2021 Budget Thread

I refer you back to Cross interview with Trevor. Cross told Mthuli that though he was a brilliant economist he had been away from Zim for too long & needed to understand Zim.

In his 2021 budget presentation, what was conspicuous was lack of gusto!
In analyzing the budget I will focus on the four major themes
(i) Zim debt trap
(ii) High insatiable tax regime
(iii) Currency policy rigidity
(iv) Donor funds & remittances anchor the economy
Asked once,if Zim would abandon the multi-currency system I argued GOZ vehement support of the dollar system & empirical data of countries that had dollarised. It seemed too obvious that Zim was now a regional hub of financial security & economic growth to abandon the system
I argued corruption was suitably financed in dollars & diamonds. There was no way politicians & GOZ could ditch such a mutually beneficial system.

I was still wet behind the ears.

For that is exactly what the new republic did. It introduced chaos into the system.
Former Minister Biti soon realized the big elephant in Zim. It’s external debt. He could see that growth wasn’t sustainable in the long term without dealing with the elephant. Unfortunately, the politicians didn’t want to hear of HIPC. He lost the battle.
Chinamasa took over. He too soon realized the impossibility of sustainable growth without dealing with the debt crisis. Zim has negative savings for 20 years.

He managed to get consensus around LIMA in 2016. The stumbling block was political reforms.
In some regard the international community believed Chinamasa was on the right track & supported the coup on the trust that the final outstanding issue of reforms would be resolved.

When ED entered office, it was a golden opportunity. Not only was it wasted away
ED’s government plunged the country into more debt. Mthuli was meant to be the talisman that could solve the problem. Within a year with gusto he introduced into Zim lexicon a phrase we had never heard of in 40 years. Budget surplus.

It only revealed how naive he was!
He should’ve followed Cross advice. The RBZ was in massive quasi fiscal activities.

I highlight the above to show that anyone who thinks they can solve Zim crisis without the debt issue solved they’re deceiving themselves & stupid for not listening & learning from our past
Finally the MOF has produced Zim external debt. Inclusive of RBZ debt it’s US$13.2bn. If you include white farmer’s compensation of US$3.5bn it’s US$16.7bn. Excluded are some of China’s debts.

According to WB, Zim economy is US$17bn.

Zim external debt is over 100% of GDP
According to the public finance management act Zim debt shouldn’t exceed 70% of GDP.

Never mind the law.

The real economic problem is that production is now hamstrung. Either towards debt servicing or lack of FDI or new low cost debt into Zim.
Production can only happen through new investments.

Investments = savings.

Meaning Zim fails to be globally competitive. And it’s low value commodity exports go to paying off high interest loans.
Ten years too late the MOF has now acknowledged HIPC as the way out.

Infact this is the only way out.

In August 2019, I articulated on my blog why it was the only way out, using Greece, Egypt, Israel, Nigeria, Ghana, Tanzania as examples
To be clear, not only is HIPC the only way out, it is now the single most important GDP stimulant & competitive advantage. Nigeria & Ghana etc saw their economies double.

Zim hasn’t gone through this re-rating that others went through. That’s the opportunity.
HIPC requires proper, genuine institutional and political reforms.

We have seen sanctions being lifted off Burundi & Sudan recently.

If Zim genuinely follows the course of reforms. Then sanctions will be lifted and HIPC will be successful.

Is GOZ ready for this?
Tax system

MOF has introduced or increased new taxes despite Zimra exceeding its targets. Why? The 2% money transfer tax now contributes almost 10% of tax revenues. Withholding tax is set to increase from 10% to 30% & affects the informal sector.
It’s evidently clear that the economy is NOT growing. An economy growing at 7.8% like gnu days, comes with it increase in taxes. But MOF is playing fast & loose with numbers. What they’re after is USD taxes. ZWL loses value. GOZ gets 20% of every USD electronic transfer
which it changes at 50% of actual value.This is a tax. Mining firms will see royalties & fees increase as MOF changes the way fees are calculated. Its USD they’re after. Not ZWL. GOZ is anchoring itself in USD & not ZWL. It doesn’t trust it’s own currency nor inflation.
Currency policy rigidity.

Despite year on year money supply of ZWL increasing by 220% in August the currency Fx auction hardly moved. This is how GOZ in connivance with RBZ fixes its numbers. It prints ZWL to buy USD at 50% of its true value. This is currency rigging.
It’s not sustainable. Export viability is the big question for 2022. How many exporters can sustain 40% of expropriation & wave of tax increases in USD? Zimra warning of under-declaring of CD1 points to exporters being unviable with current currency rigidity.
GOZ currency rigidity is informed by its external debt problem. Any devaluation is an increase in inflation. Hence paramount to solve debt trap. Plus exports & imports of goods is square at US$5.7bn Zero current a/c surplus. What happens when exports fall?
Donor aid & remittances

Zim economy is now anchored by western aid & remittances. Western aid US$850m + SDR $950m + remittances $1.3bn = US$3.1bn.

That is why Zim is now a consumption as opposed to a production economy. US$3.1bn is equal if not more than tax revenues
What it means is that production happens outside Zim borders but consumption happens in Zim. This makes Zim even more uncompetitive in terms of production as dollars are not in the financial system. Pvt sector credit is only US$1bn

Being donor dependent is a sugar high.
I sort to sure that the 41 years of economic mismanagement culminates in the debt trap.

Biggest challenge but also the biggest opportunity.

Zim is not ready to solve this problem hence the misalignment of policy. Western aid gives sugar highs & delays reforms.

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More from @baba_nyenyedzi

19 Nov
So what went wrong? What can we learn?

A thread 🔥🔥🔥

1/22 Reflecting on Nov 2017 coup
The coup was a reaction to the succession question left too late by Mugabe. By 2017 Mugabe had systematically wilted & weeded out many formidable individuals out of politics. By 2017, the choice for leadership was scant & relied on brawn than intellect.
Therefore whomsoever took over was certainly not the best & lacked the leadership mantle & skill. To have survived up to 2017 required utter, non conditional subserviency. That’s why Grace took a prominent position in succession. Her loyalty was deemed unquestionable.
Read 23 tweets
17 Nov
(i) IMF release its report on Zim
(ii) RBZ move the Fx rate to 105
(iii) Backlog to be cleared

What to make of these.

The IMF article IV consultations are routine chats with it’s member countries. Unfortunately Zim is no longer on SMP & though the IMF & MOF had indicated…
..the resumption of SMP this year, the current report makes no mention. Meaning it’s not in the near future. SMP involves IMF deep dive & interrogation of the state of affairs. In contrast with this report based on feedback from stakeholders. It’s thin on details.
Eg it speaks of unsustainable debt & external arrears without any details. Zim is in a debt trap. With external debt upwards of US$20bn. The RBZ alone has a US$5bn debt problem.

The IMF let the cat out of the bag by highlighting how the RBZ is in control of the Fx rate despite
Read 7 tweets
15 Nov
People remember the 14 November 1997 zim dollar crash. And attribute it to war vet payments. This is patently false. Correlation does not mean causation.

While war vet payments may have been the straw that broke the camel’s back it’s not the real reason.
The real reason is RBZ quasi fiscal activities that started in 1990. The mismanagement of the economy in the 1980’s despite huge donor funds spilled over in 1990’s.

RBZ printing filled the gap left by donors & MFI’s.
(i) Maize subsidy of 56% for consumers & 100% for vulnerable
(ii) RBZ printing directly funding farmers input schemes.
Africa went through exactly the same problems Zim had. But didn’t use their central banks in direct financing of subsidies, fiscal activities & political payments.
Read 5 tweets
29 Oct
I am going to say something positive about the MPC. Hold on tight.

It’s really one aspect. The rest was the usual jaba jaba.

The MPC increased RBZ interest rates from 40 to 60% pa. Giving a real positive interest rate. Albeit with a suspect inflation rate.
This is what the RBZ remit is all about. This is the major lever the central bank has. Yet it has been absent and useless for the last six years. The day Mangudya decided on Zim dollars the next thing he should have done is positive interest rates. That’s the only way
A central bank defends its currency & maintains monetary integrity of the whole system. By doing so it would rein in GOZ profligacy & mal investments in the market. Sakunda would never have happened.

So it was dereliction of duty by RBZ as prescribed by the constitution
Read 12 tweets
19 Oct
The way I was attacked, my IQ questioned, vitriol & trolling for simply stating the obvious that Zim is NOT an agriculture based economy! That over the decade, even with the best harvest Agric was now 9% ( 10 yr avg)of GDP.

In 2020 it was worse. It was 7.6%. Lowest in a decade.
Yet, unprecedented in the world is the amount of GOZ expenditure directed to agriculture.

We can explain it thus; despite an unprecedented expenditure in Agric through Command Agriculture, the sector contribution fell to its lowest.
The actual numbers point to a very fragile economy which was devastated by Covid.

Try & use the official exchange rates to determine the USD GDP.

Fx auction has reduced GDP overall gains. In the past Zim has enjoyed commodity booms, this time it was muted.

Thread in November
Read 6 tweets
17 Oct
Most problems can be solved if only we engage. Twitter makes it possible to engage regardless of our views. But, through engagement & interrogation we often find the truth & logic to questions that trouble us. The worst is acting on something in ignorance.
Twitter allows the ignorance to find light. I am always amazed at the level of intelligence, engagement & examples. Oft times, I too am educated or find great nuances in our debates.

GOZ is made of ignorant politicians with power. Nothing wrong with ignorance, it can be changed
But ignorance with power will never allow debate. Leadership capacity means ability to deal with complexity. Complexity requires a lot of engagement & understanding.

One is required to be a pilot to fly a plane. But one is not required to be a pilot to run a successful airline
Read 6 tweets

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