed for exacerbating the inflation situation. The raiding of private accounts and the printing of money ensured that confidence in the currency reached zero as the Zimdollar disappeared.
 Against such a background it is highly unlikely that citizens will start to trust the central bank once more simply because it has proposed this novel move. Citizens will have to be convinced that if such a system was to be implemented the working guidelines will be strictly followed no matter how difficult the circumstances might be. The central bank at the present moment comes short on these as its so called quasi-fiscal activities in the last decade violated the cardinal rules of the fiat currency system and this ultimately led to the demise of the Zimdollar. There is no guarantee that guidelines will be followed to the letter once we adopt this system especially as the central bank has not been reformed and it is still very much politicised organisation as the appointment of its officers is made by politicians. Since the inception of this government in 2009, the governing parties have regularly clashed over the appointment of the governor and this actually means these appointees are subservient to the politicians and not the laws of sound economics.
However the reintroduction of local currency could work if all factors that led to the collapse of the last currency are dealt with. Industrial output has to be restored to pre-2000 levels and the central bank has to be really reformed and it must be really independent of the state. Meeting some of these conditions could guarantee the success of such a gold backed currency

Sunday, 9 October 2011

tapping into the unbanked in Zimbabwe


Since well before the dollarization of the economy in 2009 a lot people had grown dissatisfied with the banking system as the withdrawal limits and inflation had left a lot funds totally decimated. The high service fees and low interest on deposits meant that for the most part the exercise of banking was a costly one and subsequently people lost confidence in banks. While dollarization of the economy has ensured that inflation has been kept in check, it is the high banks service fees as evidence by the high non-interest income accruing to banks plus the low interest on deposits that continue to have many shunning the banking system.
Indeed deposits have been growing steadily but it is their transitory nature that continues to be a cause of concern because such deposits do little to aid economic recovery and there is obviously a reason for this. According to a survey by ZEPARU a local research organisation about $2.5 billion remains outside the banking system and also a snap survey carried out by the local broadcaster on the subject revealed that a lot of potential banks clients are still reluctant to embrace banks once more. The major problem according to this survey was the high fees charged and the lack of meaningful interest on deposits if there is any. Of course the previous acts by the central bank at the height of hyperinflation also still linger and since there has not been any reassuring reform at this institution people still avoid keeping their funds in banks.

It is in the back ground of this that the country’s mobile phone operators are attempting to tap into this portion of the population that is unbanked through various products known a ‘mobile wallet’. Telecel, Netone and Econet have all launched facilities which allow subscribers to send and receive cash and the emphasis is that you do not a bank account to use or access these services. The essence of this whole exercise is to have the population to at least have confidence in other economic agents who may not necessarily be banks and in this case mobile phone companies. Economic recovery in the absence of direct multilateral lender support means the domestic scene is the only viable option to fund or recapitalise industry yet this cannot happen as long as the financial system appears hamstrung by the lack of confidence in it.  An advertisement campaign by Econet explains that people will simply have to follow instructions on the sending and once a confirmation message is received by the beneficiary he/she can then go to a participating outlet to redeem the cash.

 It’s of course early days yet to tell if this is going to be a success but the sheer size of the infrastructure and organisations involved may point to its success. What is imperative is that these companies do not repeat the same approach of charging high fees for these transactions something many people are still very sensitive to. Once people feel secure with this innovative system then perhaps we might witness a significant increase of transactions that currently take place in the informal economy coming on to the fore.
This may seem unorthodox but it may perhaps be the best shot at solving this problem of low confidence in banks and with millions of mobile phone subscribers as potential clients we can only keep our fingers crossed that this turns to be a resounding success.

Friday, 7 October 2011


The past decade did a great deal in chasing away professionals, entrepreueners, farmers to mention just a few. As the economic and political environment deteriorated these were forced to settle in lands as far away as UK, USA and South Africa among other countries. However as the economic went into tailspin from 2003 till 2009, it became evident that these expatriates were instrumental to some degree in sustaining the faltering economy. It had been widely predicted back then that the whole country would simply collapse by 2005 as hyperinflation took its toll on the economy and the worsening poverty levels meant the country was on a path towards a full blown conflict. That did not exactly happen because by 2005 the economy was still struggling and it continued struggling until 2009 and many reasons have been proffered for this. However two factors seemed to have standout among the various propositions made, namely the informal sector of the economy and the impact of diaspora remittances during that period. Many people who lost jobs during this period were absorbed by the informal sector whose activities included cross border trading among others. This enabled families to survive during this difficult period. However it is Diaspora remittances back to Zimbabwe during that period which made people suddenly aware of the importance of this forgotten group. Millions of dollars were sent to families back in Zimbabwe thus helping to stem mass starvation and just keep things going. Efforts were then made by the government to harness these remittances but these efforts largely failed because for a long time the government seemed to misunderstand this economically important group. We may all remember the central bank’s homelink program, remittance program made to lure the Diasporas to channel their remittances through government channels and of course this did not succeed. Nonetheless the Diaspora still did sent money back through what was commonly known as the black market and indeed today a lot of people do acknowledge the critical role the Diaspora played in ensuring families back home were fed and that the general economy did not collapse. However since the start of the coalition government this group seems to have been forgotten as efforts to resuscitate the economy now seem to ignore them. It’s not clear if the consultation process which gave birth to the new economic blueprint actually reached out to the Diaspora though the final document does talk of Diaspora re engagement. As mentioned past efforts to use remittances by these to cushion the government from foreign currency shortages failed primarily because the government insisted on an exchange rate which sensationally overvalued the Zimdollar. During that period despite threats the black market was the preferred way of sending money home as the Diaspora avoided the homelink channel which was controlled by the government. Of course since we now use foreign currency as our own, money is now being sent through normal channels. However the diaspora could potentially do more for the economy if the government really listens to their concerns. The economy which has not received significant financial aid is currently in the midst of a gripping liquidity crisis yet we have the Diaspora which could potentially be sitting on a huge cash pile. The Mid Term Plan talks of Diaspora re-engagement an effort which if done sincerely could potentially avail to the economy the much needed liquidity injection. At the centre of the diaspora’s concern or anger is their apparent continued disenfranchisement especially when it comes to the country’s plebiscites. To them participation in economic revival efforts has to be reciprocated with participation or representation in national issues or events and currently that does not appear to be the case as reforms carried so far does not address this. Secondly the Diaspora just like a foreign investor expect or prefer a business environment in which the rights of property holders are respected, a stable socio-political environment and a degree of certainty in government actions.  If anyone in the Diaspora decides to invest, his investment should be accorded its due protection regardless of the investor’s background, colour or creed. Just like the constitution which is non-discriminatory, likewise policies or laws promulgated should reflect this, giving the same treatment to investments made by anyone who is a citizen of this country. If the government comes through on these then it is guaranteed that the Diaspora will certainly come forward to assist in reviving the economy. 

company results

Econet Wireless Zimbabwe the country’s biggest telecommunication company has just made public its interim results for the period ending 31 August 2011 and these results continue to reaffirm the company’s blue chip status. For a company that started operations in 1998, this has to be one of the most remarkable success stories of the country’s entrepreneurs particularly now as it has become the second largest capitalised company on the stock market after Delta Corporation.

The highlights of Econet performance include an increase in turnover by 24% from $235.4 million in the interim period last to $290.8 million this time around while earnings before tax and interest rose 14% from $114.9 million to $131.2 million. There is no doubt that this is a very good performance which not underlies the company’s own proficiency but also underscores the importance of a stable macro-economic environment. In fact since the adoption of the multiple currency system in 2009, Econet as well as other well managed companies have reaped heavy rewards and certainly it appears the trend will continue as long as the underlying economic fundamentals remain unchanged.

The other noteworthy feature of Econet’s performance is its cash generation capacity which reached $139.5 million while its debt leveraging improved from a high figure of 86% by the 28th of February 2011 to about 68%. While this has been a concern for some, it is however this company’s interest covers which was 10.9 times thus signifying the company’s ability to meet its obligations timely. Econet got to be in this very dominant position courtesy of major investments in infrastructure and equipment which commenced soon after the dollarization of the economy. To date the amount invested stands at $ 470 million and clearly this explains its current popularity as evidenced by the number of subscribers-5.5 million as at 31 August 2011. This investment is of course reflected in the balance sheet which shows that Econet had property and equipment worth about $450 million while the total assets were $667 million as at 31 August 2011.

On the stock market Econet wireless is one of the most liquid and stable stocks, attributes which are not very common of many Zimbabwe Stock Exchange listed shares especially in this dollarization era.  Presently the Econet stock is trading at around 400 cents which gives it a market capitalisation of about $680 million and according to results just released the earnings per share increased from 38 cents to 44 cents. Going forward Econet will continue to focus on developing innovative value added services and enhancing the customer experience as has been evidenced by its latest product the eco-cash, a mobile money transfer and payment. These value added products have in the past drove clients to the Econet stable and there is doubt these products will keep them there thus helping Econet to maintain its dominant position.

For further info on Econet stakeholders can log on to www.econet.co.zw

Wednesday, 28 September 2011


Agriculture production in the country suffered a massive decline after the so called land reform as the new farming community lacked the know-how, the knowledge and the capital to maintain the level of production of the former farmers. In any case the reforms were carried out in one of the most frenzied fashion while the debate or controversy of these reforms still dominate public discourse. However the reality is that agriculture experienced one of the most devastating decline in its history and the country being mainly an agro- based economy; the economy took a huge depression losing as much as 50% of the GDP by 2007.
The issue is still controversial yet the country still has to revive agriculture to not only avoid the now routine food shortages but to also contribute towards the economy’s recovery. To that end the just ended tobacco marketing season and the figures on the composition of the farmers that produced the crop reveal an interesting statistic. According to the figures from the Tobacco Industry and Marketing Board approximately 66 000 farmers registered to grow the tobacco crop this coming season  32% were communal farmers while the A1 farmers constituted about 48% with major farmers constituting the rest. Of course the production of commercial farmers will be higher than that of most communal farmers but the import of these statistics is the embracing of tobacco farming by the previously ignorant communal farmers.

 There is no doubt the dollarization of the economy has played key role in motivating these farmers but it is also fair to say there was an effort of imparting of knowledge and skills  to these farmers from how this crop is grown to its harvesting . Of course the quality of the crop may not be as good as that of well financed farmers but the bottom line is that production of this crop has grown from a low of below 50 million kilogrammes to about 130 million achieved this year. This has happened as some farms that previously produced tobacco remain idle in one of the legacies of the land reform meaning clearly it is these communal farmers that have stepped in. In fact communal farmers when armed with the right information or knowledge they can still produce considerably even with less resources and the production of the staple maize crop provides clear testimony of this.

The Grain Marketing Board previously used to estimate that as much as 60% of the maize it collected at its depots came from communal farmers while cotton is also produced mainly by communal farmers in the centre north of country. This means stakeholders will have to educate communal farmers about other crops such as soya beans, paprika, potatoes etc as these still remain in short supply locally forcing companies like National Foods to import these or actually stop producing certain products.
The results in the tobacco crop show that an effort to get communal farmers to join has paid off and more communal farmers continue to join in the production of this crop. In fact the country is now fifth largest producer of tobacco in the world thanks to largely to these peasant farmers that have joined the ranks of tobacco farmers recently and the country certainly looks poised to regain its status as the largest producer of Virginia tobacco. With the most ideal economic environment currently prevailing the training of communal farmers on growing various other crops will pay off just as it has done with tobacco. 

Monday, 19 September 2011


The new central bank regulations on real estate property sales is now limiting the money that can be accessed by the seller to the initial $50000 and the rest will only be accessed over a year. This is what was contained in the monetary policy statement in late July 2011 and implementation seems to have started only now. The rationale for this according to the central bank is that the economy is not benefitting from real estate transactions because the proceeds are being kept outside the country hence prejudicing the country. It then goes on to note that since dollarization there has been what it terms ignorance by traders on the exchange controls which it believes it should still enforce even though it does not control much of the economy. In the statement it mentions that it is the custodian of the capital account and as such it has been perturbed by the movement of funds in this account without its approval and this especially in an environment of liquidity shortages. By enforcing these regulations it believes it can stem the problem of illiquidity and help to resuscitate the economy. However the central bank appears to have developed a short memory of what brought us to this and unfortunately this move might hit badly on the very fragile investor confidence, a prerequisite for any country wishing to attract foreign direct investment. Unfortunately for the central bank though not everyone shares this amnesia; potential investors and citizens still remember the economic turmoil of the last decade in which the central bank’s actions played a major part. By its owned admission the central bank used funds of foreign currency account holders without their consent and it printed money thus fuelling inflation. Whether these acts were benign or not is besides the point, it is the implications for the central bank that I wish to put into perspective here. After raiding private accounts the central bank lost credibility and trust because that action constituted what may be termed a property right violation if we are to use more diplomatic language and it’s not clear if all its victims have been compensated. Subsequently investors or traders have since adopted ways of trying to circumvent or avoid having their money stuck in the country’s financial system particularly the central bank and this is corroborated by Zeparu a local research firm. It concluded in one of its surveys that a significant part of the trading population remains unbanked because people still do not have confidence in the financial system after the traumas of losing savings at the hands of banks at the height of hyperinflation. Zeparu estimates as much as $2.5 billion circulates outside the formal system and that if true is an indictment against the entire financial system the RBZ included. In light of this it’s hard to understand why the central bank now wants sellers of property to give it custodianship over their money for about year with an interest earning potential through this so called involuntary surrender requirement. As stated earlier confidence is a very fragile attribute and once it’s ruined it will take a long and painstaking effort restore it and certainly the central bank has not done that yet. If the central bank insists on this, the obvious result would be the slowing down of business in property sales and the foreign investment that was flowing into this industry will dissipate. No one especially now believes the central bank will honour its obligations at the end of the year as it has lost its function of issuing currency when we adopted the multiple currency system. In fact the central bank has been a peripheral figure in the economy since dollarization of the economy largely because it cannot issue currency and its heavily undercapitalised hence cannot perform some of its traditional functions. There has been no interbank trade since formal dollarization of the economy and there has effectively been no lender of last resort because the central bank remains insolvent perhaps that’s the down side of dollarization. To that end it has since called for the return of the local currency and this latest effort is testimony showing the central bank’s exasperation with the limitations brought to it by dollarization. It is quite a paradox for the central bank because confidence in the economy has been partly restored because the RBZ has been side-lined with stakeholders apparently satisfied with this arrangement thus far. On the other hand liquidity problems continue because as explained in the monetary policy there is no lender of last resort hence financial institutions are taking extra cautious steps by avoiding lending that would cripple them. Industry has been the major victim of this yet it is the general economy that will continue to suffer as companies that could potentially do well remain constrained by low capitalisation. The solution to this at least in the interim lies in restoring the credibility of the central bank, a very important step if we are to assuage every stakeholder. In that regard reforming the central bank has to be the number one priority at the moment, a change in its structure, the right check and balances and its independence from executive are paramount changes. If a change in personnel at the central bank is what it is going to take to get stakeholders to have confidence in the central bank once more then logic has to prevail over narrow politics. Additionally recapitalising its operations is also very important because at the moment if there is going to be turmoil in the banking industry the central bank does not have the capacity to intervene and salvage the situation because it does not have the resources to do this. In the monetary policy statement the central bank acknowledges the $7 million extended to it by treasury for its recapitalisation yet this is just a miniscule of what it is actually needed and thus more will be needed if enough capitalisation is to be achieved so as to fully restore the credibility and function of the central bank. It is such a fine line between protecting the country’s economic interests and spooking investors hence authorities always have to be mindful of this when contemplating new regulations.

Terence Zimwara is an economic analyst contact him on tem2ra@yahoo.com
ZES articles are coordinated by Lovemore Kadenge contact him kadenge.zes@gmail.com and tel 0772 382852

Friday, 16 September 2011

overview of financial services


In the past few days the Zimbabwean based financial services companies have been releasing their results for the first six months of this year and so far the results have been consistent save for one or two; most banks are reporting profitability, improved financial positions and increased deposits. In fact this all round performance of the banking industry is the clearest indication of just how the effective the policies of the coalition government have been thus far. In particular, most of the chairman’s reports accompanying these results have singled out the multi-currency system as a key change that has resulted in an enabling business environment and have commended authorities for maintaining this system throughout the duration of the MTP. This multi-currency system or dollarization has enabled the government for the first time in years to control inflation to very manageable levels of around 3.5% below so far this year while the year-end target of 4.5% looks very achievable. This combination has been a massive boon for business, planning has become possible again while the inherent currency risk has been reduced to near zero as the currency we are using is basically an international one. Significantly most banks are now adequately capitalised in line with regulatory minimums and most seem to be adhering to the accepted corporate governance principles. In the meantime deposits have also grown from $2.3 billion on 31 December 2010 to $2.9 billion by 30 June 2011 perhaps indicating a return to a banking culture. On the down side however deposits still remain short term and it has been emphasised enough already just how badly this augurs for business prospects. Industry is in desperate need of medium to long term funds to finance or recapitalise their operations yet banks can only avail short term credit which does not help industrialists’ needs right now. It is unfortunate that some banks have been accused of certain ulterior motives because they are not lending to industry or agriculture and when they do lend its often short term. These accusations have led to threats and ultimatums as in the case of Standard Chartered and Barclays bank yet no amount of political pressure will force privately owned banks to unnecessarily risk depositors’ funds and shareholders’ value. The reality is that there is a problem within the system, a mismatch exists between the maturity of depositors funds which is essentially short term on one hand and the maturity needs of borrowers on the other hand which are long term. Clearly there is nothing banks can do about this now because any attempts to violate banking convention for the sake of resuscitating industry will back fire almost immediately as depositors will start calling on their deposits and the bank will have no funds to cover for this. In addition we have to remain mindful that it was that sort of approach to lending if not worse that caused the collapse of major financial institutions like Lehman brothers and Bear Sterns in the United States back in 2008. The collapse of these and others resulted in a world recession which nearly brought down the world economy as we know it and subsequently new banking and particularly lending practices have been formulated to avoid a repeat of this. The central bank is well aware of this which is why it has instituted its own prudent lending guidelines which must guide banks in lending consequently it would be inconceivable for any bank to flout these guidelines especially now when one bank that apparently did collapsed. The only way out of this would be to secure lines of credit which offer long repayment periods as well as an affordable rate of interest and it is the government that has the major responsibility in this regard even though individual banks can still secure such funding independent of government. The message from industrialists seems to be that economic growth would be much faster if this key demand is addressed and this should motivate government to do more to secure the offshore lines credits so dearly wanted. The other issue concerns the inactive internet bank market due to the absence of lender of last resort a function the central bank has not been able play since the dollarization of the economy. It’s a real Achilles heel but one which the banking industry will have to learn to live with because at the moment it would appear the return of the local currency is the only way the interbank market would become alive again. Yet everyone does acknowledge that the economy still needs time to consolidate gains made so far before we start discussing the resuscitation of the local currency. Additionally other problems like power shortages are also affecting banking operations and resolutions of these would be essential in sustaining high levels of economic growth. In the final analysis it has to be said a healthy banking system mirrors a healthy economy and in our case economic recovery has been very real government revenues collections are exceeding set targets meaning growth could faster than predictions. We have just had a successful tobacco marketing season and next season is poised to be better if the numbers registered to grow the crop is anything to go by. Mining too continues to benefit from high commodity prices and as such production will remain high. Therefore the important thing at this point is to avoid changes or acts that might disturb this momentum and hopefully this is a sentiment every Zimbabwean shares.

Thursday, 25 August 2011


Privatisation of state utilities essential to aiding government performance
During the years of economic decline the country’s infrastructure and companies charged with maintaining these became out-dated, ramshackle and the economic consequences are now quite apparent. In most cases the decay in the nation’s infrastructure began well before the accelerated decline of this past decade and this decay had an effect of making the economy less competitive and less efficient.  Power generation, rail transport, telecommunication which are some of the vital services that aid economic prosperity yet in the last decade these were simply not provided for adequately or efficiently hence impacting greatly the economy’s competitiveness. For instance during its heyday the rail transportation system used to handle the bulk of the country’s and the region freight needs and given the rail road infrastructure, its vastness this undoubtedly made it the freighter of choice. In fact this was the preferred form of transportation because it was not only economical but efficient as well and ultimately these factors would eventually show in the final cost of production. However the obliteration of this important organisation is well documented and now the entire infrastructure is in a state of derelict and this of course continues to be a bane on the economy. Power generation has of course become the biggest obstacle to not only the smooth operations of companies but individuals as well though it used to be quite efficient, the best in the region. However since the late 90s virtually every other organisation whether public or private has been deeply affected by the rolling blackouts and again this has also been impeding the economy’s recovery pace. For instance at the launch of the Mid-term plan in July bankers intimated that power shortages were directly affecting their efficiency because according to them extra costs incurred in securing alternative power sources was passed on to consumers in the form of higher fees. Now according to consumer groups these high fees or charges are in effect driving people out of the formal banking system thus contributing to liquidity problems besetting the general economy. Clearly the inefficiency of some of these government owned enterprises contributed towards the collapse of the formal economy in the last decade and certainly continue to inhibit its recovery to this point. Refreshingly though the country’s telecommunication industry has been an island of positive development since the start of the coalition government .While indeed the country’s telecommunication system particularly the fixed line network owned the government suffered extremely during the past decade, the presence of private players in this industry has helped to ensure its lightning fast recovery. In fact the figures made available so far prove this. Now for instance according to figures released by the finance ministry the country now ranks fourth in the region with regards to mobile phone penetration at 66% while internet bandwidth usage has increased 400% since 2009. This has all happened while the state owned entities remain in a state of comatose thus driving home the point home that the only way the country can escape from this straitjacket is by disposing controlling stakes in these parastatals. Of course some officials might baulk at the mere mention of selling Air Zimbabwe for instance, yet disposing controlling stake or finding a partner is the only way the government can have it back in the air. Anything short of this will only help to exacerbate the deficit and debt problems and of course this will mean little left for civil servants. Fortunately the government Mid Term Plan mentions what is called public-private partnerships or PPPs as the best way to revive the country’s infrastructure though it’s not clear if everyone in government is on board with this. Clearly as testimony from Zambia’s Copperfields and the diamonds in Botswana shows private capital seems better placed at managing some of these than the state. Reluctance to embrace this will only ensure that the state will remain mired in this miserable state, high wage demands from a very low revenue base meaning the government will continue to operate in this state of technical bankruptcy.

Wednesday, 24 August 2011

R&D and competitiveness

Research &Development key to improving efficiency and competitiveness
Again we will have to acknowledge that the decade long recession has had far reaching implications on the economy because during this period companies could not invest in new technologies hence the inefficiencies and the poor quality products we see. Of course since the start of the dollarization era the business environment improved resulting in companies resuming operations though there is now a yawning efficiency gap between local producers and their foreign rivals. Now according to local producers protection or shielding of some sort is necessary to allow them to fully recover and compete with these. However historical evidence seem to suggest that calls for this form shielding is often motivated by other objectives like increased profits without a corresponding increase in quality or efficiency or something known as rent seeking. For instance now there are reports already that local producers in industries that recently got protection have effected price increases to match imports prices and ultimately it is the consumer who emerges the biggest loser. Now in a follow up to the last article I will try to explain what may be the missing link to attempts to unravel this problem; the role of research and development in improving efficiency and technologies and why this is an important function. Indeed a lot of people and companies are ignorant about the importance of research and development (hereafter R &D) however what may be interesting is the revealing statistics made available by organisations such as the UNESCO that tell quite a story around this R&D  function . We are all aware that the United States is the world’s largest economy yet not many people would be aware of the US’s R&D spending which is estimated to top $405billion in 2011 alone and that this constitutes about 2.7% of its GDP. These figures are quite staggering but also help people to understand how that country values R&D which inevitably gives it the edge in global trade and that is why sometimes and naively so we expect the US to produce the latest technologies, the latest computer software, or even movies. Japan another innovative trading nation is expected to top $144 billion and that roughly equals about 3.3% of its GDP and until recently Japan was the second largest economy in the world. In fact the top 10 list almost resembles the list of the world’s top 10 economies and thus clearly showing that R&D is essential in ensuring growth and sustaining it. One emerging economy that has really embraced R&D and whose results now prove this is China. China according to the same list now out ranks Japan with its spending expected to top $153 billion about 1.4% of its GDP and indeed China recently overtook Japan as the world’s second largest economy and again this simply highlights the co relationship between R&D spending and economic growth. Zimbabwean companies are constantly clamouring for protection from imports because they are inherently inefficient as they still use out-dated technologies and production methods. Evidently protecting or shielding them from competition is not the stimulus needed to change their attitude towards R & D as the tool necessary to gain a competitive edge. For instance American automakers lost ground to Japanese carmakers  some years ago due to the latter’s emphasise on new technologies and production methods and since there was no government protection the only way the former were going to compete was to spend more on R & D. Now it is the story of China’s growth that should help to realign the thinking and comprehension of R&D as the foundation of sustained economic growth by people, leaders and businesspersons in the developing economies. In Africa where most developing economies are including ours, R&D has not received its due attention because according to figures available R&D spending often falls short of the UNDP’s minimum threshold of at least 1%of a country’s GDP. According to the UNESCO R&D list South Africa ranks first on the continent with its spending estimated to reach $3.7 billion which translates to about 0.7% of its GDP on the other hand Egypt ranks second with its spending topping $910 million that’s about 0.23% of GDP and finally Morocco in third with its spending at $760 million which about 0.6% of its GDP. However none of these rank in the world’s top 30 with SA ranking 31st, Egypt a distant 45th and Morocco 47th and there was no other African country on the list perhaps suggesting that there is little or next nothing being earmarked for R&D on the entire continent. Evidently these figures make a strong case for increased funding on research and development because it is exactly this sort of expenditure that ensures that our exports compete very well on the global market and help in import substitution efforts. Competitive exports and reduced dependence on imports not only helps to improve the balance of trade in our favour but in the long term it helps to reduce the balance of payments deficit something very much akin to African and developing economies. Now instead of adopting blatant protectionism measures the government could aid companies facing extreme competition by encouraging or sponsoring innovation, research and development as an alternative. It is this kind of route that will ensure local companies will eventually become competitive again and compete fairly without having to go the way of imposing duties something that flies in the face of the envisioned regional integration. Most importantly this will be done without harming or disadvantaging the consumer as is the case now after the government imposed tariffs on the certain food imports. Now what is probably needed is a new approach, investment in advanced research facilities, increased funding for R&D both in public and private sectors and most importantly a change in the mind-set or in the appreciation R&D. It is only this way that we can set the economy towards a path of sustained growth just like what other previously developing economies did a few decades ago and now they are major trading nations like South Korea.
Terence Zimwara feedback tem2ra@yahoo.com  temra-temra.blogspot.com

Monday, 15 August 2011

cost of protectionism


While there was indeed a general agreement that the state had to intervene in markets by protecting certain industries from competition in it is nonetheless important to highlight the costs associated with such acts. Obviously Buy Zimbabwe enthusiasts will have been pleased with outcome of the recent of monetary policy review outcome which for all intents and purposes gave in to some of the protectionist lobby designs. In particular the food and agro processing industry which now enjoys protection in the form duty imposed on imports and it has been said that this could be the stimulus necessary to allow local producers to recover. In other words given the price sensitiveness of the products in question most consumers will be forced to buy local stuff regardless of any misgiving they might have and of course local producers will thus increase their production levels. No doubt this raises questions that must get answers. How will consumers be protected from purchasing poor quality products given that protection from competition often breeds mediocrity? Will this really result in increased capacity utilisation? How and who will determine that this modest protection has achieved its intended results? It is pertinent we have these answers because one cannot rule rent seeking by some of those that lobbied for this protection. However to be fair on businesses the last decade was very horrendous and as has what happened elsewhere to countries in or emerging from crisis or war the local industry has to be given protection allow it stand on its feet again. Certainly the rationale often is not purely an economic one but hybrid one because political considerations will be at play and certainly Zimbabwe is no exception from this rule. However there are two sides to this coin, consumers needs as well. In fact while companies struggled during the last decade consumers were hardest hit by inflation particularly as incomes were just decimated leaving a majority of the population in poverty. So in as much as we want to help companies there has to be a balance between these two groups and it’s not an easy one but certainly not an impossible one. Now if a certain industry is going to be protected, then this does not have to be a blank cheque as it were. The protected industry must reciprocate the benevolence extended to them firstly by ensuring that their products attain the same quality standards of imports (yet this can normally happen if imports compete unhindered). In fact this should be an undertaking local companies must commit to if they are to be given protection and certainly in this case it does not appear to look that way. Secondly most companies have been complaining that they cannot improve their reward or compensation to their workers due to low productivity levels among other problems. Now by being shielded from competition as happened here then these must be pressured to improve wages offered to their workers as demand and possibly production will improve. Protectionism here should be seen as a double edged sword; those calling for it should be made to understand that getting government protection comes with responsibilities as well not just an increase in to their revenues or profits.  Ultimately the responsibility of the government is not only to businesses but to consumers as well hence the need for the balance. Now in the absence of such counter measures then this apparent capitulation by government to lobbying by business groups will only embolden these to lobby for further protection so that they can ostensibly compete on equal footing with imports. For instance most companies are facing liquidity problems, out-dated capital equipment and infrastructure which unfortunately factors heavily in the costs, costs which ultimately mean higher prices hence they cannot compete with imports from more efficient economies. Clearly shielding local industry from more efficient producers will harm the interests of consumers more than the increase in profits to a few large producers. It is not the business of the government or any government for that matter to inhibit competition by penalising more efficient foreign producers regardless of the heavy lobbying by locals. In my other instalment on this topic I said it is only when the competition is unfair that the government can with some justifiable economic reasons impose counter measures. For instance it has been argued widely that subsidies given to particularly farmers in North America and Europe give an unfair advantage to their farmers and the currency manipulations by giant Asian economies give their producers an unfair advantage on the global stage. In addition if the majority of the imports are composed of counterfeit and pirated merchandise then that is clearly unfair and illegal competition. Under such circumstances actions to shield local producers will be justified though protectionism is really hard to endorse. So far I believe this argument may be applicable in clothing and electrical products where there are considerable illegal products competing with our limping producers. For the rest of companies the government simply has to find other ways to assist without hindering the working of the market and this can be done by securing lines of credit, tax breaks among other tools. Of course the government has already set the duties on selected imported products what it can do now is to monitor the companies earmarked for that protection. A cost benefit analysis of this protectionhas to be undertaken after a certain period to determine if the protection is having the desired effect. In any case we have to understand that if we start imposing duties on certain imports then our trade rivals will most certainly retaliate resulting in this vicious cycle where everyone ultimately loses.That is why many great economists of old have consistently averred that protectionism only works in the short term and normally benefitsa few rent seeking business people. In the long run it hurts everyone consumers, the businesses and the government because ultimately protectionism will beget protectionism. Whatever the reasons for protecting industry such a policy should only be short term and we should strive to have a more open and free economy an assured path to sustained economic prosperity in the long run.
Terence Zimwara is an economic analyst you can contact him on tem2ra@yahoo.com