Quasi-Fiscal Activities ruining Zimbabwe Economy
Central banks and the conduct of monetary policy have often been viewed as impenetrable mysteries, understood only by the limited few who somewhere along the way gained access to an exclusive club.Even well-informed citizens will find it difficult to think clearly about many economic issues and debates without having at least an approximate understanding of what central banks do.As part of the 12 part inflation series I have had to cover Monetary and Fiscal Policies mainly due to Zimbabwe's now infamous Quasi-Fiscal Activities (QFA)being carried of by its central bank. These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money.
Monetary policy refers to any of a number of government measures undertaken to affect financial markets and credit conditions with the ultimate objective of influencing the overall behaviour of the economy. Monetary policy is the responsibility of the Central Bank that implements its policy decisions largely through its ability to alter the money supply.Any excess money growth will likely result in inflationary pressure.
Fiscal policy is the use of government taxing and spending powers to affect the behaviour of the Economy .Fiscal policy also refers to government action to change the total or composition of revenues and expenditures in order to manage the growth of demand in the economy .The economy's total output, income and employment levels are directly related to total private and public spending or aggregate demand.Fiscal policy is normally the responsibility of the minister of Finance.In most countries the minister of finance and the governor of the Central Bank consult regularly. Furthermore there has been an explicit agreement that if any irreconcilable conflict between the two arises, the governor must either follow the written (and publicly released) directive of the minister or resign office.
QFA are defined as operations and actions whose effect can and and should be in principle be carried out by budgetary measures in form of explicit tax,subsidy or direct expenditure .QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons.Examples include subsidised credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition.By shifting what are essentially taxes and subsidies from government account to central bank account QFA severely distort the measurement of revenue and expenditure they render attempts sto assess fiscal policy meaningless.QFA create contigent implicit liabilities which the government is expected to fullfil there by mortgaging the nations future without proper approval.Since QFA are normally meant to circumvent the normal budgetary process they end up being funded by printing money which leads to hyoer inflation is unchecked.
The use of off-Budget activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidise certain groups through below-market pricing. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances.This leads normally to increase in monetary expansion which is unmatched by supply as a result inflation can set in.QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.
Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenues from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments.This process is critical and if the foundation of public finance.Once the government ascertains its needs it then lookst at ways to fund it needs.The budget spells out all this.The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy.Any expenditure not provided for in the budget then exposes the nation to the risk of printinng money to cover for unbudgeted for expenses.This is why Quasi-Fiscal Activities are undesirable , as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a Company's true financial position.
Central banks exist in most countries as government-owned institutions operating with considerable independence from the governing political structures. It is crucial, therefore, that the central bank be accountable to the people through their elected officials.For this reason most central banks are accountable to the Minister of Finance . Monetary policy may be sufficiently complex and technical that its implementation is left to experts who specialize in nothing else, but in a well-functioning and market economy, the people must ultimately be left to judge the performance of those experts. Such judgment requires a basic understanding of the main issues.
The monetary policy is aimed at harnessing the benefits of low inflation . Among other things, a credible commitment to keeping inflation low helps create a positive climate for low interest rates and productive long-term investment. This in turn strengthens the growth of the economy and its capacity to generate new jobs. An important benefit of low inflation is that it generates less uncertainty, interferes less with the operation of the price system, and thus imposes fewer costs on society .It is important that fiscal policy and monetary policy be separate even though they are complimentary.A hidden technique of combining the fiscal and monetary policy is generally refered ro as Quasi Fiscal Activity( QFA).It has to be avoided as it seeks to circumvent proven systems such as national budgets which make national institutions accountable to the people through Parliament.
Monetary policy is normally guided by an inflation-control target . This means adopting various measures and steps to keep inflation low and within a certain pre-set level.Low inflation would then bring about stability and translate into a better standard of living for the the nation.Essentially, successful monetary policy requires central banks to invest in the creation, monitoring, and projection of economic information-all devoted to achieving a better understanding of developments and relationships in the domestic and world economies.
Inflation erodes the value of money. When future prices are less predictable, sensible spending and saving plans are harder to make. People increasingly fear that their future purchasing power will decline and erode their standard of living.
Inflation encourages investments that are speculative and take advantage of inflation rather than productive investment. It can also create the illusion of temporary financial success while masking fundamental economic problems. Businesses and households must spend more time, and money, protecting themselves from the effects of rising costs and prices. Businesses, workers, and investors respond to signs of inflation by pushing up prices, wages, and interest rates to protect themselves. This can lead to a "vicious circle" of rising inflation. Inflation can mean particular hardship for those whose incomes don't keep pace with the rising level of prices, especially people on fixed incomes such as senior citizens who are receiving pensions.
Consumers and businesses are better able to make long-range plans because they know that their money is not losing its purchasing power year after year. Interest rates, both in nominal and real terms, are lower, encouraging investment to improve productivity and allowing businesses to prosper without raising prices. Sustained low inflation is self-reinforcing. Businesses and individuals do not react so quickly to short-term price pressures by seeking to raise prices and wages if they are confident that inflation is under long-term control. This contributes to keeping inflation low.
Finally, monetary policy is restricted by the impact of other government actions, especially Fiscal Policy ie, decisions about government expenditures and taxation. Fiscal policy also influences overall economic demand, and if fiscal and monetary policy are not co-ordinated, they can work at cross-purposes.
Central banks choose to focus on maintaining low and relatively stable inflation for two reasons. First, low inflation is beneficial for the operation of the economy. Second, both theory and evidence suggest that monetary policy cannot have a systematic and sustained effect on macroeconomic variables other than the inflation rate. Given this limited scope for monetary policy, it would make little sense for monetary policy to adopt other long-run targets, such as the unemployment rate or the growth rate of real output. It is natural for central banks to adopt a long-run target for the one thing that they can reasonably expect to influence over the long run-the rate of inflation.
When the Central Bank has clearly stated objectives and takes policy actions that affirm those objectives, the result is an increase in its credibility. This credibility, in turn, helps to keep expectations of future inflation close to the inflation target-what is sometimes called an anchoring of inflation expectations Through maintaining low and relatively stable inflation, central banks make their best contribution to the economic health of a nation. This objective is grounded in the propositions that (1) high inflation is damaging to the economy, and (2) monetary policy is unable to have a systematic and lasting effect on macroeconomic variables other than the rate of inflation.
The biggest cost of inflation is the uncertainty that it generates and the inefficiencies it creates by distorting the information conveyed by relative prices. Cross-country evidence suggests that countries with higher rates of inflation also tend to have more volatile rates of inflation.. Stable output growth is desirable. Genuine benefits come from having a more stable growth rate of real output and also from having a more stable output gap.
It is impossible to determine precisely that the greater stability in inflation and output growth has been the result of better monetary policy rather than just a less volatile economic environment. Monetary policy is forward-looking. The transmission mechanism of monetary policy is the complex chain of cause and effect that connects policy actions by the Central Bank to aggregate demand, output, and inflation. Monetary policy works with long and variable lags, and monetary policy must therefore be forward-looking, anticipating events that are likely to happen in the world and domestic economies. For this reason it is important that policy be clearly spelt out and then be given an condicive atmosphere to succeed.
Two types of uncertainty complicate the conduct of monetary policy: uncertainty about the precise workings of the transmission mechanism, and uncertainty about economic events in both the global and local economies. Both types of uncertainty require that the Central Bank invest considerable resources in research, current analysis, and projection in order to make the best-informed policy decisions.This means inflation figures be released on time and be accurate.
Currently there is hot debate whether inflation is 24,000% or 26,000% or 164,000%.This lack of accurate and trusted inflation statistics make the markets unstable.Currently there is a wide shortage of basket goods used to calculate inflation.Households have no choice but to use home-made statisitcs which tend to be closer to reality since they compare actual price movements albeit in the black market.Due to lack of accurate figures business and households generally expect inflation to be very high and in turn ask for higher prices and salaries which feeds the inflation circle.
The RBZ has come up with various programmes providing subsidised funding .These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).This product directly competes with Banks who are supposed to lend to the same clients and earn sufficient interest income to keep the banks afloat. In reality a bank can not match this rate being offered by the RBZ, which has now been converted to a massive commercial bank.These facilities represent a hidden tax since this money is not at market rates.It means someone (tax payer) is subsidising these facilities through an undeclared tax. As noted above these facilities lack an relation to reality.Current money market rates are around 700% -1600%, yet money can be borrowed at around 25% which creates loopholes and leads to market distortions and market inefficiencies.The only reason why this money is so cheap its because its printed money which mistakenly is being viewed as a benefit ignoring the more disasterous impact on money supply and inflation.
As a direct result of QFA the central bank has moved into areas which it doesnt have expertise or capacity.This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in measures to recover the money.Once a lender like the RBZ gets involved borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out.The RBZ becomes lender of prefered choice as borrowers stampede for loans which in all likely hood they would never have to repay.Commercial Banks and other financial institutions a better plsced to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.
The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs.The now much talked about People's shops cant be viewed differently from the controversial Operation Dzikisa Price.If all other Supermarkets cants provide cheap food how can the People's Shops do it without being subsidised?This is how QFA activities mislead the market and distort resource allocation.This trend discourges business to invest .As a result shortages will follow leading to increased black market activities and run away inflation..The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.
Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com
See additional articles at http://www.gilbertmuponda.com/
Thursday, February 28, 2008
Friday, February 22, 2008
ENG Directors Not guilty
NYASHA Watyoka, a director of the collapsed ENG Asset Management, who was accused of swindling the firm of over $61 billion in 2003 was yesterday set free at the Harare Magistrates’ Courts. Harare magistrate Mrs Faith Mushure finally granted Watyoka’s application for refusal of further remand saying he would be called to court by way of summons if more evidence against him crops up.
Watyoka, having faithfully attended the court’s routine remand sessions for over two years, freely walked out of the courtroom in the company of his lawyer Mr Moses Kamudefure after Mrs Mushure’s ruling at around 9:30am.In her ruling, Mrs Mushure considered the defence submission that Watyoka’s placement on remand for over two years without a trial date was unreasonable."As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable."This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time."I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years," said Mrs Mushure.
She however, said it was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial."His (Watyoka’s) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises," she added.It was also noted in the ruling that Watyoka initially applied for refusal of remand on March 17 this year but another magistrate Ms Rebecca Takavadiyi dismissed the application. The State was accorded time to come up with a trial date by April 24. On April 24, the State led by Mr Ndabezinhle Moyo, again failed to provide Watyoka with a trial date and they applied for further indulgence, which was again granted.
Mr Joseph Jagada later confirmed handling the matter and on May 24, the State was again given a further two months to put its house in order, until last Friday when the defence pleaded with the magistrate to pass a ruling on the matter.Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.Watyoka was accused of defrauding the now-collapsed asset management firm of more than $61 billion in 2003.He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. His co-accused, Gilbert Muponda skipped bail and is believed to be in Atlanta, Georgia, in the United States.
This article originally appeared in the Government controlled Herald Newspaper on 1 August 2006.
Follow Link http://www.herald.co.zw/inside.aspx?sectid=6847&cat=1&livedate=8/1/2006
Watyoka, having faithfully attended the court’s routine remand sessions for over two years, freely walked out of the courtroom in the company of his lawyer Mr Moses Kamudefure after Mrs Mushure’s ruling at around 9:30am.In her ruling, Mrs Mushure considered the defence submission that Watyoka’s placement on remand for over two years without a trial date was unreasonable."As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable."This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time."I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years," said Mrs Mushure.
She however, said it was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial."His (Watyoka’s) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises," she added.It was also noted in the ruling that Watyoka initially applied for refusal of remand on March 17 this year but another magistrate Ms Rebecca Takavadiyi dismissed the application. The State was accorded time to come up with a trial date by April 24. On April 24, the State led by Mr Ndabezinhle Moyo, again failed to provide Watyoka with a trial date and they applied for further indulgence, which was again granted.
Mr Joseph Jagada later confirmed handling the matter and on May 24, the State was again given a further two months to put its house in order, until last Friday when the defence pleaded with the magistrate to pass a ruling on the matter.Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.Watyoka was accused of defrauding the now-collapsed asset management firm of more than $61 billion in 2003.He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. His co-accused, Gilbert Muponda skipped bail and is believed to be in Atlanta, Georgia, in the United States.
This article originally appeared in the Government controlled Herald Newspaper on 1 August 2006.
Follow Link http://www.herald.co.zw/inside.aspx?sectid=6847&cat=1&livedate=8/1/2006
Thursday, February 21, 2008
Wednesday, February 20, 2008
RBZ and Rule of Law
- By Mutumwa Mawere -
The RBZ and asset managers: implications on democracy II
Posted on October 08th 2006
WHEN I first wrote the article RBZ and the Rule of Law: Implications on Democracy, I had no idea that it would generate so much interest and controversy. Given the emergence of the RBZ and its current Governor, Gideon Gono, as the only source of salvation for Zimbabwe, it is important that we continue to test and interrogate the hypothesis that there is a causal link between the actions of the RBZ/Gono and the undermining of the rule of law, property and human rights.In addition, there is need to test the hypothesis that democratic institutions are being undermined by the RBZ/Gono resulting in the creation of a single power centre that may be described as a "weapon of mass destruction" in the context of Zimbabwe given the consequences of a series of policies and programs implemented by the RBZ/Gono since December 2003.
In as much as people may believe that my critique of the RBZ/Gono economic policies are motivated by my substantial loss of assets pursuant to the extra-judicial expropriation of all the companies deemed to be under my control in Zimbabwe, I believe that it is important to broaden the discourse beyond me and seek to objectively contextualize the political and economic challenges facing the country and the role, if any, of the RBZ/Gono in resolving or worsening the crisis.At independence in 1980, Zimbabwe made a choice to be a democratic state with a constitution that enshrined on its citizens a common set of rights. In choosing to create a common citizenship under one Republic, there was hope that no Zimbabwean would be a subject of another like under a monarchy or an object of another like under apartheid/colonialism. Equally, it is important to state that rights without remedies are sterile.
After 26 years of independence and given the colonial legacy, it was the expectation of many that the values that underpinned the liberation struggle would be an integral part of the nation building project and never again would the rights of a few be used to undermine the rights of many.I have chosen to focus only on the actions of the RBZ under Gono not only because it comes at a time when the future of Zimbabwe is so bleak but because his actions do have a direct bearing on the rule of law and if not exposed may condemn the country to a state where citizens have rights with no recourse.I believe that it is only fair that we use empirical evidence to test the hypotheses referred to above. In my article of last week, I used Makamba's ordeal in support of the thesis that the use of emergency powers to undermine citizens' rights has nothing to do with fighting corruption but demonstrates the contempt with which the importance of the rule of law is regarded by many state actors including Gono.In this article, I have chosen to look at the ENG saga that provides a comprehensive case study of the role of the RBZ in undermining democracy and the rule of law.
ENG and its executive directors, Messrs. Nyasha Watyoka and Gilbert Muponda, as well as the former legislator, Phillip Chiyangwa, were the first victims of Gono's reign when they were arrested in December 2003 during the first month of Gono's appointment. The fate was already decided when Gono made his maiden state of the nation address on 18 December 2003 by unilaterally announcing that asset management firms would fall under the direct supervision of the RBZ with effect from January 2004. He said that asset management firms were not adequately policed and posed a threat to the country's financial system.The RBZ without any change of the legal framework assumed the responsibility to directly monitor the registration process, supervision and regulation of all asset management companies in the country. All asset management companies were required to re-register with the RBZ notwithstanding the fact that some of them were legally registered by the Ministry of Finance.
By effectively assuming control of the asset management industry, it meant that he could decide single handedly decide who was a criminal and direct the police to arrest such individuals.Before dealing with the merits of the ENG case, it is important that we put into context the regulatory framework that governs the asset management industry universally and the point of departure in the case of Zimbabwe. Asset management is often used to refer to the investment management of collective investments and is a non banking activity that is normally regulated by independent institutions established by statute to oversee the Non-Banking Financial Services Industry in the public interest.In the case of the UK, the asset management industry is regulated by the Financial Services Authority (FSA), an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 10 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive.
The FSA is accountable to Treasury Ministers and through them to Parliament.It is operationally independent of Government and is funded entirely by the firms it regulates. The FSA is an open and transparent organisation and provides full information for firms, consumers and others about its objectives, plans, policies and rules. In South Africa's case, the asset management industry is regulated by The Financial Services Board (FSB), a unique independent institution established by statute to oversee the South African Non-Banking Financial Services Industry in the public interest. Its mission is to promote sound and efficient financial institutions and services together with mechanisms for investor protection in the markets we supervise.
However, in the case of Zimbabwe, the control of asset management industry has been placed under the RBZ, a state actor, whose primary goal is no longer consistent with what ordinarily would be the achievement and maintenance of price stability in the Zimbabwean economy. Only in Zimbabwe is the asset management industry defined as asset quasi-banking institutions whose financial intermediary role is mainly to manage financial assets on behalf of specific customers. By defining these institutions as quasi-banking, Gono craftily found a way of removing such institutions that fall under the Collective Investment Schemes (CIS) laws that were administered with the Registrar of Banks and Financial Institutions.Accordingly, Parliament was circumvented by Gono through a re-definition of what is universally accepted as a non banking financial services provider into a banking platform so as to allow him to control the entire financial services industry without parliamentary oversight. While other countries see a role for an independent regulator, in Zimbabwe this is not the case. Accordingly, if you are deemed to be an enemy of the system and you wish to operate an asset management company, you now know the consequences.
As background, it is important to locate the nationalization by Gono of the asset management industry in some context. Having assumed control of this significant financial services provider, Gono instructed the asset management firms to invest 40% of their assets in productive investments. In his Monetary Statement he presented the conclusion a self-serving "research" that the RBZ had carried out on the operations of asset management firms and that said if the companies continued without adequate regulation, they would seriously compromise the broader financial services sector. The compliant media then was put into full gear with stories portraying Gono as the "messiah" and "corruption buster" who was on a mission to crack down on institutions engaged in shady dealings and indigenous banks that were described as battling for survival as well as asset management companies were his main target.
In a typical fashion, anonymous high-level sources were quoted by the media saying that banks and asset management firms - some of which were allegedly used as conduits for money-laundering activities and speculative investments - were struggling to cope with new regulations ushered in by Gono's recent monetary policy statement. Some of the statements from these nameless and faceless sources were saying that most of the locally-owned banks were facing a serious liquidity crisis and bank managers were reported to be holding emergency meetings, including on Christmas day, to find ways of surviving in the new environment.
Gono, the master spin doctor gave the financial services industry their Christmas 2003 gift with this statement widely reported in the media: "Gono's threat that the curtain will soon come down on the era of the proliferation of weak, poorly-managed financial institutions dependent on cheap and unlimited central bank credit was real."This marked the beginning of the palace coup staged by Gono whose sole mission was to identify enemies of the state and use extra-judicial measures to punish them.
The pioneer victim was ENG whose directors were arrested with the media having a field day regarding the underpinning criminality of these individuals. The police arrested the two directors of ENG Capital Asset Management while its subsidiary, Century Discount House, had its operating licence withdrawn by the Reserve Bank of Zimbabwe.
The arrest of the directors came after it was reported that ENG had failed to pay more than $50 billion owed to investors. The financial services industry was in panic with banks reported to be selling their properties and foreign currency reserves to improve their liquidity and raise their capital levels. After the actions of Gono, the US dollar dramatically crashed from US$1:$6 000 to US$1:$4 500.Reports in the media were saying that the ENG directors were on the run as a result of problems engulfing their financial services concern. The firm was understood to be facing a liquidity crunch of between $70 billion and $80 billion.
Creditors were reported to have pounced on ENG, seizing the firm's property with one leading bank grabbing vehicles and shares which the company holds at a local commercial bank. Asset management companies were generally reported to be the source of the problems in the financial services industry and indirectly to the economic meltdown. Against this background, there was need to identify and punish the culprits and ENG provided a convenient scapegoat and Chiyangwa provided the high profile victim needed to capture the imagination of the general public that Zimbabwe had a new no-nonsense boss.Chiyangwa was only cleared by a magistrate of attempting to defeat the course justice, contempt of court and perjury by the magistrate's court after the State failed to build a case against him.
The State in what has now been standard practice failed to prove a prima facie case against Chiyangwa and all charges were withdrawn after plea and accordingly he was found not guilty on all the three counts. Muponda and Watyoka's arrest by police on December 31, 2003 for allegedly defrauding investors which included Century Holdings, First Mutual Asset Management among others, presented Gono with the first casualties he desperately needed in proving his credentials to his masters that he understood Zimbabwe's problems and he alone had the answers.
In a dramatic development, on July 31, Nyasha Watyoka was set free at the Harare Magistrates' Courts. Harare magistrate, Mrs. Faith Mushure, finally granted Watyoka's application for refusal of further remand after an ordeal spanning over two years saying he would be called to court by way of summons if more evidence against him crops up. If any of the liberation war heroes were to come back to live and hear Watyoka, Muponda and Chiyangwa's stories they would justifiably not believe that it is the same Zimbabwe that they risked and sacrificed their lives for. It is difficult to imagine what Watyoka was thinking of when he walked out of court as free man but I am not sure whether he would have any complementary things to say about the rule of law and democracy in Zimbabwe.
The ENG and Makamba's cases share one thing in common i.e. they have not captured the imagination of the opposition parties and non-state actors who appear not to have woken up to the corporate violence taking place in Zimbabwe that has left the affected individuals with no remedies for damages suffered. I believe that the ENG proprietors have lost everything only to be told after two years that the state is still trying to manufacture a case and may proceed by way of summons. How do you compensate such a loss and is the RBZ considering a compensation package for individuals like Watyoka or it is the price they need to pay to facilitate Gono's short journey to the state house.
Notwithstanding, the state was still arguing that Mr. Watyoka must not be removed from remand. In her ruling, Mrs. Mushure considered the defence submission that Watyoka's placement on remand for over two years without a trial date was unreasonable.She said: "As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable. This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time. I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years. It was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial. His (Watyoka's) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises."Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.
To confirm the direct nexus between the actions of the RBZ/Gono and Watyoka's ordeal, the charges are revealing. He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. Watyoka's co-accused, Gilbert Muponda, having discovered that his case had nothing to do with the bona fides pursuit of justice, decided to skip bail and is now believed to be in exile.I believe that it is important to learn from the rich experiences that have characterized post-independence Zimbabwe if the goal of creating a new dispensation is to be realized in our life time.
I have often reflected on my own personal experiences and it occurred to me that even Mugabe may not be fully aware of the destructive nature of the actions that have been taken by the RBZ/Gono in the name of national interest. I do not have any idea what Mugabe would say to a person like Watyoka who may have believed in the nation building project and registered with his colleagues an asset management company that operated in accordance with prevailing laws of the country only to wake up on 31 December 2003 and found out that he was an accused person.
The legal framework that would permit Gono to nullify the licences of asset management companies that were registered under a law passed by the Parliament of Zimbabwe should be interrogated otherwise the difference between Gono's actions and those typically associated with dictators of which Africa has many examples would be the same. Surely, if Watyoka and company were guilty of fraud against investors and its clients, one would have expected a complaint by such interested parties rather than a Governor of the RBZ. One would have expected the injured parties to have their own remedies since an asset manager is nothing but an agent representing the interests of its principals.
The return to an asset manager should ordinarily be management fees and we are not told to date how ENG ended up being a principal without the knowledge and consent of its principals. Instead we see the government being the complainant and the RBZ/Gono changing laws to create a room for intervention so that the rights of the legitimate interested parties are then subordinated to the state.As Zimbabwe gropes for solutions to the current economic meltdown and political crisis, it is obvious that a critical evaluation of the role of the RBZ/Gono in undermining democratic institutions is undertaken and appropriate lessons be drawn from case studies like the one described above.
Failure to appreciate the danger posed by individuals who have no regard of the rights of others and who do not have the patience to use Parliament as the law making body not only undermines nation building but exposes future generations to poverty. Rather than focusing the debate on regime change, it is time that we focus on the kind of governance that enables creative and enterprising people to apply their minds without fear of the state abusing their rights and using the law to persecute them.In focusing on the actions of the RBZ/Gono one hopes that this exercise will enable anyone interested in the future of Zimbabwe to reflect on what Zimbabwe and its people urgently require if hope and confidence is to be restored.
In as much as the ENG saga shows blacks in government do not need the former colonial master's help to victimize their own fellow citizens, there may not be any value in Benjamin Mkapa's much talked about intervention that appears to be premised on the belief that Zimbabwean problems are externally and colonially generated. It is my hope that in our lifetime we will reach a stage where we can openly talk about Africa's challenges and promise using real life examples without favour and prejudice.
Written By Mutumwa Mawere
The RBZ and asset managers: implications on democracy II
Posted on October 08th 2006
WHEN I first wrote the article RBZ and the Rule of Law: Implications on Democracy, I had no idea that it would generate so much interest and controversy. Given the emergence of the RBZ and its current Governor, Gideon Gono, as the only source of salvation for Zimbabwe, it is important that we continue to test and interrogate the hypothesis that there is a causal link between the actions of the RBZ/Gono and the undermining of the rule of law, property and human rights.In addition, there is need to test the hypothesis that democratic institutions are being undermined by the RBZ/Gono resulting in the creation of a single power centre that may be described as a "weapon of mass destruction" in the context of Zimbabwe given the consequences of a series of policies and programs implemented by the RBZ/Gono since December 2003.
In as much as people may believe that my critique of the RBZ/Gono economic policies are motivated by my substantial loss of assets pursuant to the extra-judicial expropriation of all the companies deemed to be under my control in Zimbabwe, I believe that it is important to broaden the discourse beyond me and seek to objectively contextualize the political and economic challenges facing the country and the role, if any, of the RBZ/Gono in resolving or worsening the crisis.At independence in 1980, Zimbabwe made a choice to be a democratic state with a constitution that enshrined on its citizens a common set of rights. In choosing to create a common citizenship under one Republic, there was hope that no Zimbabwean would be a subject of another like under a monarchy or an object of another like under apartheid/colonialism. Equally, it is important to state that rights without remedies are sterile.
After 26 years of independence and given the colonial legacy, it was the expectation of many that the values that underpinned the liberation struggle would be an integral part of the nation building project and never again would the rights of a few be used to undermine the rights of many.I have chosen to focus only on the actions of the RBZ under Gono not only because it comes at a time when the future of Zimbabwe is so bleak but because his actions do have a direct bearing on the rule of law and if not exposed may condemn the country to a state where citizens have rights with no recourse.I believe that it is only fair that we use empirical evidence to test the hypotheses referred to above. In my article of last week, I used Makamba's ordeal in support of the thesis that the use of emergency powers to undermine citizens' rights has nothing to do with fighting corruption but demonstrates the contempt with which the importance of the rule of law is regarded by many state actors including Gono.In this article, I have chosen to look at the ENG saga that provides a comprehensive case study of the role of the RBZ in undermining democracy and the rule of law.
ENG and its executive directors, Messrs. Nyasha Watyoka and Gilbert Muponda, as well as the former legislator, Phillip Chiyangwa, were the first victims of Gono's reign when they were arrested in December 2003 during the first month of Gono's appointment. The fate was already decided when Gono made his maiden state of the nation address on 18 December 2003 by unilaterally announcing that asset management firms would fall under the direct supervision of the RBZ with effect from January 2004. He said that asset management firms were not adequately policed and posed a threat to the country's financial system.The RBZ without any change of the legal framework assumed the responsibility to directly monitor the registration process, supervision and regulation of all asset management companies in the country. All asset management companies were required to re-register with the RBZ notwithstanding the fact that some of them were legally registered by the Ministry of Finance.
By effectively assuming control of the asset management industry, it meant that he could decide single handedly decide who was a criminal and direct the police to arrest such individuals.Before dealing with the merits of the ENG case, it is important that we put into context the regulatory framework that governs the asset management industry universally and the point of departure in the case of Zimbabwe. Asset management is often used to refer to the investment management of collective investments and is a non banking activity that is normally regulated by independent institutions established by statute to oversee the Non-Banking Financial Services Industry in the public interest.In the case of the UK, the asset management industry is regulated by the Financial Services Authority (FSA), an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 10 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive.
The FSA is accountable to Treasury Ministers and through them to Parliament.It is operationally independent of Government and is funded entirely by the firms it regulates. The FSA is an open and transparent organisation and provides full information for firms, consumers and others about its objectives, plans, policies and rules. In South Africa's case, the asset management industry is regulated by The Financial Services Board (FSB), a unique independent institution established by statute to oversee the South African Non-Banking Financial Services Industry in the public interest. Its mission is to promote sound and efficient financial institutions and services together with mechanisms for investor protection in the markets we supervise.
However, in the case of Zimbabwe, the control of asset management industry has been placed under the RBZ, a state actor, whose primary goal is no longer consistent with what ordinarily would be the achievement and maintenance of price stability in the Zimbabwean economy. Only in Zimbabwe is the asset management industry defined as asset quasi-banking institutions whose financial intermediary role is mainly to manage financial assets on behalf of specific customers. By defining these institutions as quasi-banking, Gono craftily found a way of removing such institutions that fall under the Collective Investment Schemes (CIS) laws that were administered with the Registrar of Banks and Financial Institutions.Accordingly, Parliament was circumvented by Gono through a re-definition of what is universally accepted as a non banking financial services provider into a banking platform so as to allow him to control the entire financial services industry without parliamentary oversight. While other countries see a role for an independent regulator, in Zimbabwe this is not the case. Accordingly, if you are deemed to be an enemy of the system and you wish to operate an asset management company, you now know the consequences.
As background, it is important to locate the nationalization by Gono of the asset management industry in some context. Having assumed control of this significant financial services provider, Gono instructed the asset management firms to invest 40% of their assets in productive investments. In his Monetary Statement he presented the conclusion a self-serving "research" that the RBZ had carried out on the operations of asset management firms and that said if the companies continued without adequate regulation, they would seriously compromise the broader financial services sector. The compliant media then was put into full gear with stories portraying Gono as the "messiah" and "corruption buster" who was on a mission to crack down on institutions engaged in shady dealings and indigenous banks that were described as battling for survival as well as asset management companies were his main target.
In a typical fashion, anonymous high-level sources were quoted by the media saying that banks and asset management firms - some of which were allegedly used as conduits for money-laundering activities and speculative investments - were struggling to cope with new regulations ushered in by Gono's recent monetary policy statement. Some of the statements from these nameless and faceless sources were saying that most of the locally-owned banks were facing a serious liquidity crisis and bank managers were reported to be holding emergency meetings, including on Christmas day, to find ways of surviving in the new environment.
Gono, the master spin doctor gave the financial services industry their Christmas 2003 gift with this statement widely reported in the media: "Gono's threat that the curtain will soon come down on the era of the proliferation of weak, poorly-managed financial institutions dependent on cheap and unlimited central bank credit was real."This marked the beginning of the palace coup staged by Gono whose sole mission was to identify enemies of the state and use extra-judicial measures to punish them.
The pioneer victim was ENG whose directors were arrested with the media having a field day regarding the underpinning criminality of these individuals. The police arrested the two directors of ENG Capital Asset Management while its subsidiary, Century Discount House, had its operating licence withdrawn by the Reserve Bank of Zimbabwe.
The arrest of the directors came after it was reported that ENG had failed to pay more than $50 billion owed to investors. The financial services industry was in panic with banks reported to be selling their properties and foreign currency reserves to improve their liquidity and raise their capital levels. After the actions of Gono, the US dollar dramatically crashed from US$1:$6 000 to US$1:$4 500.Reports in the media were saying that the ENG directors were on the run as a result of problems engulfing their financial services concern. The firm was understood to be facing a liquidity crunch of between $70 billion and $80 billion.
Creditors were reported to have pounced on ENG, seizing the firm's property with one leading bank grabbing vehicles and shares which the company holds at a local commercial bank. Asset management companies were generally reported to be the source of the problems in the financial services industry and indirectly to the economic meltdown. Against this background, there was need to identify and punish the culprits and ENG provided a convenient scapegoat and Chiyangwa provided the high profile victim needed to capture the imagination of the general public that Zimbabwe had a new no-nonsense boss.Chiyangwa was only cleared by a magistrate of attempting to defeat the course justice, contempt of court and perjury by the magistrate's court after the State failed to build a case against him.
The State in what has now been standard practice failed to prove a prima facie case against Chiyangwa and all charges were withdrawn after plea and accordingly he was found not guilty on all the three counts. Muponda and Watyoka's arrest by police on December 31, 2003 for allegedly defrauding investors which included Century Holdings, First Mutual Asset Management among others, presented Gono with the first casualties he desperately needed in proving his credentials to his masters that he understood Zimbabwe's problems and he alone had the answers.
In a dramatic development, on July 31, Nyasha Watyoka was set free at the Harare Magistrates' Courts. Harare magistrate, Mrs. Faith Mushure, finally granted Watyoka's application for refusal of further remand after an ordeal spanning over two years saying he would be called to court by way of summons if more evidence against him crops up. If any of the liberation war heroes were to come back to live and hear Watyoka, Muponda and Chiyangwa's stories they would justifiably not believe that it is the same Zimbabwe that they risked and sacrificed their lives for. It is difficult to imagine what Watyoka was thinking of when he walked out of court as free man but I am not sure whether he would have any complementary things to say about the rule of law and democracy in Zimbabwe.
The ENG and Makamba's cases share one thing in common i.e. they have not captured the imagination of the opposition parties and non-state actors who appear not to have woken up to the corporate violence taking place in Zimbabwe that has left the affected individuals with no remedies for damages suffered. I believe that the ENG proprietors have lost everything only to be told after two years that the state is still trying to manufacture a case and may proceed by way of summons. How do you compensate such a loss and is the RBZ considering a compensation package for individuals like Watyoka or it is the price they need to pay to facilitate Gono's short journey to the state house.
Notwithstanding, the state was still arguing that Mr. Watyoka must not be removed from remand. In her ruling, Mrs. Mushure considered the defence submission that Watyoka's placement on remand for over two years without a trial date was unreasonable.She said: "As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable. This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time. I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years. It was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial. His (Watyoka's) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises."Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.
To confirm the direct nexus between the actions of the RBZ/Gono and Watyoka's ordeal, the charges are revealing. He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. Watyoka's co-accused, Gilbert Muponda, having discovered that his case had nothing to do with the bona fides pursuit of justice, decided to skip bail and is now believed to be in exile.I believe that it is important to learn from the rich experiences that have characterized post-independence Zimbabwe if the goal of creating a new dispensation is to be realized in our life time.
I have often reflected on my own personal experiences and it occurred to me that even Mugabe may not be fully aware of the destructive nature of the actions that have been taken by the RBZ/Gono in the name of national interest. I do not have any idea what Mugabe would say to a person like Watyoka who may have believed in the nation building project and registered with his colleagues an asset management company that operated in accordance with prevailing laws of the country only to wake up on 31 December 2003 and found out that he was an accused person.
The legal framework that would permit Gono to nullify the licences of asset management companies that were registered under a law passed by the Parliament of Zimbabwe should be interrogated otherwise the difference between Gono's actions and those typically associated with dictators of which Africa has many examples would be the same. Surely, if Watyoka and company were guilty of fraud against investors and its clients, one would have expected a complaint by such interested parties rather than a Governor of the RBZ. One would have expected the injured parties to have their own remedies since an asset manager is nothing but an agent representing the interests of its principals.
The return to an asset manager should ordinarily be management fees and we are not told to date how ENG ended up being a principal without the knowledge and consent of its principals. Instead we see the government being the complainant and the RBZ/Gono changing laws to create a room for intervention so that the rights of the legitimate interested parties are then subordinated to the state.As Zimbabwe gropes for solutions to the current economic meltdown and political crisis, it is obvious that a critical evaluation of the role of the RBZ/Gono in undermining democratic institutions is undertaken and appropriate lessons be drawn from case studies like the one described above.
Failure to appreciate the danger posed by individuals who have no regard of the rights of others and who do not have the patience to use Parliament as the law making body not only undermines nation building but exposes future generations to poverty. Rather than focusing the debate on regime change, it is time that we focus on the kind of governance that enables creative and enterprising people to apply their minds without fear of the state abusing their rights and using the law to persecute them.In focusing on the actions of the RBZ/Gono one hopes that this exercise will enable anyone interested in the future of Zimbabwe to reflect on what Zimbabwe and its people urgently require if hope and confidence is to be restored.
In as much as the ENG saga shows blacks in government do not need the former colonial master's help to victimize their own fellow citizens, there may not be any value in Benjamin Mkapa's much talked about intervention that appears to be premised on the belief that Zimbabwean problems are externally and colonially generated. It is my hope that in our lifetime we will reach a stage where we can openly talk about Africa's challenges and promise using real life examples without favour and prejudice.
Written By Mutumwa Mawere
RBZ and Rule of Law
- By Mutumwa Mawere -
The RBZ and asset managers: implications on democracy II
Posted on October 08th 2006
WHEN I first wrote the article RBZ and the Rule of Law: Implications on Democracy, I had no idea that it would generate so much interest and controversy. Given the emergence of the RBZ and its current Governor, Gideon Gono, as the only source of salvation for Zimbabwe, it is important that we continue to test and interrogate the hypothesis that there is a causal link between the actions of the RBZ/Gono and the undermining of the rule of law, property and human rights.
In addition, there is need to test the hypothesis that democratic institutions are being undermined by the RBZ/Gono resulting in the creation of a single power centre that may be described as a "weapon of mass destruction" in the context of Zimbabwe given the consequences of a series of policies and programs implemented by the RBZ/Gono since December 2003.
In as much as people may believe that my critique of the RBZ/Gono economic policies are motivated by my substantial loss of assets pursuant to the extra-judicial expropriation of all the companies deemed to be under my control in Zimbabwe, I believe that it is important to broaden the discourse beyond me and seek to objectively contextualize the political and economic challenges facing the country and the role, if any, of the RBZ/Gono in resolving or worsening the crisis.
At independence in 1980, Zimbabwe made a choice to be a democratic state with a constitution that enshrined on its citizens a common set of rights. In choosing to create a common citizenship under one Republic, there was hope that no Zimbabwean would be a subject of another like under a monarchy or an object of another like under apartheid/colonialism. Equally, it is important to state that rights without remedies are sterile.
After 26 years of independence and given the colonial legacy, it was the expectation of many that the values that underpinned the liberation struggle would be an integral part of the nation building project and never again would the rights of a few be used to undermine the rights of many.
I have chosen to focus only on the actions of the RBZ under Gono not only because it comes at a time when the future of Zimbabwe is so bleak but because his actions do have a direct bearing on the rule of law and if not exposed may condemn the country to a state where citizens have rights with no recourse.
I believe that it is only fair that we use empirical evidence to test the hypotheses referred to above. In my article of last week, I used Makamba's ordeal in support of the thesis that the use of emergency powers to undermine citizens' rights has nothing to do with fighting corruption but demonstrates the contempt with which the importance of the rule of law is regarded by many state actors including Gono.
In this article, I have chosen to look at the ENG saga that provides a comprehensive case study of the role of the RBZ in undermining democracy and the rule of law. ENG and its executive directors, Messrs. Nyasha Watyoka and Gilbert Muponda, as well as the former legislator, Phillip Chiyangwa, were the first victims of Gono's reign when they were arrested in December 2003 during the first month of Gono's appointment. The fate was already decided when Gono made his maiden state of the nation address on 18 December 2003 by unilaterally announcing that asset management firms would fall under the direct supervision of the RBZ with effect from January 2004. He said that asset management firms were not adequately policed and posed a threat to the country's financial system.
The RBZ without any change of the legal framework assumed the responsibility to directly monitor the registration process, supervision and regulation of all asset management companies in the country. All asset management companies were required to re-register with the RBZ notwithstanding the fact that some of them were legally registered by the Ministry of Finance. By effectively assuming control of the asset management industry, it meant that he could decide single handedly decide who was a criminal and direct the police to arrest such individuals.
Before dealing with the merits of the ENG case, it is important that we put into context the regulatory framework that governs the asset management industry universally and the point of departure in the case of Zimbabwe. Asset management is often used to refer to the investment management of collective investments and is a non banking activity that is normally regulated by independent institutions established by statute to oversee the Non-Banking Financial Services Industry in the public interest.
In the case of the UK, the asset management industry is regulated by the Financial Services Authority (FSA), an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 10 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive. The FSA is accountable to Treasury Ministers and through them to Parliament.
It is operationally independent of Government and is funded entirely by the firms it regulates. The FSA is an open and transparent organisation and provides full information for firms, consumers and others about its objectives, plans, policies and rules. In South Africa's case, the asset management industry is regulated by The Financial Services Board (FSB), a unique independent institution established by statute to oversee the South African Non-Banking Financial Services Industry in the public interest. Its mission is to promote sound and efficient financial institutions and services together with mechanisms for investor protection in the markets we supervise.
However, in the case of Zimbabwe, the control of asset management industry has been placed under the RBZ, a state actor, whose primary goal is no longer consistent with what ordinarily would be the achievement and maintenance of price stability in the Zimbabwean economy. Only in Zimbabwe is the asset management industry defined as asset quasi-banking institutions whose financial intermediary role is mainly to manage financial assets on behalf of specific customers. By defining these institutions as quasi-banking, Gono craftily found a way of removing such institutions that fall under the Collective Investment Schemes (CIS) laws that were administered with the Registrar of Banks and Financial Institutions.
Accordingly, Parliament was circumvented by Gono through a re-definition of what is universally accepted as a non banking financial services provider into a banking platform so as to allow him to control the entire financial services industry without parliamentary oversight. While other countries see a role for an independent regulator, in Zimbabwe this is not the case. Accordingly, if you are deemed to be an enemy of the system and you wish to operate an asset management company, you now know the consequences.
As background, it is important to locate the nationalization by Gono of the asset management industry in some context. Having assumed control of this significant financial services provider, Gono instructed the asset management firms to invest 40% of their assets in productive investments. In his Monetary Statement he presented the conclusion a self-serving "research" that the RBZ had carried out on the operations of asset management firms and that said if the companies continued without adequate regulation, they would seriously compromise the broader financial services sector. The compliant media then was put into full gear with stories portraying Gono as the "messiah" and "corruption buster" who was on a mission to crack down on institutions engaged in shady dealings and indigenous banks that were described as battling for survival as well as asset management companies were his main target.
In a typical fashion, anonymous high-level sources were quoted by the media saying that banks and asset management firms - some of which were allegedly used as conduits for money-laundering activities and speculative investments - were struggling to cope with new regulations ushered in by Gono's recent monetary policy statement. Some of the statements from these nameless and faceless sources were saying that most of the locally-owned banks were facing a serious liquidity crisis and bank managers were reported to be holding emergency meetings, including on Christmas day, to find ways of surviving in the new environment. Gono, the master spin doctor gave the financial services industry their Christmas 2003 gift with this statement widely reported in the media: "Gono's threat that the curtain will soon come down on the era of the proliferation of weak, poorly-managed financial institutions dependent on cheap and unlimited central bank credit was real."
This marked the beginning of the palace coup staged by Gono whose sole mission was to identify enemies of the state and use extra-judicial measures to punish them. The pioneer victim was ENG whose directors were arrested with the media having a field day regarding the underpinning criminality of these individuals. The police arrested the two directors of ENG Capital Asset Management while its subsidiary, Century Discount House, had its operating licence withdrawn by the Reserve Bank of Zimbabwe. The arrest of the directors came after it was reported that ENG had failed to pay more than $50 billion owed to investors. The financial services industry was in panic with banks reported to be selling their properties and foreign currency reserves to improve their liquidity and raise their capital levels. After the actions of Gono, the US dollar dramatically crashed from US$1:$6 000 to US$1:$4 500.
Reports in the media were saying that the ENG directors were on the run as a result of problems engulfing their financial services concern. The firm was understood to be facing a liquidity crunch of between $70 billion and $80 billion. Creditors were reported to have pounced on ENG, seizing the firm's property with one leading bank grabbing vehicles and shares which the company holds at a local commercial bank. Asset management companies were generally reported to be the source of the problems in the financial services industry and indirectly to the economic meltdown. Against this background, there was need to identify and punish the culprits and ENG provided a convenient scapegoat and Chiyangwa provided the high profile victim needed to capture the imagination of the general public that Zimbabwe had a new no-nonsense boss.
Chiyangwa was only cleared by a magistrate of attempting to defeat the course justice, contempt of court and perjury by the magistrate's court after the State failed to build a case against him.
The State in what has now been standard practice failed to prove a prima facie case against Chiyangwa and all charges were withdrawn after plea and accordingly he was found not guilty on all the three counts. Muponda and Watyoka's arrest by police on December 31, 2003 for allegedly defrauding investors which included Century Holdings, First Mutual Asset Management among others, presented Gono with the first casualties he desperately needed in proving his credentials to his masters that he understood Zimbabwe's problems and he alone had the answers.In a dramatic development, on July 31, Nyasha Watyoka was set free at the Harare Magistrates' Courts. Harare magistrate, Mrs. Faith Mushure, finally granted Watyoka's application for refusal of further remand after an ordeal spanning over two years saying he would be called to court by way of summons if more evidence against him crops up. If any of the liberation war heroes were to come back to live and hear Watyoka, Muponda and Chiyangwa's stories they would justifiably not believe that it is the same Zimbabwe that they risked and sacrificed their lives for. It is difficult to imagine what Watyoka was thinking of when he walked out of court as free man but I am not sure whether he would have any complementary things to say about the rule of law and democracy in Zimbabwe.
The ENG and Makamba's cases share one thing in common i.e. they have not captured the imagination of the opposition parties and non-state actors who appear not to have woken up to the corporate violence taking place in Zimbabwe that has left the affected individuals with no remedies for damages suffered. I believe that the ENG proprietors have lost everything only to be told after two years that the state is still trying to manufacture a case and may proceed by way of summons. How do you compensate such a loss and is the RBZ considering a compensation package for individuals like Watyoka or it is the price they need to pay to facilitate Gono's short journey to the state house.
Notwithstanding, the state was still arguing that Mr. Watyoka must not be removed from remand. In her ruling, Mrs. Mushure considered the defence submission that Watyoka's placement on remand for over two years without a trial date was unreasonable.
She said: "As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable. This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time. I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years. It was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial. His (Watyoka's) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises."
Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.To confirm the direct nexus between the actions of the RBZ/Gono and Watyoka's ordeal, the charges are revealing. He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. Watyoka's co-accused, Gilbert Muponda, having discovered that his case had nothing to do with the bona fides pursuit of justice, decided to skip bail and is now believed to be in exile.
I believe that it is important to learn from the rich experiences that have characterized post-independence Zimbabwe if the goal of creating a new dispensation is to be realized in our life time. I have often reflected on my own personal experiences and it occurred to me that even Mugabe may not be fully aware of the destructive nature of the actions that have been taken by the RBZ/Gono in the name of national interest. I do not have any idea what Mugabe would say to a person like Watyoka who may have believed in the nation building project and registered with his colleagues an asset management company that operated in accordance with prevailing laws of the country only to wake up on 31 December 2003 and found out that he was an accused person.
The legal framework that would permit Gono to nullify the licences of asset management companies that were registered under a law passed by the Parliament of Zimbabwe should be interrogated otherwise the difference between Gono's actions and those typically associated with dictators of which Africa has many examples would be the same. Surely, if Watyoka and company were guilty of fraud against investors and its clients, one would have expected a complaint by such interested parties rather than a Governor of the RBZ. One would have expected the injured parties to have their own remedies since an asset manager is nothing but an agent representing the interests of its principals. The return to an asset manager should ordinarily be management fees and we are not told to date how ENG ended up being a principal without the knowledge and consent of its principals. Instead we see the government being the complainant and the RBZ/Gono changing laws to create a room for intervention so that the rights of the legitimate interested parties are then subordinated to the state.
As Zimbabwe gropes for solutions to the current economic meltdown and political crisis, it is obvious that a critical evaluation of the role of the RBZ/Gono in undermining democratic institutions is undertaken and appropriate lessons be drawn from case studies like the one described above. Failure to appreciate the danger posed by individuals who have no regard of the rights of others and who do not have the patience to use Parliament as the law making body not only undermines nation building but exposes future generations to poverty. Rather than focusing the debate on regime change, it is time that we focus on the kind of governance that enables creative and enterprising people to apply their minds without fear of the state abusing their rights and using the law to persecute them.
In focusing on the actions of the RBZ/Gono one hopes that this exercise will enable anyone interested in the future of Zimbabwe to reflect on what Zimbabwe and its people urgently require if hope and confidence is to be restored. In as much as the ENG saga shows blacks in government do not need the former colonial master's help to victimize their own fellow citizens, there may not be any value in Benjamin Mkapa's much talked about intervention that appears to be premised on the belief that Zimbabwean problems are externally and colonially generated. It is my hope that in our lifetime we will reach a stage where we can openly talk about Africa's challenges and promise using real life examples without favour and prejudice.
Written By Mutumwa Mawere
The RBZ and asset managers: implications on democracy II
Posted on October 08th 2006
WHEN I first wrote the article RBZ and the Rule of Law: Implications on Democracy, I had no idea that it would generate so much interest and controversy. Given the emergence of the RBZ and its current Governor, Gideon Gono, as the only source of salvation for Zimbabwe, it is important that we continue to test and interrogate the hypothesis that there is a causal link between the actions of the RBZ/Gono and the undermining of the rule of law, property and human rights.
In addition, there is need to test the hypothesis that democratic institutions are being undermined by the RBZ/Gono resulting in the creation of a single power centre that may be described as a "weapon of mass destruction" in the context of Zimbabwe given the consequences of a series of policies and programs implemented by the RBZ/Gono since December 2003.
In as much as people may believe that my critique of the RBZ/Gono economic policies are motivated by my substantial loss of assets pursuant to the extra-judicial expropriation of all the companies deemed to be under my control in Zimbabwe, I believe that it is important to broaden the discourse beyond me and seek to objectively contextualize the political and economic challenges facing the country and the role, if any, of the RBZ/Gono in resolving or worsening the crisis.
At independence in 1980, Zimbabwe made a choice to be a democratic state with a constitution that enshrined on its citizens a common set of rights. In choosing to create a common citizenship under one Republic, there was hope that no Zimbabwean would be a subject of another like under a monarchy or an object of another like under apartheid/colonialism. Equally, it is important to state that rights without remedies are sterile.
After 26 years of independence and given the colonial legacy, it was the expectation of many that the values that underpinned the liberation struggle would be an integral part of the nation building project and never again would the rights of a few be used to undermine the rights of many.
I have chosen to focus only on the actions of the RBZ under Gono not only because it comes at a time when the future of Zimbabwe is so bleak but because his actions do have a direct bearing on the rule of law and if not exposed may condemn the country to a state where citizens have rights with no recourse.
I believe that it is only fair that we use empirical evidence to test the hypotheses referred to above. In my article of last week, I used Makamba's ordeal in support of the thesis that the use of emergency powers to undermine citizens' rights has nothing to do with fighting corruption but demonstrates the contempt with which the importance of the rule of law is regarded by many state actors including Gono.
In this article, I have chosen to look at the ENG saga that provides a comprehensive case study of the role of the RBZ in undermining democracy and the rule of law. ENG and its executive directors, Messrs. Nyasha Watyoka and Gilbert Muponda, as well as the former legislator, Phillip Chiyangwa, were the first victims of Gono's reign when they were arrested in December 2003 during the first month of Gono's appointment. The fate was already decided when Gono made his maiden state of the nation address on 18 December 2003 by unilaterally announcing that asset management firms would fall under the direct supervision of the RBZ with effect from January 2004. He said that asset management firms were not adequately policed and posed a threat to the country's financial system.
The RBZ without any change of the legal framework assumed the responsibility to directly monitor the registration process, supervision and regulation of all asset management companies in the country. All asset management companies were required to re-register with the RBZ notwithstanding the fact that some of them were legally registered by the Ministry of Finance. By effectively assuming control of the asset management industry, it meant that he could decide single handedly decide who was a criminal and direct the police to arrest such individuals.
Before dealing with the merits of the ENG case, it is important that we put into context the regulatory framework that governs the asset management industry universally and the point of departure in the case of Zimbabwe. Asset management is often used to refer to the investment management of collective investments and is a non banking activity that is normally regulated by independent institutions established by statute to oversee the Non-Banking Financial Services Industry in the public interest.
In the case of the UK, the asset management industry is regulated by the Financial Services Authority (FSA), an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 10 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive. The FSA is accountable to Treasury Ministers and through them to Parliament.
It is operationally independent of Government and is funded entirely by the firms it regulates. The FSA is an open and transparent organisation and provides full information for firms, consumers and others about its objectives, plans, policies and rules. In South Africa's case, the asset management industry is regulated by The Financial Services Board (FSB), a unique independent institution established by statute to oversee the South African Non-Banking Financial Services Industry in the public interest. Its mission is to promote sound and efficient financial institutions and services together with mechanisms for investor protection in the markets we supervise.
However, in the case of Zimbabwe, the control of asset management industry has been placed under the RBZ, a state actor, whose primary goal is no longer consistent with what ordinarily would be the achievement and maintenance of price stability in the Zimbabwean economy. Only in Zimbabwe is the asset management industry defined as asset quasi-banking institutions whose financial intermediary role is mainly to manage financial assets on behalf of specific customers. By defining these institutions as quasi-banking, Gono craftily found a way of removing such institutions that fall under the Collective Investment Schemes (CIS) laws that were administered with the Registrar of Banks and Financial Institutions.
Accordingly, Parliament was circumvented by Gono through a re-definition of what is universally accepted as a non banking financial services provider into a banking platform so as to allow him to control the entire financial services industry without parliamentary oversight. While other countries see a role for an independent regulator, in Zimbabwe this is not the case. Accordingly, if you are deemed to be an enemy of the system and you wish to operate an asset management company, you now know the consequences.
As background, it is important to locate the nationalization by Gono of the asset management industry in some context. Having assumed control of this significant financial services provider, Gono instructed the asset management firms to invest 40% of their assets in productive investments. In his Monetary Statement he presented the conclusion a self-serving "research" that the RBZ had carried out on the operations of asset management firms and that said if the companies continued without adequate regulation, they would seriously compromise the broader financial services sector. The compliant media then was put into full gear with stories portraying Gono as the "messiah" and "corruption buster" who was on a mission to crack down on institutions engaged in shady dealings and indigenous banks that were described as battling for survival as well as asset management companies were his main target.
In a typical fashion, anonymous high-level sources were quoted by the media saying that banks and asset management firms - some of which were allegedly used as conduits for money-laundering activities and speculative investments - were struggling to cope with new regulations ushered in by Gono's recent monetary policy statement. Some of the statements from these nameless and faceless sources were saying that most of the locally-owned banks were facing a serious liquidity crisis and bank managers were reported to be holding emergency meetings, including on Christmas day, to find ways of surviving in the new environment. Gono, the master spin doctor gave the financial services industry their Christmas 2003 gift with this statement widely reported in the media: "Gono's threat that the curtain will soon come down on the era of the proliferation of weak, poorly-managed financial institutions dependent on cheap and unlimited central bank credit was real."
This marked the beginning of the palace coup staged by Gono whose sole mission was to identify enemies of the state and use extra-judicial measures to punish them. The pioneer victim was ENG whose directors were arrested with the media having a field day regarding the underpinning criminality of these individuals. The police arrested the two directors of ENG Capital Asset Management while its subsidiary, Century Discount House, had its operating licence withdrawn by the Reserve Bank of Zimbabwe. The arrest of the directors came after it was reported that ENG had failed to pay more than $50 billion owed to investors. The financial services industry was in panic with banks reported to be selling their properties and foreign currency reserves to improve their liquidity and raise their capital levels. After the actions of Gono, the US dollar dramatically crashed from US$1:$6 000 to US$1:$4 500.
Reports in the media were saying that the ENG directors were on the run as a result of problems engulfing their financial services concern. The firm was understood to be facing a liquidity crunch of between $70 billion and $80 billion. Creditors were reported to have pounced on ENG, seizing the firm's property with one leading bank grabbing vehicles and shares which the company holds at a local commercial bank. Asset management companies were generally reported to be the source of the problems in the financial services industry and indirectly to the economic meltdown. Against this background, there was need to identify and punish the culprits and ENG provided a convenient scapegoat and Chiyangwa provided the high profile victim needed to capture the imagination of the general public that Zimbabwe had a new no-nonsense boss.
Chiyangwa was only cleared by a magistrate of attempting to defeat the course justice, contempt of court and perjury by the magistrate's court after the State failed to build a case against him.
The State in what has now been standard practice failed to prove a prima facie case against Chiyangwa and all charges were withdrawn after plea and accordingly he was found not guilty on all the three counts. Muponda and Watyoka's arrest by police on December 31, 2003 for allegedly defrauding investors which included Century Holdings, First Mutual Asset Management among others, presented Gono with the first casualties he desperately needed in proving his credentials to his masters that he understood Zimbabwe's problems and he alone had the answers.In a dramatic development, on July 31, Nyasha Watyoka was set free at the Harare Magistrates' Courts. Harare magistrate, Mrs. Faith Mushure, finally granted Watyoka's application for refusal of further remand after an ordeal spanning over two years saying he would be called to court by way of summons if more evidence against him crops up. If any of the liberation war heroes were to come back to live and hear Watyoka, Muponda and Chiyangwa's stories they would justifiably not believe that it is the same Zimbabwe that they risked and sacrificed their lives for. It is difficult to imagine what Watyoka was thinking of when he walked out of court as free man but I am not sure whether he would have any complementary things to say about the rule of law and democracy in Zimbabwe.
The ENG and Makamba's cases share one thing in common i.e. they have not captured the imagination of the opposition parties and non-state actors who appear not to have woken up to the corporate violence taking place in Zimbabwe that has left the affected individuals with no remedies for damages suffered. I believe that the ENG proprietors have lost everything only to be told after two years that the state is still trying to manufacture a case and may proceed by way of summons. How do you compensate such a loss and is the RBZ considering a compensation package for individuals like Watyoka or it is the price they need to pay to facilitate Gono's short journey to the state house.
Notwithstanding, the state was still arguing that Mr. Watyoka must not be removed from remand. In her ruling, Mrs. Mushure considered the defence submission that Watyoka's placement on remand for over two years without a trial date was unreasonable.
She said: "As much as this court appreciates that the charges against the accused are very serious, a remand of two years in my view, is unreasonable. This court has given the State three chances to furnish the accused person (Watyoka) with his trial date, but obviously, the State has failed. The State has now failed to bring the accused person to trial within a reasonable time. I am of the view that the interest of justice will not suffer any prejudice if the accused is removed from remand. The State has failed to serve him in the two years. It was Watyoka who actually suffered the prejudice due to the State's failure to set his matter down for trial. His (Watyoka's) preparation of the defence may have improved and the delay may have led to disproportionate delay and mental torture. Further remand is therefore refused. State to proceed by way of summons for prosecution if more evidence arises."
Watyoka was asked to collect his $150 million bail and $700 000 surety from the clerk of court.To confirm the direct nexus between the actions of the RBZ/Gono and Watyoka's ordeal, the charges are revealing. He was facing 31 counts of fraud, 12 counts of theft, seven counts of violating the Serious Offences Act and several Exchange Control charges. Watyoka's co-accused, Gilbert Muponda, having discovered that his case had nothing to do with the bona fides pursuit of justice, decided to skip bail and is now believed to be in exile.
I believe that it is important to learn from the rich experiences that have characterized post-independence Zimbabwe if the goal of creating a new dispensation is to be realized in our life time. I have often reflected on my own personal experiences and it occurred to me that even Mugabe may not be fully aware of the destructive nature of the actions that have been taken by the RBZ/Gono in the name of national interest. I do not have any idea what Mugabe would say to a person like Watyoka who may have believed in the nation building project and registered with his colleagues an asset management company that operated in accordance with prevailing laws of the country only to wake up on 31 December 2003 and found out that he was an accused person.
The legal framework that would permit Gono to nullify the licences of asset management companies that were registered under a law passed by the Parliament of Zimbabwe should be interrogated otherwise the difference between Gono's actions and those typically associated with dictators of which Africa has many examples would be the same. Surely, if Watyoka and company were guilty of fraud against investors and its clients, one would have expected a complaint by such interested parties rather than a Governor of the RBZ. One would have expected the injured parties to have their own remedies since an asset manager is nothing but an agent representing the interests of its principals. The return to an asset manager should ordinarily be management fees and we are not told to date how ENG ended up being a principal without the knowledge and consent of its principals. Instead we see the government being the complainant and the RBZ/Gono changing laws to create a room for intervention so that the rights of the legitimate interested parties are then subordinated to the state.
As Zimbabwe gropes for solutions to the current economic meltdown and political crisis, it is obvious that a critical evaluation of the role of the RBZ/Gono in undermining democratic institutions is undertaken and appropriate lessons be drawn from case studies like the one described above. Failure to appreciate the danger posed by individuals who have no regard of the rights of others and who do not have the patience to use Parliament as the law making body not only undermines nation building but exposes future generations to poverty. Rather than focusing the debate on regime change, it is time that we focus on the kind of governance that enables creative and enterprising people to apply their minds without fear of the state abusing their rights and using the law to persecute them.
In focusing on the actions of the RBZ/Gono one hopes that this exercise will enable anyone interested in the future of Zimbabwe to reflect on what Zimbabwe and its people urgently require if hope and confidence is to be restored. In as much as the ENG saga shows blacks in government do not need the former colonial master's help to victimize their own fellow citizens, there may not be any value in Benjamin Mkapa's much talked about intervention that appears to be premised on the belief that Zimbabwean problems are externally and colonially generated. It is my hope that in our lifetime we will reach a stage where we can openly talk about Africa's challenges and promise using real life examples without favour and prejudice.
Written By Mutumwa Mawere
Zimbabwe inflation hits 100,000%
ZIMBABWE's annual inflation rate has soared to over 100,000 percent, weeks ahead of elections in the country, according to official figures obtained by AFP on Wednesday.
"The year-on-year inflation rate for the month of January 2008, as measured by the all items Consumer Price Index (CPI) stood at 100,580.2 percent, gaining 34,367.9 percentage points on the December rate of 66,212.3 percent," the Central Statistical Office (CSO) said in a statement.
"This means that prices as measured by the all items CPI increased by an average of 100,580.2 percent between January 2007 and January 2008."
Inflation for food and non-alcoholic beverages reached 105,428.0 percent while non-food inflation was 97,885.7 percent," said the statement.
Zimbabwe's economy has been in a tailspin for the past seven years, characterised by shortages of basic commodities like sugar, cooking oil and petrol.
While the products are readily available on a burgeoning black market, many Zimbabweans have resorted to buying their essentials from neighbouring countries like Botswana, South Africa and Zambia.
Rangarirai Mberi, news editor of the Financial Gazette business weekly, said the state of the economy would feature prominently in next month's presidential and parliamentary elections.
"Numbers no longer shock people," he told AFP. "Zimbabweans have learnt on how to live in a hyper inflationary environment, but the question is how long can this continue?
"What is clear is that the state of the economy would feature prominently (in polls set for March 29)."
Zimbabwe's veteran leader Robert Mugabe, who turns 84 on Thursday and has been in power since Zimbabwe's independence from Britain in 1980, will contest his sixth term in office next month.
He will be challenged by his former finance minister Simba Makoni, and opposition Movement for Democratic Change leader Morgan Tsvangirai.
The government has introduced several measures to try and curb inflation, including imposing a ceiling on the prices of some goods and services and knocking three zeros off the country's currency.
The CSO last released monthly inflation statistics to the media in September. The November figure was only released by the central bank chief in a statement last month.
Godfrey Kanyenze, chief economist of the Zimbabwe Congress of Trade Unions, said the rise could partly be blamed on money being printed for electioneering purposes.
"The situation is out of control. You can feel it, sense it, feel it and see it," Kanyenze said.
"This latest increase in inflation is as a result of excessive money printing which is being used for election campaign purposes. What we are being told is the official figure, yet the actual rate could be around 150,000 percent."
According to David Mupamhadzi, an economist with the Zimbabwe Allied Banking Group, "the battle on the inflation front has gone out of hand.
"This latest increase will have serious repercussions on industry and the welfare of the ordinary man and women on the street. Already prices of goods are beyond the reach of many, but this will now worsen."AFP/TZG
"The year-on-year inflation rate for the month of January 2008, as measured by the all items Consumer Price Index (CPI) stood at 100,580.2 percent, gaining 34,367.9 percentage points on the December rate of 66,212.3 percent," the Central Statistical Office (CSO) said in a statement.
"This means that prices as measured by the all items CPI increased by an average of 100,580.2 percent between January 2007 and January 2008."
Inflation for food and non-alcoholic beverages reached 105,428.0 percent while non-food inflation was 97,885.7 percent," said the statement.
Zimbabwe's economy has been in a tailspin for the past seven years, characterised by shortages of basic commodities like sugar, cooking oil and petrol.
While the products are readily available on a burgeoning black market, many Zimbabweans have resorted to buying their essentials from neighbouring countries like Botswana, South Africa and Zambia.
Rangarirai Mberi, news editor of the Financial Gazette business weekly, said the state of the economy would feature prominently in next month's presidential and parliamentary elections.
"Numbers no longer shock people," he told AFP. "Zimbabweans have learnt on how to live in a hyper inflationary environment, but the question is how long can this continue?
"What is clear is that the state of the economy would feature prominently (in polls set for March 29)."
Zimbabwe's veteran leader Robert Mugabe, who turns 84 on Thursday and has been in power since Zimbabwe's independence from Britain in 1980, will contest his sixth term in office next month.
He will be challenged by his former finance minister Simba Makoni, and opposition Movement for Democratic Change leader Morgan Tsvangirai.
The government has introduced several measures to try and curb inflation, including imposing a ceiling on the prices of some goods and services and knocking three zeros off the country's currency.
The CSO last released monthly inflation statistics to the media in September. The November figure was only released by the central bank chief in a statement last month.
Godfrey Kanyenze, chief economist of the Zimbabwe Congress of Trade Unions, said the rise could partly be blamed on money being printed for electioneering purposes.
"The situation is out of control. You can feel it, sense it, feel it and see it," Kanyenze said.
"This latest increase in inflation is as a result of excessive money printing which is being used for election campaign purposes. What we are being told is the official figure, yet the actual rate could be around 150,000 percent."
According to David Mupamhadzi, an economist with the Zimbabwe Allied Banking Group, "the battle on the inflation front has gone out of hand.
"This latest increase will have serious repercussions on industry and the welfare of the ordinary man and women on the street. Already prices of goods are beyond the reach of many, but this will now worsen."AFP/TZG
Tuesday, February 19, 2008
Economic recovery for Zimbabwe
By Gilbert Muponda
http://www.gilbertmuponda.com/
Zimbabwe needs fresh leadership for the Zimbabwe Economy to recover. Zimbabwe can be likened to a very poorly performing Company. And its CEO is non other than President Mugabe, and if the company is to have any chance of recovery its imperative that the CEO who led the company to its ruin must be “retired”. I have already written extensively about Zimbabwe’s Economic problems. In this article I seek to suggest ways to resolve the Economic decay. Even if Zimbabwe was to get a Finance Minister from planet Jupiter and RBZ Governor from the Outer Space Zimbabwe’s Economy would never recover as long as President Mugabe remains the CEO of Zimbabwe Inc.
There is no need to act like false prophets who masquerade as turn around experts and avoiding giving the clear and honest advice that the nation’s economic problems can not be solved as long as President Mugabe remains in office .Zimbabwe needs a new CEO who can restore confidence to investors ( foreign and local).It is pointless to keep changing or criticising the governor when its clear he is only a messenger acting on behalf of his “principal”.I am sure President Mugabe would like to retire but is obviously asking himself what is in it for me?
Zimbabwe’s political risk is so high such that its almost impossible to attract any investment ( foreign or local).Political risk refers to the risk that revolution or other political conditions will result in a loss.
There several different types of political risk, including (among others):
Political violence, such as revolution, insurrection, civil unrest, terrorism or war;
Governmental expropriation or confiscation of assets;
Governmental frustration or repudiation of contracts;
Wrongful calling of letters of credit or similar on-demand guarantees; and
Inconvertibility of foreign currency or the inability to repatriate funds.
There is total lack of confidence in the economy such that capital flight and a run on the currency make it impossible to simply try to cover up the real issues affecting the Economy. The President is 84 years old and has been ruling for 28 years. Any reasonable analyst will ask what other strategy or plan can he implement which he hasn’t in the last 28 years. I have yet to hear of such a senior citizen who was able to successfully turn around an economy .Given his advanced age and a that turn around situation demands a younger leader who can with-stand the pressure and stress that comes with trying to save a sinking titanic. As a comparison Russia’s next leader is likely to be a 42 year old.
In a corporate set up Zimbabwe’s presidential candidates can be likened to investors trying to take over a company.The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.Takeover is a business term that refers to one company (the acquirer, or bidder) purchasing another (the target). These candidates need a clear and sustainable strategy to achieve their mission of replacing the country’s current CEO. Just because it hasn’t been done in Zimbabwe doesn’t mean its impossible.
A likely and effective strategy is to form an alliance which in business we refer to as a Consortium. A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Each participant retains its separate legal status and the consortium's control over each participant is generally limited to activities involving the joint endeavor, particularly the division of profits.
Consortium is a Latin word, meaning 'partnership, association or society' and derives from consors 'partner', itself from con- 'together' and sors 'fate', meaning owner of means or comrade.
At this critical stage politicians can borrow various corporate and financial strategies to achieve their goal .In many situations a client may want to borrow more money than one bank can comfortably lend .A common strategy is to form a syndicate.
In finance, a group of banks lending, for a specific purpose and to one single borrower, a - mostly large - amount of money is referred to as a bank syndicate or often only as a syndicate . In investment banking, refers to a group of investment banks that share underwriting risk in respect to an issuer's securities. Referred to as the underwriting syndicate.This is what is currently confronting Zimbabwe.A hige task beyond capacity of one individual or one organisation.This limits individual risk but dramatically increases chances of success.
In the current set up its clear that all the other candidates lack the total resources required to unseat the current CEO. The answer is to form a syndicate of all the opposing forces. It must be noted the opposing forces dont actually need to like or love one another. All thats required is a common purpose. In business its not uncommon for competitors to collude or cooperate to achieve a common goal .A competitor should be ready to aid his opponent if the outcome serves to achieve a common objective. An immediate example is Google Inc currently offering to help its bitter rival Yahoo! Inc to fend of a hostile bid from Microsoft.
When a bidder makes an offer for another company, it will usually inform the board of the target beforehand. If the board feels that the offer is such that the shareholders will be best served by accepting, it will recommend the offer be accepted by the shareholders. A takeover would be considered "hostile" if (1) the board rejects the offer, but the bidder continues to pursue it, or (2) if the bidder makes the offer without informing the board beforehand.
The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder will be able to conduct extensive due diligence into the affairs of the target company. It will be able to find out exactly what it is taking on before it makes a commitment. A hostile bidder will know only the information on the company that is publicly available and will therefore be taking more of a risk. Banks are also less willing to back hostile bids with the loans that are usually needed to finance the takeover.In the Zimbabwe political scene this is what seems to be playing out.It is important for all the opposing participants to identify insiders and work across party lines to minimise risk and lend credibility to their proposed takeover of Zimbabwe Inc.
In a private company the shareholders and the board are likely to be either the same people or closely connected with one another. Therefore all private acquisitions are likely to be friendly, because if the shareholders have agreed to sell the company then the board, however comprised, will usually be of the same mind or be sufficiently under the orders of the shareholders to cooperate with the bidder.
In cases where management may not be acting in the best interest of the shareholders (or creditors or stakeholders), a hostile takeover allows a suitor to bypass intransigent management. This is very similar to politicians who are no longer faithfully serving those who elected them.In this case, this enables the shareholders to choose the option that may be best for them, rather than leaving approval solely with management. In this case, a hostile takeover may be beneficial to shareholders, which is contrary to the usual perception that a hostile takeover is "bad."
In publicly held companies, various methods to avoid takeover bids are called "poison pills".As a variation of the poison pill defense, the people pill is an anti-takeover defense under which the current management team of the target company threatens to quit en masse in the event of a successful hostile takeover.
The effectiveness of a people pill is dependent on the circumstances of the takeover. If the management team is efficient, the company will be left without experienced leadership following a takeover. On the other hand, a great number of takeovers are the result of inefficient leadership in which management will be fired anyway; the people pill will be ineffective in this situation.However in politics its slightly different because of the presence of career politicians those who eat,drink and sleep politics.They try to resist any takeover or change because they fear losing posts,jobs,perks and benefits.This section has to be handled with care as they are normally prepared to defend the status quo.
A golden parachute is a clause (or several) in an executive's employment contract specifying that they will receive certain significant benefits if their employment is terminated. Sometimes, but not always, these clauses apply only in the event that the company is acquired and the executive's employment is terminated as a result of that acquisition. These benefits may include severance pay, cash bonuses, stock options or a combination of the items. The benefits are designed to reduce perverse incentives.In Zimbabwe’s this is critical.It appears during the SADC initiated talks this particular clause was not tacticfully handled.It appears the opposition did not sufficiently address any incentives for the encumbent to participate in any proposed change.
A world wide trend to handle this is normally to offer a blanket immunity from prosecution for the current leadership from any crime or alleged crime.The amnesty and immunity normally covers the current leadership ,its family and close allies.This is critical to minimise resistance to change.This happened in Russia immediately when president Putin took power from President Boris Yelstin.This is critical as it allows a smooth and less volatile transition.It is most unlikely that any encumbent will ever cooperate unless and until offered such solid assurances that normally come as part of a new constitution or a presidential decree. For as long as their fate or allies’ fate remains unknown and subject to guess work then resistance will be at its maximum level.
In business a firm facing a hostile take over normally use what in corporate finance terms are called Killer bees.Killer bees are firms or individuals that are employed by a target company to fend off a takeover bid; these include investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by utilizing various anti-takeover strategies, thereby making the target company economically unattractive and acquisition more costly or impossible. They will defend the current management by almost any means necessary. The task of the bidder and his advisors is then to soften the killer bees and have as many of them defect to the other side. In a political set up in Zimbabwe’s case these comprise of elements within the security services,civil service and private sector who have embedded interest in the current set up. They need to be assured that they will not be disadvantaged by any proposed
Anybody who has ever bought a business will confirm that hard part is not to raise the money,but rather the part to convince management to cooperate and not resist new ownership .It is almost impossible to take over without reassuring the current managers that they will keep their jobs and perks.Should they be retired/fired they need to know that they are getting fair compensation for past service. Zimbabwe Inc’s current suitors need to address these concerns if the mission is to succeed.
Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com
See additional articles at http://www.gilbertmuponda.com/
http://www.gilbertmuponda.com/
Zimbabwe needs fresh leadership for the Zimbabwe Economy to recover. Zimbabwe can be likened to a very poorly performing Company. And its CEO is non other than President Mugabe, and if the company is to have any chance of recovery its imperative that the CEO who led the company to its ruin must be “retired”. I have already written extensively about Zimbabwe’s Economic problems. In this article I seek to suggest ways to resolve the Economic decay. Even if Zimbabwe was to get a Finance Minister from planet Jupiter and RBZ Governor from the Outer Space Zimbabwe’s Economy would never recover as long as President Mugabe remains the CEO of Zimbabwe Inc.
There is no need to act like false prophets who masquerade as turn around experts and avoiding giving the clear and honest advice that the nation’s economic problems can not be solved as long as President Mugabe remains in office .Zimbabwe needs a new CEO who can restore confidence to investors ( foreign and local).It is pointless to keep changing or criticising the governor when its clear he is only a messenger acting on behalf of his “principal”.I am sure President Mugabe would like to retire but is obviously asking himself what is in it for me?
Zimbabwe’s political risk is so high such that its almost impossible to attract any investment ( foreign or local).Political risk refers to the risk that revolution or other political conditions will result in a loss.
There several different types of political risk, including (among others):
Political violence, such as revolution, insurrection, civil unrest, terrorism or war;
Governmental expropriation or confiscation of assets;
Governmental frustration or repudiation of contracts;
Wrongful calling of letters of credit or similar on-demand guarantees; and
Inconvertibility of foreign currency or the inability to repatriate funds.
There is total lack of confidence in the economy such that capital flight and a run on the currency make it impossible to simply try to cover up the real issues affecting the Economy. The President is 84 years old and has been ruling for 28 years. Any reasonable analyst will ask what other strategy or plan can he implement which he hasn’t in the last 28 years. I have yet to hear of such a senior citizen who was able to successfully turn around an economy .Given his advanced age and a that turn around situation demands a younger leader who can with-stand the pressure and stress that comes with trying to save a sinking titanic. As a comparison Russia’s next leader is likely to be a 42 year old.
In a corporate set up Zimbabwe’s presidential candidates can be likened to investors trying to take over a company.The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.Takeover is a business term that refers to one company (the acquirer, or bidder) purchasing another (the target). These candidates need a clear and sustainable strategy to achieve their mission of replacing the country’s current CEO. Just because it hasn’t been done in Zimbabwe doesn’t mean its impossible.
A likely and effective strategy is to form an alliance which in business we refer to as a Consortium. A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Each participant retains its separate legal status and the consortium's control over each participant is generally limited to activities involving the joint endeavor, particularly the division of profits.
Consortium is a Latin word, meaning 'partnership, association or society' and derives from consors 'partner', itself from con- 'together' and sors 'fate', meaning owner of means or comrade.
At this critical stage politicians can borrow various corporate and financial strategies to achieve their goal .In many situations a client may want to borrow more money than one bank can comfortably lend .A common strategy is to form a syndicate.
In finance, a group of banks lending, for a specific purpose and to one single borrower, a - mostly large - amount of money is referred to as a bank syndicate or often only as a syndicate . In investment banking, refers to a group of investment banks that share underwriting risk in respect to an issuer's securities. Referred to as the underwriting syndicate.This is what is currently confronting Zimbabwe.A hige task beyond capacity of one individual or one organisation.This limits individual risk but dramatically increases chances of success.
In the current set up its clear that all the other candidates lack the total resources required to unseat the current CEO. The answer is to form a syndicate of all the opposing forces. It must be noted the opposing forces dont actually need to like or love one another. All thats required is a common purpose. In business its not uncommon for competitors to collude or cooperate to achieve a common goal .A competitor should be ready to aid his opponent if the outcome serves to achieve a common objective. An immediate example is Google Inc currently offering to help its bitter rival Yahoo! Inc to fend of a hostile bid from Microsoft.
When a bidder makes an offer for another company, it will usually inform the board of the target beforehand. If the board feels that the offer is such that the shareholders will be best served by accepting, it will recommend the offer be accepted by the shareholders. A takeover would be considered "hostile" if (1) the board rejects the offer, but the bidder continues to pursue it, or (2) if the bidder makes the offer without informing the board beforehand.
The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder will be able to conduct extensive due diligence into the affairs of the target company. It will be able to find out exactly what it is taking on before it makes a commitment. A hostile bidder will know only the information on the company that is publicly available and will therefore be taking more of a risk. Banks are also less willing to back hostile bids with the loans that are usually needed to finance the takeover.In the Zimbabwe political scene this is what seems to be playing out.It is important for all the opposing participants to identify insiders and work across party lines to minimise risk and lend credibility to their proposed takeover of Zimbabwe Inc.
In a private company the shareholders and the board are likely to be either the same people or closely connected with one another. Therefore all private acquisitions are likely to be friendly, because if the shareholders have agreed to sell the company then the board, however comprised, will usually be of the same mind or be sufficiently under the orders of the shareholders to cooperate with the bidder.
In cases where management may not be acting in the best interest of the shareholders (or creditors or stakeholders), a hostile takeover allows a suitor to bypass intransigent management. This is very similar to politicians who are no longer faithfully serving those who elected them.In this case, this enables the shareholders to choose the option that may be best for them, rather than leaving approval solely with management. In this case, a hostile takeover may be beneficial to shareholders, which is contrary to the usual perception that a hostile takeover is "bad."
In publicly held companies, various methods to avoid takeover bids are called "poison pills".As a variation of the poison pill defense, the people pill is an anti-takeover defense under which the current management team of the target company threatens to quit en masse in the event of a successful hostile takeover.
The effectiveness of a people pill is dependent on the circumstances of the takeover. If the management team is efficient, the company will be left without experienced leadership following a takeover. On the other hand, a great number of takeovers are the result of inefficient leadership in which management will be fired anyway; the people pill will be ineffective in this situation.However in politics its slightly different because of the presence of career politicians those who eat,drink and sleep politics.They try to resist any takeover or change because they fear losing posts,jobs,perks and benefits.This section has to be handled with care as they are normally prepared to defend the status quo.
A golden parachute is a clause (or several) in an executive's employment contract specifying that they will receive certain significant benefits if their employment is terminated. Sometimes, but not always, these clauses apply only in the event that the company is acquired and the executive's employment is terminated as a result of that acquisition. These benefits may include severance pay, cash bonuses, stock options or a combination of the items. The benefits are designed to reduce perverse incentives.In Zimbabwe’s this is critical.It appears during the SADC initiated talks this particular clause was not tacticfully handled.It appears the opposition did not sufficiently address any incentives for the encumbent to participate in any proposed change.
A world wide trend to handle this is normally to offer a blanket immunity from prosecution for the current leadership from any crime or alleged crime.The amnesty and immunity normally covers the current leadership ,its family and close allies.This is critical to minimise resistance to change.This happened in Russia immediately when president Putin took power from President Boris Yelstin.This is critical as it allows a smooth and less volatile transition.It is most unlikely that any encumbent will ever cooperate unless and until offered such solid assurances that normally come as part of a new constitution or a presidential decree. For as long as their fate or allies’ fate remains unknown and subject to guess work then resistance will be at its maximum level.
In business a firm facing a hostile take over normally use what in corporate finance terms are called Killer bees.Killer bees are firms or individuals that are employed by a target company to fend off a takeover bid; these include investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by utilizing various anti-takeover strategies, thereby making the target company economically unattractive and acquisition more costly or impossible. They will defend the current management by almost any means necessary. The task of the bidder and his advisors is then to soften the killer bees and have as many of them defect to the other side. In a political set up in Zimbabwe’s case these comprise of elements within the security services,civil service and private sector who have embedded interest in the current set up. They need to be assured that they will not be disadvantaged by any proposed
Anybody who has ever bought a business will confirm that hard part is not to raise the money,but rather the part to convince management to cooperate and not resist new ownership .It is almost impossible to take over without reassuring the current managers that they will keep their jobs and perks.Should they be retired/fired they need to know that they are getting fair compensation for past service. Zimbabwe Inc’s current suitors need to address these concerns if the mission is to succeed.
Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com
See additional articles at http://www.gilbertmuponda.com/
Quasi-Fiscal Activities ruining Zimbabwe Economy
Central banks and the conduct of monetary policy have often been viewed as impenetrable mysteries, understood only by the limited few who somewhere along the way gained access to an exclusive club.Even well-informed citizens will find it difficult to think clearly about many economic issues and debates without having at least an approximate understanding of what central banks do.As part of the 12 part inflation series I have had to cover Monetary and Fiscal Policies mainly due to Zimbabwe's now infamous Quasi-Fiscal Activities (QFA)being carried of by its central bank. These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money.
Monetary policy refers to any of a number of government measures undertaken to affect financial markets and credit conditions with the ultimate objective of influencing the overall behaviour of the economy. Monetary policy is the responsibility of the Central Bank that implements its policy decisions largely through its ability to alter the money supply.Any excess money growth will likely result in inflationary pressure.
Fiscal policy is the use of government taxing and spending powers to affect the behaviour of the Economy .Fiscal policy also refers to government action to change the total or composition of revenues and expenditures in order to manage the growth of demand in the economy .The economy's total output, income and employment levels are directly related to total private and public spending or aggregate demand.Fiscal policy is normally the responsibility of the minister of Finance.In most countries the minister of finance and the governor of the Central Bank consult regularly. Furthermore there has been an explicit agreement that if any irreconcilable conflict between the two arises, the governor must either follow the written (and publicly released) directive of the minister or resign office.
QFA are defined as operations and actions whose effect can and and should be in principle be carried out by budgetary measures in form of explicit tax,subsidy or direct expenditure .QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons.Examples include subsidised credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition.By shifting what are essentially taxes and subsidies from government account to central bank account QFA severely distort the measurement of revenue and expenditure they render attempts sto assess fiscal policy meaningless.QFA create contigent implicit liabilities which the government is expected to fullfil there by mortgaging the nations future without proper approval.Since QFA are normally meant to circumvent the normal budgetary process they end up being funded by printing money which leads to hyoer inflation is unchecked.
The use of off-Budget activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidise certain groups through below-market pricing. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances.This leads normally to increase in monetary expansion which is unmatched by supply as a result inflation can set in.QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.
Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenues from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments.This process is critical and if the foundation of public finance.Once the government ascertains its needs it then lookst at ways to fund it needs.The budget spells out all this.The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy.Any expenditure not provided for in the budget then exposes the nation to the risk of printinng money to cover for unbudgeted for expenses.This is why Quasi-Fiscal Activities are undesirable , as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a Company's true financial position.
Central banks exist in most countries as government-owned institutions operating with considerable independence from the governing political structures. It is crucial, therefore, that the central bank be accountable to the people through their elected officials.For this reason most central banks are accountable to the Minister of Finance . Monetary policy may be sufficiently complex and technical that its implementation is left to experts who specialize in nothing else, but in a well-functioning and market economy, the people must ultimately be left to judge the performance of those experts. Such judgment requires a basic understanding of the main issues.
The monetary policy is aimed at harnessing the benefits of low inflation . Among other things, a credible commitment to keeping inflation low helps create a positive climate for low interest rates and productive long-term investment. This in turn strengthens the growth of the economy and its capacity to generate new jobs. An important benefit of low inflation is that it generates less uncertainty, interferes less with the operation of the price system, and thus imposes fewer costs on society .It is important that fiscal policy and monetary policy be separate even though they are complimentary.A hidden technique of combining the fiscal and monetary policy is generally refered ro as Quasi Fiscal Activity( QFA).It has to be avoided as it seeks to circumvent proven systems such as national budgets which make national institutions accountable to the people through Parliament.
Monetary policy is normally guided by an inflation-control target . This means adopting various measures and steps to keep inflation low and within a certain pre-set level.Low inflation would then bring about stability and translate into a better standard of living for the the nation.Essentially, successful monetary policy requires central banks to invest in the creation, monitoring, and projection of economic information-all devoted to achieving a better understanding of developments and relationships in the domestic and world economies.
Inflation erodes the value of money. When future prices are less predictable, sensible spending and saving plans are harder to make. People increasingly fear that their future purchasing power will decline and erode their standard of living.
Inflation encourages investments that are speculative and take advantage of inflation rather than productive investment. It can also create the illusion of temporary financial success while masking fundamental economic problems. Businesses and households must spend more time, and money, protecting themselves from the effects of rising costs and prices. Businesses, workers, and investors respond to signs of inflation by pushing up prices, wages, and interest rates to protect themselves. This can lead to a "vicious circle" of rising inflation. Inflation can mean particular hardship for those whose incomes don't keep pace with the rising level of prices, especially people on fixed incomes such as senior citizens who are receiving pensions.
Consumers and businesses are better able to make long-range plans because they know that their money is not losing its purchasing power year after year. Interest rates, both in nominal and real terms, are lower, encouraging investment to improve productivity and allowing businesses to prosper without raising prices. Sustained low inflation is self-reinforcing. Businesses and individuals do not react so quickly to short-term price pressures by seeking to raise prices and wages if they are confident that inflation is under long-term control. This contributes to keeping inflation low.
Finally, monetary policy is restricted by the impact of other government actions, especially Fiscal Policy ie, decisions about government expenditures and taxation. Fiscal policy also influences overall economic demand, and if fiscal and monetary policy are not co-ordinated, they can work at cross-purposes.
Central banks choose to focus on maintaining low and relatively stable inflation for two reasons. First, low inflation is beneficial for the operation of the economy. Second, both theory and evidence suggest that monetary policy cannot have a systematic and sustained effect on macroeconomic variables other than the inflation rate. Given this limited scope for monetary policy, it would make little sense for monetary policy to adopt other long-run targets, such as the unemployment rate or the growth rate of real output. It is natural for central banks to adopt a long-run target for the one thing that they can reasonably expect to influence over the long run-the rate of inflation.
When the Central Bank has clearly stated objectives and takes policy actions that affirm those objectives, the result is an increase in its credibility. This credibility, in turn, helps to keep expectations of future inflation close to the inflation target-what is sometimes called an anchoring of inflation expectations Through maintaining low and relatively stable inflation, central banks make their best contribution to the economic health of a nation. This objective is grounded in the propositions that (1) high inflation is damaging to the economy, and (2) monetary policy is unable to have a systematic and lasting effect on macroeconomic variables other than the rate of inflation.
The biggest cost of inflation is the uncertainty that it generates and the inefficiencies it creates by distorting the information conveyed by relative prices. Cross-country evidence suggests that countries with higher rates of inflation also tend to have more volatile rates of inflation.. Stable output growth is desirable. Genuine benefits come from having a more stable growth rate of real output and also from having a more stable output gap.
It is impossible to determine precisely that the greater stability in inflation and output growth has been the result of better monetary policy rather than just a less volatile economic environment. Monetary policy is forward-looking. The transmission mechanism of monetary policy is the complex chain of cause and effect that connects policy actions by the Central Bank to aggregate demand, output, and inflation. Monetary policy works with long and variable lags, and monetary policy must therefore be forward-looking, anticipating events that are likely to happen in the world and domestic economies. For this reason it is important that policy be clearly spelt out and then be given an condicive atmosphere to succeed.
Two types of uncertainty complicate the conduct of monetary policy: uncertainty about the precise workings of the transmission mechanism, and uncertainty about economic events in both the global and local economies. Both types of uncertainty require that the Central Bank invest considerable resources in research, current analysis, and projection in order to make the best-informed policy decisions.This means inflation figures be released on time and be accurate.
Currently there is hot debate whether inflation is 24,000% or 26,000% or 164,000%.This lack of accurate and trusted inflation statistics make the markets unstable.Currently there is a wide shortage of basket goods used to calculate inflation.Households have no choice but to use home-made statisitcs which tend to be closer to reality since they compare actual price movements albeit in the black market.Due to lack of accurate figures business and households generally expect inflation to be very high and in turn ask for higher prices and salaries which feeds the inflation circle.
The RBZ has come up with various programmes providing subsidised funding .These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).This product directly competes with Banks who are supposed to lend to the same clients and earn sufficient interest income to keep the banks afloat. In reality a bank can not match this rate being offered by the RBZ, which has now been converted to a massive commercial bank.These facilities represent a hidden tax since this money is not at market rates.It means someone (tax payer) is subsidising these facilities through an undeclared tax. As noted above these facilities lack an relation to reality.Current money market rates are around 700% -1600%, yet money can be borrowed at around 25% which creates loopholes and leads to market distortions and market inefficiencies.The only reason why this money is so cheap its because its printed money which mistakenly is being viewed as a benefit ignoring the more disasterous impact on money supply and inflation.
As a direct result of QFA the central bank has moved into areas which it doesnt have expertise or capacity.This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in measures to recover the money.Once a lender like the RBZ gets involved borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out.The RBZ becomes lender of prefered choice as borrowers stampede for loans which in all likely hood they would never have to repay.Commercial Banks and other financial institutions a better plsced to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.
The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs.The now much talked about People's shops cant be viewed differently from the controversial Operation Dzikisa Price.If all other Supermarkets cants provide cheap food how can the People's Shops do it without being subsidised?This is how QFA activities mislead the market and distort resource allocation.This trend discourges business to invest .As a result shortages will follow leading to increased black market activities and run away inflation..The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.
Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com
See additional articles at http://www.gilbertmuponda.com/
Monetary policy refers to any of a number of government measures undertaken to affect financial markets and credit conditions with the ultimate objective of influencing the overall behaviour of the economy. Monetary policy is the responsibility of the Central Bank that implements its policy decisions largely through its ability to alter the money supply.Any excess money growth will likely result in inflationary pressure.
Fiscal policy is the use of government taxing and spending powers to affect the behaviour of the Economy .Fiscal policy also refers to government action to change the total or composition of revenues and expenditures in order to manage the growth of demand in the economy .The economy's total output, income and employment levels are directly related to total private and public spending or aggregate demand.Fiscal policy is normally the responsibility of the minister of Finance.In most countries the minister of finance and the governor of the Central Bank consult regularly. Furthermore there has been an explicit agreement that if any irreconcilable conflict between the two arises, the governor must either follow the written (and publicly released) directive of the minister or resign office.
QFA are defined as operations and actions whose effect can and and should be in principle be carried out by budgetary measures in form of explicit tax,subsidy or direct expenditure .QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons.Examples include subsidised credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition.By shifting what are essentially taxes and subsidies from government account to central bank account QFA severely distort the measurement of revenue and expenditure they render attempts sto assess fiscal policy meaningless.QFA create contigent implicit liabilities which the government is expected to fullfil there by mortgaging the nations future without proper approval.Since QFA are normally meant to circumvent the normal budgetary process they end up being funded by printing money which leads to hyoer inflation is unchecked.
The use of off-Budget activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidise certain groups through below-market pricing. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances.This leads normally to increase in monetary expansion which is unmatched by supply as a result inflation can set in.QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.
Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenues from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments.This process is critical and if the foundation of public finance.Once the government ascertains its needs it then lookst at ways to fund it needs.The budget spells out all this.The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy.Any expenditure not provided for in the budget then exposes the nation to the risk of printinng money to cover for unbudgeted for expenses.This is why Quasi-Fiscal Activities are undesirable , as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a Company's true financial position.
Central banks exist in most countries as government-owned institutions operating with considerable independence from the governing political structures. It is crucial, therefore, that the central bank be accountable to the people through their elected officials.For this reason most central banks are accountable to the Minister of Finance . Monetary policy may be sufficiently complex and technical that its implementation is left to experts who specialize in nothing else, but in a well-functioning and market economy, the people must ultimately be left to judge the performance of those experts. Such judgment requires a basic understanding of the main issues.
The monetary policy is aimed at harnessing the benefits of low inflation . Among other things, a credible commitment to keeping inflation low helps create a positive climate for low interest rates and productive long-term investment. This in turn strengthens the growth of the economy and its capacity to generate new jobs. An important benefit of low inflation is that it generates less uncertainty, interferes less with the operation of the price system, and thus imposes fewer costs on society .It is important that fiscal policy and monetary policy be separate even though they are complimentary.A hidden technique of combining the fiscal and monetary policy is generally refered ro as Quasi Fiscal Activity( QFA).It has to be avoided as it seeks to circumvent proven systems such as national budgets which make national institutions accountable to the people through Parliament.
Monetary policy is normally guided by an inflation-control target . This means adopting various measures and steps to keep inflation low and within a certain pre-set level.Low inflation would then bring about stability and translate into a better standard of living for the the nation.Essentially, successful monetary policy requires central banks to invest in the creation, monitoring, and projection of economic information-all devoted to achieving a better understanding of developments and relationships in the domestic and world economies.
Inflation erodes the value of money. When future prices are less predictable, sensible spending and saving plans are harder to make. People increasingly fear that their future purchasing power will decline and erode their standard of living.
Inflation encourages investments that are speculative and take advantage of inflation rather than productive investment. It can also create the illusion of temporary financial success while masking fundamental economic problems. Businesses and households must spend more time, and money, protecting themselves from the effects of rising costs and prices. Businesses, workers, and investors respond to signs of inflation by pushing up prices, wages, and interest rates to protect themselves. This can lead to a "vicious circle" of rising inflation. Inflation can mean particular hardship for those whose incomes don't keep pace with the rising level of prices, especially people on fixed incomes such as senior citizens who are receiving pensions.
Consumers and businesses are better able to make long-range plans because they know that their money is not losing its purchasing power year after year. Interest rates, both in nominal and real terms, are lower, encouraging investment to improve productivity and allowing businesses to prosper without raising prices. Sustained low inflation is self-reinforcing. Businesses and individuals do not react so quickly to short-term price pressures by seeking to raise prices and wages if they are confident that inflation is under long-term control. This contributes to keeping inflation low.
Finally, monetary policy is restricted by the impact of other government actions, especially Fiscal Policy ie, decisions about government expenditures and taxation. Fiscal policy also influences overall economic demand, and if fiscal and monetary policy are not co-ordinated, they can work at cross-purposes.
Central banks choose to focus on maintaining low and relatively stable inflation for two reasons. First, low inflation is beneficial for the operation of the economy. Second, both theory and evidence suggest that monetary policy cannot have a systematic and sustained effect on macroeconomic variables other than the inflation rate. Given this limited scope for monetary policy, it would make little sense for monetary policy to adopt other long-run targets, such as the unemployment rate or the growth rate of real output. It is natural for central banks to adopt a long-run target for the one thing that they can reasonably expect to influence over the long run-the rate of inflation.
When the Central Bank has clearly stated objectives and takes policy actions that affirm those objectives, the result is an increase in its credibility. This credibility, in turn, helps to keep expectations of future inflation close to the inflation target-what is sometimes called an anchoring of inflation expectations Through maintaining low and relatively stable inflation, central banks make their best contribution to the economic health of a nation. This objective is grounded in the propositions that (1) high inflation is damaging to the economy, and (2) monetary policy is unable to have a systematic and lasting effect on macroeconomic variables other than the rate of inflation.
The biggest cost of inflation is the uncertainty that it generates and the inefficiencies it creates by distorting the information conveyed by relative prices. Cross-country evidence suggests that countries with higher rates of inflation also tend to have more volatile rates of inflation.. Stable output growth is desirable. Genuine benefits come from having a more stable growth rate of real output and also from having a more stable output gap.
It is impossible to determine precisely that the greater stability in inflation and output growth has been the result of better monetary policy rather than just a less volatile economic environment. Monetary policy is forward-looking. The transmission mechanism of monetary policy is the complex chain of cause and effect that connects policy actions by the Central Bank to aggregate demand, output, and inflation. Monetary policy works with long and variable lags, and monetary policy must therefore be forward-looking, anticipating events that are likely to happen in the world and domestic economies. For this reason it is important that policy be clearly spelt out and then be given an condicive atmosphere to succeed.
Two types of uncertainty complicate the conduct of monetary policy: uncertainty about the precise workings of the transmission mechanism, and uncertainty about economic events in both the global and local economies. Both types of uncertainty require that the Central Bank invest considerable resources in research, current analysis, and projection in order to make the best-informed policy decisions.This means inflation figures be released on time and be accurate.
Currently there is hot debate whether inflation is 24,000% or 26,000% or 164,000%.This lack of accurate and trusted inflation statistics make the markets unstable.Currently there is a wide shortage of basket goods used to calculate inflation.Households have no choice but to use home-made statisitcs which tend to be closer to reality since they compare actual price movements albeit in the black market.Due to lack of accurate figures business and households generally expect inflation to be very high and in turn ask for higher prices and salaries which feeds the inflation circle.
The RBZ has come up with various programmes providing subsidised funding .These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).This product directly competes with Banks who are supposed to lend to the same clients and earn sufficient interest income to keep the banks afloat. In reality a bank can not match this rate being offered by the RBZ, which has now been converted to a massive commercial bank.These facilities represent a hidden tax since this money is not at market rates.It means someone (tax payer) is subsidising these facilities through an undeclared tax. As noted above these facilities lack an relation to reality.Current money market rates are around 700% -1600%, yet money can be borrowed at around 25% which creates loopholes and leads to market distortions and market inefficiencies.The only reason why this money is so cheap its because its printed money which mistakenly is being viewed as a benefit ignoring the more disasterous impact on money supply and inflation.
As a direct result of QFA the central bank has moved into areas which it doesnt have expertise or capacity.This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in measures to recover the money.Once a lender like the RBZ gets involved borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out.The RBZ becomes lender of prefered choice as borrowers stampede for loans which in all likely hood they would never have to repay.Commercial Banks and other financial institutions a better plsced to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.
The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs.The now much talked about People's shops cant be viewed differently from the controversial Operation Dzikisa Price.If all other Supermarkets cants provide cheap food how can the People's Shops do it without being subsidised?This is how QFA activities mislead the market and distort resource allocation.This trend discourges business to invest .As a result shortages will follow leading to increased black market activities and run away inflation..The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.
Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com
See additional articles at http://www.gilbertmuponda.com/
Zimbabwe Banks have been put undermined
The banking system developed when, people deposited gold coins,precious metals and silver coins at goldsmiths for safe keeping, in return of a note for their deposit. Slowly the notes became a trusted medium of exchange an early form of paper money was born, in the form of gold certificates and silver certificates.
Over time the notes were used directly in trade, the goldsmiths observed that people would never redeem all their notes at the same time, and exploited the opportunity to issue new bank notes in the form of interest paying loans. These generated income—a process that enhanced their role from passive guardians of bullion charging fees for safe storage, to interest-paying and earning banks. When creditors (the owners of the notes) lost faith in the ability of the bank to exchange their notes back into coins, many would try to redeem their notes at the same time. This was called a bank run and many early banks either went into insolvency or refused to pay up.
Banks are required to keep on hand only a fraction of the funds deposited with them which allows the function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Banks make money from various products and services .These include interest on loans, fees and margins on forex trades. It must be noted banks have to make money regardless of the operating environment. And for this to happen banks have to develop various products and services that match their operating environment. This article is a brief look at how the Banks operating environment has been poisoned to make it almost impossible for them to stay afloat whilst focusing on traditional “core-activities” and holding “core -business-assets”
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion.Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams and arrests in the case of Zimbabwe‘s black market. In many markets there is bureau de changes which help mobilise foreign currency. In Zimbabwe these were outlawed in one of the early “scape goat finding” seasons, when they were blamed for fuelling the black market.
The Zimbabwe forex market was further reduced by various regulations which essentially tried to centralise the market whilst simultaneously paying an unrealistic exchange rate .This action has deprived the banks of an important fee and income generating product and service. Banks would normally source forex,be its custodian and provide a ready and perhaps more transparent market for forex. Banks generally knew the exporters and the importers. As such Banks were better placed to match these participants requirements and earn a fee or some income in the process.
This cant be viewed in isolation. The other main area a is bank is supposed to make money is on loans through interest income. The RBZ has come up with various programmes providing subsidised funding .These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).This product directly competes with Banks who are supposed to lend to the same clients and earn sufficient interest income to keep the banks afloat. In reality a bank can not match this rate being offered by the RBZ, which has now been converted to a massive commercial bank. The only difference being it can lend money on a non-commercial basis with a net effect of taking the bread out of the commercial banks mouth.
Below is a general description how the forex market should work .The forex market has various transactions including spot, forward and swaps. A spot transaction is an immediate delivery transaction. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. Spot has the largest share by volume in FX transactions among all instruments.
A forex forward contract is an agreement between two parties to buy or sell a currency at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It is used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on US$ or Z$).Its use broaden and deepen the forex market since participants will have more option to satisfy their forex needs.
One party agrees (obligated) to sell, the other to buy, for a forward price agreed in advance. In some forward transactions, no actual cash changes hands. If the transaction is collateralized, exchange of margin will take place according to a pre-agreed rule or schedule. Otherwise no forex of any kind actually changes hands, until the maturity of the contract.( but a commitment fee maybe payable upfront).This secures the forex. These contracts are legally enforceable. Its therefore important to have a strong and independent judiciary system which allows both parties to enforce their rights. The presence as in Zimbabwe’s case of a participant who appears above the law or who can unilaterally shift contract goal posts undermines these critical financial instruments.
The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the forex changes hands (on the spot date, usually within two business days). The difference between the spot and the forward price is the forward premium or forward discount. In Zimbabwe’s case the premium would then reflect the scarcity of forex plus the forex rate uncertainty and market volatility.
Forward contracts are personalized between parties ( but can be sold or ceded). The forward market is a general term used to describe the informal market by which these contracts are entered into. In Zimbabwe this would involve a financial institution and an exporter or an importer. This would allow the bank or the exporter to plan with some certainty about a future cash flow. This stabilised the market. The premium which now is openly a black market rate would legally and correctly be incorporated as the premium for committing to rates upfront. Standardized forward contracts are called futures contracts and traded on a futures exchange.
In finance, a swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. This allows parties to swap say Zim dollars today and exchange the amounts at an agreed date. This allowed participants to legally lend each other foreign currency. This involved most financial institutions including the Central Bank which was probably the biggest player and beneficiary.
Zimbabwe has always needed outside forex for it balance of payment support. This came from various sources including donors,aid,direct foreign investment, supra-national organisations such as world bank,IFC and exports. These started to dry up about 8 years ago .As forex became more scarce the black market developed. The Banking industry responded with various products that included forward contracts, swaps and other forex linked derivatives. This allowed industry to access the at market determined rates.This is so because derivatives allow a premium or discount to factor in the scarcity, the volatility and the uncertainty. Using such instruments the banking system was able to efficiently allocate the scarce resource without letting the exchange rate get out of control. This way the market remained more formalised as banks acted as agents of the RBZ and the RBZ didn’t have to directly release trillions directly to its runners.
Prior to December 2003 this was the norm. The market players would transact at the going market rates as determined by the forward, swap and other derivative market instruments. These instruments were critical in the price discovery process as they factored most of the known risk variables .This kept the market reasonably stable and allowed RBZ, government and industry to orderly access whatever forex available. Then suddenly in December 2003 the biggest player in the market decided to unilaterally change pre-agreed rates in all forward, swap and other derivative contracts it had obligations .
This spelt a disaster for the sector. This is so because even if an institution was not a direct participant in the forward or swap contracts if it had exposure to any player who had a contract that was unilaterally re-priced that spelt enough trouble to cause panic which would then trigger a bank run when coupled with other factors. The unilateral re-pricing of contracts ( i.e. changing exchange rates pre-agreed) was and is ruinous to who ever is holding the contract .In short this meant certain institutions were unable to pay for their obligations as their expected cash flow from forward, swap and other derivative contracts were dramatically reduced by the key participant in the forex market.
A currency swap (or cross currency swap) is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. Swaps can be used to hedge certain risks such as interest rate risk and exchange rate risk plus the future availability of forex.In the Zimbabwean case this would involve swapping forex for Zim dollars ,with the understanding that at maturity this would be reversed. Obviously should the other party choose to unilaterally change the swap currency or transaction terms then other market participants would be exposed to ruin.
Currency swaps can be negotiated for a variety of maturities up 25 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by many accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract. This allows market participants to lend each other and carry out their normal economic activity using such products . Currency swaps involve the exchange of the principal amount. Interest payments are not netted (as they are in interest rate swaps) because they are denominated in different currencies.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Zimbabwean companies have been excluded from such markets because of the country’s risk profile. The involvement of an interest and currency swap in one transaction allows the participants to accurately price the risk and reward who ever is providing the commodity being traded in this instance the exporter would be fairly rewarded whilst the importer can plan with certainty that they will be able to import their raw materials. This kept production systems on tracks and allowed the formal economy to function.
It is clear banks have been left with no option but to improvise to remain afloat. They deserve credit for that. They cant make loans out as the clients have a greater risk of default due to hostile environment. In addition the central bank has forex runners who by-pass the banks. They cant trade in forex as this has all been centralised and generally monopolised to such an extent its now a preserve of the central bank. This indicates the need to look beyond individual banks but rather the whole operating environment, regulations and various policy shifts which happen so constantly such that its almost impossible to assess their benefits. The central bank is now competing with the banks and as such banks have been crowded out of the traditional areas such as provision of market determined loans and forex transactions. Instead of being the lender of last resort the RBZ has become the lender of first choice. This is partially responsible for eroding the confidence in the banking system and undermining the sector. It may be time to amend the Banking Act to enable banks to ride the crisis .
Gilbert Muponda is a Zimbabwe-born entrepreneur, living in exile. He can be contacted at gilbert@gilbertmuponda.com
Over time the notes were used directly in trade, the goldsmiths observed that people would never redeem all their notes at the same time, and exploited the opportunity to issue new bank notes in the form of interest paying loans. These generated income—a process that enhanced their role from passive guardians of bullion charging fees for safe storage, to interest-paying and earning banks. When creditors (the owners of the notes) lost faith in the ability of the bank to exchange their notes back into coins, many would try to redeem their notes at the same time. This was called a bank run and many early banks either went into insolvency or refused to pay up.
Banks are required to keep on hand only a fraction of the funds deposited with them which allows the function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Banks make money from various products and services .These include interest on loans, fees and margins on forex trades. It must be noted banks have to make money regardless of the operating environment. And for this to happen banks have to develop various products and services that match their operating environment. This article is a brief look at how the Banks operating environment has been poisoned to make it almost impossible for them to stay afloat whilst focusing on traditional “core-activities” and holding “core -business-assets”
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion.Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams and arrests in the case of Zimbabwe‘s black market. In many markets there is bureau de changes which help mobilise foreign currency. In Zimbabwe these were outlawed in one of the early “scape goat finding” seasons, when they were blamed for fuelling the black market.
The Zimbabwe forex market was further reduced by various regulations which essentially tried to centralise the market whilst simultaneously paying an unrealistic exchange rate .This action has deprived the banks of an important fee and income generating product and service. Banks would normally source forex,be its custodian and provide a ready and perhaps more transparent market for forex. Banks generally knew the exporters and the importers. As such Banks were better placed to match these participants requirements and earn a fee or some income in the process.
This cant be viewed in isolation. The other main area a is bank is supposed to make money is on loans through interest income. The RBZ has come up with various programmes providing subsidised funding .These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).This product directly competes with Banks who are supposed to lend to the same clients and earn sufficient interest income to keep the banks afloat. In reality a bank can not match this rate being offered by the RBZ, which has now been converted to a massive commercial bank. The only difference being it can lend money on a non-commercial basis with a net effect of taking the bread out of the commercial banks mouth.
Below is a general description how the forex market should work .The forex market has various transactions including spot, forward and swaps. A spot transaction is an immediate delivery transaction. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. Spot has the largest share by volume in FX transactions among all instruments.
A forex forward contract is an agreement between two parties to buy or sell a currency at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It is used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on US$ or Z$).Its use broaden and deepen the forex market since participants will have more option to satisfy their forex needs.
One party agrees (obligated) to sell, the other to buy, for a forward price agreed in advance. In some forward transactions, no actual cash changes hands. If the transaction is collateralized, exchange of margin will take place according to a pre-agreed rule or schedule. Otherwise no forex of any kind actually changes hands, until the maturity of the contract.( but a commitment fee maybe payable upfront).This secures the forex. These contracts are legally enforceable. Its therefore important to have a strong and independent judiciary system which allows both parties to enforce their rights. The presence as in Zimbabwe’s case of a participant who appears above the law or who can unilaterally shift contract goal posts undermines these critical financial instruments.
The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the forex changes hands (on the spot date, usually within two business days). The difference between the spot and the forward price is the forward premium or forward discount. In Zimbabwe’s case the premium would then reflect the scarcity of forex plus the forex rate uncertainty and market volatility.
Forward contracts are personalized between parties ( but can be sold or ceded). The forward market is a general term used to describe the informal market by which these contracts are entered into. In Zimbabwe this would involve a financial institution and an exporter or an importer. This would allow the bank or the exporter to plan with some certainty about a future cash flow. This stabilised the market. The premium which now is openly a black market rate would legally and correctly be incorporated as the premium for committing to rates upfront. Standardized forward contracts are called futures contracts and traded on a futures exchange.
In finance, a swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. This allows parties to swap say Zim dollars today and exchange the amounts at an agreed date. This allowed participants to legally lend each other foreign currency. This involved most financial institutions including the Central Bank which was probably the biggest player and beneficiary.
Zimbabwe has always needed outside forex for it balance of payment support. This came from various sources including donors,aid,direct foreign investment, supra-national organisations such as world bank,IFC and exports. These started to dry up about 8 years ago .As forex became more scarce the black market developed. The Banking industry responded with various products that included forward contracts, swaps and other forex linked derivatives. This allowed industry to access the at market determined rates.This is so because derivatives allow a premium or discount to factor in the scarcity, the volatility and the uncertainty. Using such instruments the banking system was able to efficiently allocate the scarce resource without letting the exchange rate get out of control. This way the market remained more formalised as banks acted as agents of the RBZ and the RBZ didn’t have to directly release trillions directly to its runners.
Prior to December 2003 this was the norm. The market players would transact at the going market rates as determined by the forward, swap and other derivative market instruments. These instruments were critical in the price discovery process as they factored most of the known risk variables .This kept the market reasonably stable and allowed RBZ, government and industry to orderly access whatever forex available. Then suddenly in December 2003 the biggest player in the market decided to unilaterally change pre-agreed rates in all forward, swap and other derivative contracts it had obligations .
This spelt a disaster for the sector. This is so because even if an institution was not a direct participant in the forward or swap contracts if it had exposure to any player who had a contract that was unilaterally re-priced that spelt enough trouble to cause panic which would then trigger a bank run when coupled with other factors. The unilateral re-pricing of contracts ( i.e. changing exchange rates pre-agreed) was and is ruinous to who ever is holding the contract .In short this meant certain institutions were unable to pay for their obligations as their expected cash flow from forward, swap and other derivative contracts were dramatically reduced by the key participant in the forex market.
A currency swap (or cross currency swap) is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. Swaps can be used to hedge certain risks such as interest rate risk and exchange rate risk plus the future availability of forex.In the Zimbabwean case this would involve swapping forex for Zim dollars ,with the understanding that at maturity this would be reversed. Obviously should the other party choose to unilaterally change the swap currency or transaction terms then other market participants would be exposed to ruin.
Currency swaps can be negotiated for a variety of maturities up 25 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by many accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract. This allows market participants to lend each other and carry out their normal economic activity using such products . Currency swaps involve the exchange of the principal amount. Interest payments are not netted (as they are in interest rate swaps) because they are denominated in different currencies.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Zimbabwean companies have been excluded from such markets because of the country’s risk profile. The involvement of an interest and currency swap in one transaction allows the participants to accurately price the risk and reward who ever is providing the commodity being traded in this instance the exporter would be fairly rewarded whilst the importer can plan with certainty that they will be able to import their raw materials. This kept production systems on tracks and allowed the formal economy to function.
It is clear banks have been left with no option but to improvise to remain afloat. They deserve credit for that. They cant make loans out as the clients have a greater risk of default due to hostile environment. In addition the central bank has forex runners who by-pass the banks. They cant trade in forex as this has all been centralised and generally monopolised to such an extent its now a preserve of the central bank. This indicates the need to look beyond individual banks but rather the whole operating environment, regulations and various policy shifts which happen so constantly such that its almost impossible to assess their benefits. The central bank is now competing with the banks and as such banks have been crowded out of the traditional areas such as provision of market determined loans and forex transactions. Instead of being the lender of last resort the RBZ has become the lender of first choice. This is partially responsible for eroding the confidence in the banking system and undermining the sector. It may be time to amend the Banking Act to enable banks to ride the crisis .
Gilbert Muponda is a Zimbabwe-born entrepreneur, living in exile. He can be contacted at gilbert@gilbertmuponda.com
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