Thank you for visiting my blog for the last few months .I value your support and feedback. As a direct result of your feedback it is now time for the site to move on to the next stage. The site is being converted to a branded research data base .This is the first step towards the establishment of the proposed Gilbert Muponda University (GMU). The blog will remain but will only be a small section of the proposed venture.
The Proposed new set up will be made up of several sections some of which visitors will need to subscribe (for free) to be able to access. There are two clear benefits of subscribing .The first benefit is that subscribers will receive detailed Economic and Financial Quarterly reports and other in depth reports and exclusive articles. Secondly at a future date subscribers in certain jurisdictions will be given an opportunity to convert their membership into free shares of the Proposed Venture. For this reason potential subscribers are encouraged to provide accurate information when they register.
This site will not be updated till the end of May 2008.The new site will be launched on 1 June 2008. If you have comments please send them to gilbert@gilbertmuponda.com
So, please come back on 1 June 2008 and join me to break new ground.
Thank you ,
Wednesday, May 7, 2008
Saturday, May 3, 2008
Need engage the International Community
The need to re-engage the International Community
By Gilbert Muponda
The recent Monetary Statement by the Reserve Bank of Zimbabwe revealed the relaxation of the foreign exchange market aimed at floating the Zimbabwe Dollar. This represents one step in the right direction only if backed by an active and aggressive growth of export revenues. This is urgent given that a floating currency not backed by exports leaves the currency exposed to wild speculative attacks. Zimbabwe needs to take immediate steps to reclaim its position in the international Trade arena which is the exchange of goods and services across national borders. In most countries, it represents a significant part of National Output. While international trade has been present throughout much of history its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalization".
Zimbabwe in particular and Africa in general need carefully structured policies which will allow them to access international markets at favorable terms .This will shift the focus from donor aid to better trading terms which are more preferable .Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. Such examples make it clear that rapid industrialization is possible given that Ghana and South Korea were essentially at the same stage of development 50 years ago. But to active and aggressive export based policies South Korea has been transformed into a highly developed and wealthy nation. This presents lessons for Zimbabwe and SADC since with careful planning they could be where South Korea and other Asian nations are. The difference being that Zimbabwe could do it faster with the right policy.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years. A lot has been said about Zimbabwe in this regard. Whilst sanctions can hurt an economy they also present opportunity to develop internal capacity such as that was developed by Zimbabwe and South Africa when under sanctions ( pre 1980 and 1994 respectively).The two nations managed to build strong infrastructure and industrial capacity despite being under sanctions. The key appears to be national will at the top levels of government to develop internal capacity whilst minimizing expenditure on what is deemed luxuries.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair-trade labelling requirements.
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. Nations such as Zimbabwe need to watch these treaties carefully as they can easily result in product dumping( poor quality imports) and ruin local industries similar to what happened to the textile industry which was ruined by cheap used clothes from the far east in the 1990s when Zimbabwe was pursuing ESAP.
Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures. For Zimbabwe and Africa it is critical to develop certain areas such value addition on minerals and agro produce which will help in increased export value plus give voice on international trade area.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. This places Africa at a disadvantage given the lack of clout in many trade negotiations since the value of its exports are relatively low.The emergence of oil and other mineral wealth on the African continent presents Africa with a new platform to negotiate better terms of trade. Such negotiations are better done as a block than as individual countries. This is why is critical that Zimbabwe’s economic and political crisis be solved so that the country can play a more leading role in SADC as the trade block positions it self among other trading blocks
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
Whilst there are many benefits of International trade there are attendant risks that have to be mitigated .The risks that exist in international trade can be divided into two major groups:
Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of Exchange rate
Political risks
Risk of cancellation or non-renewal of export or import licences
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
The above factors indicate the need for the Authorities to re-double their efforts to create conducive atmosphere for exporters to export. The policy should be clear and consistent to encourage investors to invest in those areas which will result in increased exports and foreign currency earnings. Investments in this area normally take a minimum of 6 to 18 months to start showing improvements so there is need to implement further reforms that support this initial step.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com
By Gilbert Muponda
The recent Monetary Statement by the Reserve Bank of Zimbabwe revealed the relaxation of the foreign exchange market aimed at floating the Zimbabwe Dollar. This represents one step in the right direction only if backed by an active and aggressive growth of export revenues. This is urgent given that a floating currency not backed by exports leaves the currency exposed to wild speculative attacks. Zimbabwe needs to take immediate steps to reclaim its position in the international Trade arena which is the exchange of goods and services across national borders. In most countries, it represents a significant part of National Output. While international trade has been present throughout much of history its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalization".
Zimbabwe in particular and Africa in general need carefully structured policies which will allow them to access international markets at favorable terms .This will shift the focus from donor aid to better trading terms which are more preferable .Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. Such examples make it clear that rapid industrialization is possible given that Ghana and South Korea were essentially at the same stage of development 50 years ago. But to active and aggressive export based policies South Korea has been transformed into a highly developed and wealthy nation. This presents lessons for Zimbabwe and SADC since with careful planning they could be where South Korea and other Asian nations are. The difference being that Zimbabwe could do it faster with the right policy.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years. A lot has been said about Zimbabwe in this regard. Whilst sanctions can hurt an economy they also present opportunity to develop internal capacity such as that was developed by Zimbabwe and South Africa when under sanctions ( pre 1980 and 1994 respectively).The two nations managed to build strong infrastructure and industrial capacity despite being under sanctions. The key appears to be national will at the top levels of government to develop internal capacity whilst minimizing expenditure on what is deemed luxuries.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair-trade labelling requirements.
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. Nations such as Zimbabwe need to watch these treaties carefully as they can easily result in product dumping( poor quality imports) and ruin local industries similar to what happened to the textile industry which was ruined by cheap used clothes from the far east in the 1990s when Zimbabwe was pursuing ESAP.
Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures. For Zimbabwe and Africa it is critical to develop certain areas such value addition on minerals and agro produce which will help in increased export value plus give voice on international trade area.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. This places Africa at a disadvantage given the lack of clout in many trade negotiations since the value of its exports are relatively low.The emergence of oil and other mineral wealth on the African continent presents Africa with a new platform to negotiate better terms of trade. Such negotiations are better done as a block than as individual countries. This is why is critical that Zimbabwe’s economic and political crisis be solved so that the country can play a more leading role in SADC as the trade block positions it self among other trading blocks
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
Whilst there are many benefits of International trade there are attendant risks that have to be mitigated .The risks that exist in international trade can be divided into two major groups:
Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of Exchange rate
Political risks
Risk of cancellation or non-renewal of export or import licences
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
The above factors indicate the need for the Authorities to re-double their efforts to create conducive atmosphere for exporters to export. The policy should be clear and consistent to encourage investors to invest in those areas which will result in increased exports and foreign currency earnings. Investments in this area normally take a minimum of 6 to 18 months to start showing improvements so there is need to implement further reforms that support this initial step.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com
Monetary Policy statement and Quasi Fiscal Activities
The Zimbabwe Central Bank has released its much awaited Monetary statement on 30 April 2008.The full statement can be viewed at www.rbz.co.zw .Whilst the Statement had some positive measures it will come short in terms of addressing the nations current problems due to its over reliance on Quasi-Fiscal Activities (QFA) as a tool to both stimulate production and lower inflation. QFA are defined as operations and actions whose effect can and should be in principle be carried out by budgetary measures in form of explicit tax, subsidy or direct expenditure It is generally agreed that you cant apply the same thinking logic that created the problem in your endeavor to solve the problem.
These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money. Whilst the statement sought to justify the printing of money by comparing the injection of funds to stabilize world financial markets this is misleading and a totally misplaced comparison. The sited examples of the UK and USA refer to countries whose governments still have strong tax base, generally strong asset base and attractive credit rating in the international financial markets. The injection of funds such as that on Bear Sterns , Northern Rock and other bail out do not represent printing on money similar to what we have witnessed in Zimbabwe over the last 48 months. It is well known all over the world that printing of money does not solve economic problems. If it did then there would be no poor countries on this planet. Instead if it worked all countries would simply invest heavily in money printing machines.
The recent statement was positive in admitting that the Economic problems would not be solved in absence of political settlement. This is positive in that one would assume the authorities will focus their efforts on creating a conducive environment for political engagement and economic recovery than trying to be all things to all people or doing all things in all sectors. On the positive side as well was the relaxation of the foreign exchange market with an attempt to float the Zimbabwe dollar. This assumes elasticity of supply of foreign currency i.e. the rate decline will attract more forex. But due to Zimbabwe’s hostile operating environment the supply of forex may not improve and the currency collapse will continue as exports remain subdued. However the positive thing is more forex will be attracted into the official channels since the black market rate will likely merge with the official floated rate.
Whilst indigenization is desirable the statement correctly advises caution at the manner and rate at which locals acquire foreign owned businesses. This is critical to avoid further capital flight .
Whilst food prices are going up globally it is disappointing that the statement focused on other countries which have historically never been self reliant on food production. At this stage the analysis should have focused on how a poorly implemented strategy lead to a once net export ended up being a donor-food recipient. There are lessons in this as Zimbabwe embarks on its next phase of localization of key sectors of the economy.
Sanctions may have caused some problems and challenges it goes without saying that sanctions were not invented for Zimbabwe. Sanctions have been there and will be there, but there are nations that have been under sanctions and have managed to keep the economies in working order( Zimbabwe before 1980 and South Africa before 1994). The point needs to be made that just before a nation decides to embark on policy that may attract sanctions it should make a plan before hand on how to handle such sanctions .Some actions are clearly going to attract reactions and it is such reactions which nations must do their homework and be prepared to wither such storms when they occur .
QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons. Examples include subsidized 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 to assess fiscal policy meaningless. QFA create contingent implicit liabilities which the government is expected to fulfill there by mortgaging the nation’s 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 hyper inflation is unchecked.
The Government through the RBZ and various other bodies should focus on creating a conducive atmosphere for production. This will widen the tax base as more people are incorporated into the formal economy and businesses contribute in form of corporate tax. The attempt to have a command economy in this day and age with the RBZ into anything and everything will only result in further distortions and weaken the countries industrial capacity as no meaningful private sector investment will take place in an unstable environment.
The use of off-Budget/ off balance sheet 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 subsidize 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 is the foundation of public finance. Once the government ascertains its needs it then looks 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 printing 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.
The RBZ has come up with various programmes providing subsidized funding .These facilities whose rates are as low as 25% include the Agricultural Mechanization Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).These facilities represent a hidden tax since this money is not at market rates. It means someone (tax payer) is subsidizing these facilities through an undeclared tax. As noted above these facilities lack an relation to reality. 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 disastrous impact on money supply and inflation. Forward incentives like giving cheap money on promise of production tend to encourage corruption and resource diversion. They need to be replaced by rewarding in retrospect ( pay a premium on actual goods produced).
As a direct result of QFA the central bank has moved into areas which it doesn’t 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 preferred 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 placed 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 discourages 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. He can be contacted gilbert@gilbertmuponda.com.
See more articles at www.gilbertmuponda.com
These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money. Whilst the statement sought to justify the printing of money by comparing the injection of funds to stabilize world financial markets this is misleading and a totally misplaced comparison. The sited examples of the UK and USA refer to countries whose governments still have strong tax base, generally strong asset base and attractive credit rating in the international financial markets. The injection of funds such as that on Bear Sterns , Northern Rock and other bail out do not represent printing on money similar to what we have witnessed in Zimbabwe over the last 48 months. It is well known all over the world that printing of money does not solve economic problems. If it did then there would be no poor countries on this planet. Instead if it worked all countries would simply invest heavily in money printing machines.
The recent statement was positive in admitting that the Economic problems would not be solved in absence of political settlement. This is positive in that one would assume the authorities will focus their efforts on creating a conducive environment for political engagement and economic recovery than trying to be all things to all people or doing all things in all sectors. On the positive side as well was the relaxation of the foreign exchange market with an attempt to float the Zimbabwe dollar. This assumes elasticity of supply of foreign currency i.e. the rate decline will attract more forex. But due to Zimbabwe’s hostile operating environment the supply of forex may not improve and the currency collapse will continue as exports remain subdued. However the positive thing is more forex will be attracted into the official channels since the black market rate will likely merge with the official floated rate.
Whilst indigenization is desirable the statement correctly advises caution at the manner and rate at which locals acquire foreign owned businesses. This is critical to avoid further capital flight .
Whilst food prices are going up globally it is disappointing that the statement focused on other countries which have historically never been self reliant on food production. At this stage the analysis should have focused on how a poorly implemented strategy lead to a once net export ended up being a donor-food recipient. There are lessons in this as Zimbabwe embarks on its next phase of localization of key sectors of the economy.
Sanctions may have caused some problems and challenges it goes without saying that sanctions were not invented for Zimbabwe. Sanctions have been there and will be there, but there are nations that have been under sanctions and have managed to keep the economies in working order( Zimbabwe before 1980 and South Africa before 1994). The point needs to be made that just before a nation decides to embark on policy that may attract sanctions it should make a plan before hand on how to handle such sanctions .Some actions are clearly going to attract reactions and it is such reactions which nations must do their homework and be prepared to wither such storms when they occur .
QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons. Examples include subsidized 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 to assess fiscal policy meaningless. QFA create contingent implicit liabilities which the government is expected to fulfill there by mortgaging the nation’s 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 hyper inflation is unchecked.
The Government through the RBZ and various other bodies should focus on creating a conducive atmosphere for production. This will widen the tax base as more people are incorporated into the formal economy and businesses contribute in form of corporate tax. The attempt to have a command economy in this day and age with the RBZ into anything and everything will only result in further distortions and weaken the countries industrial capacity as no meaningful private sector investment will take place in an unstable environment.
The use of off-Budget/ off balance sheet 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 subsidize 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 is the foundation of public finance. Once the government ascertains its needs it then looks 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 printing 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.
The RBZ has come up with various programmes providing subsidized funding .These facilities whose rates are as low as 25% include the Agricultural Mechanization Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).These facilities represent a hidden tax since this money is not at market rates. It means someone (tax payer) is subsidizing these facilities through an undeclared tax. As noted above these facilities lack an relation to reality. 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 disastrous impact on money supply and inflation. Forward incentives like giving cheap money on promise of production tend to encourage corruption and resource diversion. They need to be replaced by rewarding in retrospect ( pay a premium on actual goods produced).
As a direct result of QFA the central bank has moved into areas which it doesn’t 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 preferred 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 placed 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 discourages 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. He can be contacted gilbert@gilbertmuponda.com.
See more articles at www.gilbertmuponda.com
Friday, April 25, 2008
Beyond the land
Many commentators and observers have linked Zimbabwe’s current economic decline to the land reform and in particular the way it was put on the fast track mode. Land reform is an often-controversial alteration in the societal arrangements whereby government administers possession and use of land. .Economies tend to follow a developmental progression that takes them from a heavy reliance on (Land) agriculture and mining, toward the development of industry (e.g. technology, textiles, shipbuilding, steel) and finally toward a more service based structure.
First economy to follow this path in the modern world was the United Kingdom, however the speed at which other economies have later made the transition to service-based, sometimes called post-industrial, has accelerated over time. Given this background it maybe time for Zimbabwe to pursue a policy that takes into account how other economies are making the transition into a service driven Economy. It is undeniable that land reform was necessary. And all main stakeholders seem to agree on that. But beyond that the New Zimbabwe needs a modern well thought out policy to rapidly develop the nation taking advantage of its various forms of capital of which land is just one of them.
Whilst land is a critical resource ,it can not be a substitute to other forms of capital that are required to generate wealth and uplift the standards of living. Most of these other forms of capital are equally vital if the land is to be fully exploited to fully benefit all the citizens. The much hoped for New Zimbabwe needs to generate and mobilise other forms of capital and develop a balanced modern economic model which can compete on a global stage.
It should be noted that there are various nations who do not have much is terms of land in form of arable land for agricultural purposes but this hasn’t stopped these nations from building solid economies. Some have discovered mineral wealth, others turns to textiles, fisheries and yet others to trade .Developing key competences they have built clear cut advantages to become trade centres, service centres or specialised in manufacture of high value goods for exports.
A nation that seeks to become the global leader in a particular industry must attract many of the most qualified talents in that field, to apply and to improve their own particular individual capital to that problem in that country. The underlying assumption is the country has to be attractive to live in and be able to offer a stable and fairly predictable future. This will draw capital into the country. As noted above land is just one and on its own will not deliver a better standard of living
There are general 5 broadly accepted forms of capital. The other sub-divisions fall into these 5 main categories of capital. The Five Capitals Model of sustainable development was developed by the organization Forum for the Future. The model groups together:
Natural capital
Social capital
Human capital
Manufactured capital
Financial capital
The model is used to show stocks and flows of resources as they relate to a sustainable society and economy. For a fully functioning economy all the 5 forms of capital are required and are also accessible. The presence of one or some of the capital is normally enough to attract the other lacking capital.However an isolated economy may not be able to attract most of these forms of capital and may not be able to borrow either to make up for any shortfalls.
This is where investor confidence and good governance come in. The lack of this will result in capital flight in terms of financial and human capital ( brain drain).This can have devastating impact on production .Normally production plummets due to lack of investment and rapid loss of skilled personnel to handle the challenges that immediately follow after financial capital flight.
Economic Industrial development is generally widely accepted to fall in three categories. The lower levels indicate lower value addition and more reliance on natural capital .Below are the basic sectors which economies tend to follow ;
Primary sector of industry
Secondary sector of industry
Tertiary sector of industry
Quaternary sector of industry
The quaternary sector of industry is an extension of the Three-sector hypothesis of industrial evolution. It is principally concerns the intellectual services: information generation, information sharing, consultation, education and research and development. It is sometimes incorporated into the tertiary sector but many argue that intellectual services are significant enough to warrant a separate sector.
This sector evolves in well developed countries and requires a highly educated workforce. Given Zimbabwe’s relatively strongly educated work force and well developed education sector this is an area Zimbabwe could focus on as an anchor for its development plan. Considering the its considerable non resident population many of whom have gained exposure and skills in advanced markets this presents a New Zimbabwe with critical human capital .
The quaternary sector can be seen as the sector in which companies invest in order to ensure further expansion. Research will be directed into cutting costs, tapping into markets, producing innovative ideas, new production methods and methods of manufacture, amongst others. To many industries, such as the pharmaceutical industry, the sector is the most valuable because it creates future branded products which the company will profit from.
The quinary sector of industry is the sector of industry suggested by some economists as comprising health, education, culture, research, police, fire service, and other government industries not intended to make a profit. These industries are more often included in the tertiary or quaternary sectors. These are areas Zimbabwe has made progress on even though in recent years some of the gains have been reversed. Despite the recent reversal the infrastructure still remains to allow a New Zimbabwe to be built on the previous gains.
The quinary sector also includes domestic activities such as those performed by stay-at-home parents or homemakers. These activities are not measured by monetary amounts but make a considerable contribution to the economy.
The tertiary sector of industry (also known as the service sector or the service industry) is one of the four main industrial categories of a developed economy, the others being the secondary industry (manufacturing), primary industry (extraction such as mining, agriculture and fishing), and (quaternary) the sharing of information. Services are defined in conventional economic literature as "intangible goods".Considering how these sectors can drive an economy it may be time for a New Zimbabwe that focuses on all its capital not on just one form of capital. The pursuit of one form of capital at the expense of anything else usually leads to severe imbalances which can disrupt production cycles, leading to shortages, black markets and inflation.
First economy to follow this path in the modern world was the United Kingdom, however the speed at which other economies have later made the transition to service-based, sometimes called post-industrial, has accelerated over time. Given this background it maybe time for Zimbabwe to pursue a policy that takes into account how other economies are making the transition into a service driven Economy. It is undeniable that land reform was necessary. And all main stakeholders seem to agree on that. But beyond that the New Zimbabwe needs a modern well thought out policy to rapidly develop the nation taking advantage of its various forms of capital of which land is just one of them.
Whilst land is a critical resource ,it can not be a substitute to other forms of capital that are required to generate wealth and uplift the standards of living. Most of these other forms of capital are equally vital if the land is to be fully exploited to fully benefit all the citizens. The much hoped for New Zimbabwe needs to generate and mobilise other forms of capital and develop a balanced modern economic model which can compete on a global stage.
It should be noted that there are various nations who do not have much is terms of land in form of arable land for agricultural purposes but this hasn’t stopped these nations from building solid economies. Some have discovered mineral wealth, others turns to textiles, fisheries and yet others to trade .Developing key competences they have built clear cut advantages to become trade centres, service centres or specialised in manufacture of high value goods for exports.
A nation that seeks to become the global leader in a particular industry must attract many of the most qualified talents in that field, to apply and to improve their own particular individual capital to that problem in that country. The underlying assumption is the country has to be attractive to live in and be able to offer a stable and fairly predictable future. This will draw capital into the country. As noted above land is just one and on its own will not deliver a better standard of living
There are general 5 broadly accepted forms of capital. The other sub-divisions fall into these 5 main categories of capital. The Five Capitals Model of sustainable development was developed by the organization Forum for the Future. The model groups together:
Natural capital
Social capital
Human capital
Manufactured capital
Financial capital
The model is used to show stocks and flows of resources as they relate to a sustainable society and economy. For a fully functioning economy all the 5 forms of capital are required and are also accessible. The presence of one or some of the capital is normally enough to attract the other lacking capital.However an isolated economy may not be able to attract most of these forms of capital and may not be able to borrow either to make up for any shortfalls.
This is where investor confidence and good governance come in. The lack of this will result in capital flight in terms of financial and human capital ( brain drain).This can have devastating impact on production .Normally production plummets due to lack of investment and rapid loss of skilled personnel to handle the challenges that immediately follow after financial capital flight.
Economic Industrial development is generally widely accepted to fall in three categories. The lower levels indicate lower value addition and more reliance on natural capital .Below are the basic sectors which economies tend to follow ;
Primary sector of industry
Secondary sector of industry
Tertiary sector of industry
Quaternary sector of industry
The quaternary sector of industry is an extension of the Three-sector hypothesis of industrial evolution. It is principally concerns the intellectual services: information generation, information sharing, consultation, education and research and development. It is sometimes incorporated into the tertiary sector but many argue that intellectual services are significant enough to warrant a separate sector.
This sector evolves in well developed countries and requires a highly educated workforce. Given Zimbabwe’s relatively strongly educated work force and well developed education sector this is an area Zimbabwe could focus on as an anchor for its development plan. Considering the its considerable non resident population many of whom have gained exposure and skills in advanced markets this presents a New Zimbabwe with critical human capital .
The quaternary sector can be seen as the sector in which companies invest in order to ensure further expansion. Research will be directed into cutting costs, tapping into markets, producing innovative ideas, new production methods and methods of manufacture, amongst others. To many industries, such as the pharmaceutical industry, the sector is the most valuable because it creates future branded products which the company will profit from.
The quinary sector of industry is the sector of industry suggested by some economists as comprising health, education, culture, research, police, fire service, and other government industries not intended to make a profit. These industries are more often included in the tertiary or quaternary sectors. These are areas Zimbabwe has made progress on even though in recent years some of the gains have been reversed. Despite the recent reversal the infrastructure still remains to allow a New Zimbabwe to be built on the previous gains.
The quinary sector also includes domestic activities such as those performed by stay-at-home parents or homemakers. These activities are not measured by monetary amounts but make a considerable contribution to the economy.
The tertiary sector of industry (also known as the service sector or the service industry) is one of the four main industrial categories of a developed economy, the others being the secondary industry (manufacturing), primary industry (extraction such as mining, agriculture and fishing), and (quaternary) the sharing of information. Services are defined in conventional economic literature as "intangible goods".Considering how these sectors can drive an economy it may be time for a New Zimbabwe that focuses on all its capital not on just one form of capital. The pursuit of one form of capital at the expense of anything else usually leads to severe imbalances which can disrupt production cycles, leading to shortages, black markets and inflation.
Thursday, April 17, 2008
Loans for shares scheme may be upon us
Zimbabwe’s current situation closely mirrors that of Russia in the mid to late 1990s in many respects. Of particular importance President Mugabe finds himself in a situation similar to where President Boris Yeltsin found himself in 1996. Panic struck the Yeltsin team when opinion polls suggested that the ailing president could not win; members of his entourage urged him to cancel presidential elections and effectively rule as dictator from then on.
The president's inner circle assumed that it had only a short time in which to act on privatization “empowerment”: it therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents. The team quickly devised a plan to co-opt potentially powerful interests, including enterprise directors and regional officials, in order to ensure Yeltsin's re-election.
When Zimbabwe was implementing ESAP in the 1990s Russia followed similar trade liberalization policies as well . The process of liberalization would create winners and losers, depending on how particular industries, classes, age groups, ethnic groups, regions, and other sectors of Russian society were positioned. Some would benefit by the opening of competition; others would suffer. Among the winners were the new class of entrepreneurs and black marketeers that had emerged in the early 1990s.The trend is very similar to the various empowerment schemes that have been implemented in Zimbabwe over the last few years.
The new capitalist opportunities presented by the opening of the Russian economy in the late 1980s and early 1990s affected many people's interests. As the Soviet system was being dismantled, well-placed bosses , career politicians and technocrats in the Communist Party, the KGB, and the ruling party Youth League were cashing in on their Soviet-era power and privileges. Some quietly liquidated the assets of their organization and secreted the proceeds in overseas accounts and investments. This development could yet be replayed in the Zimbabwean scenario .Others created banks and enterprises in Russia, taking advantage of their insider positions to win exclusive government contracts ,tenders, exclusive licenses and to acquire subsidised loans and supplies at artificially low, state-subsidized prices in order to transact business at high, market-value prices.
During the same period, a few young people, with limited much social status, but with lots of entrepreneurial spirit, saw opportunity in the economic and legal confusion of the transition. During the period 1987 and 1992, trading of abundant natural resources and foreign currencies, as well as imports of highly demanded consumer goods and then domestic production of their rudimentary substitutes, rapidly enabled these pioneering entrepreneurs to accumulate considerable wealth. In turn, the emerging cash-based, highly opaque markets provided a breeding ground for a large number of racket gangs. Its clear Zimbabwe has followed a similar path. The black market has become the dominant market for all basic items. Whilst this has created opportunities for enterprising individuals it has left the state coffers bleeding during to the limited ability to tax such activities. The problem is worsened that some state enterprises have become main actors in black market activities especially in the case of foreign currency.
By the mid-nineties, the best-connected former leaders accumulated considerable financial resources, while on the other hand the most successful entrepreneurs became acquainted with government officials and politicians. The privatization of state enterprises was a unique opportunity, since it gave many of those who had gained wealth in the early 1990s a chance to convert it into shares of privatized enterprises. Zimbabwe has had its on start -stop privatization programme which has occasionally been put on the back burner. However in its place Zimbabwe developed its own unique empowerment model from the land reform to farm mechanization to subsidised funding .Whilst the intentions are noble what has been queried in both countries is the after effect results plus the skewed distribution of the beneficiaries.
The Yeltsin government hoped to use privatization to spread ownership of shares in former state enterprises as widely as possible to create political support for his government and his reforms. This presents a clear similarity with the Zimbabwean land reform. The government used a system of free vouchers as a way to give mass privatization a jump-start. But it also allowed people to purchase shares of stock in privatized enterprises with cash. Even though initially each citizen received a voucher of equal face value, within months most of them converged in the hands of intermediaries who were ready to buy them for cash right away.
As the government ended the voucher privatization phase and launched cash privatization, it devised a program that it thought would simultaneously speed up privatization and yield the government a much-needed infusion of cash for its operating needs. Under the scheme, which quickly became known world wide as "loans for shares", the Yeltsin regime auctioned off substantial packages of stock shares in some of its most desirable enterprises, such as energy, telecommunications, and metallurgical firms, as collateral for bank loans.
The scheme had at least three desired outcomes. Firstly to make any policy reversal very expensive and complicated for Yeltsin’s rivals should they win power .Secondly to raise cash for a cash strapped government which was running out of sources of money after printing money had caused massive inflation and currency collapse. The third desired result was to extend patronage , buy loyalty and support from the new and fast developing capitalist class.
Whilst the initial transaction is disguised as a loan it is in fact a deeply discounted outright disposal of a valuable state asset at a fraction of its value. This is clear since the state is in fact bankrupt which is why it is engaging in such a transaction. And it well known upfront that the state can not repay the loan and as such the security for the loan (shares) are already exchanging hands permanently.
When the rumour mill went into over drive speculating that one of Russia’s most well known billionaires was in Zimbabwe ahead of a crunch election one should be forgiven to think Zimbabwe was just about to unveil its own mini version of loan for shares scheme.
In exchange for the loans, the state would hand over assets worth many times as much. Under the terms of the deals, if the Yeltsin government failed to repay the “loans” by September 1996, the lenders would automatically acquire title to the shares and could then immediately on-sell the stock or take an equity position in the enterprise.
The first auctions under the loans for shares scheme were held in late 1995. The auctions were usually structured in such a way so to limit the number of banks bidding for shares and thus to keep the auction prices extremely low. By summer 1996, major packages of shares in some of Russia's largest firms had been transferred to a small number of major banks, thus allowing a handful of powerful banks to acquire substantial ownership shares over major firms at shockingly low prices. These deals were effectively giveaways of valuable state assets to a few powerful, well-connected, and wealthy individuals.
This trend creates very powerful interest groups who have to be co-opted into any change in the status quo agenda.Zimbabwe has some valuable assets which could end up going this route. In addition under the recently passed 51% local ownership law the requirement to cede or sell a stake to the state can easily end up feeding such a scheme. This would be possible since the certain businesses would be forced to sell or give up stakes to the state .The state would in turn liquidate such acquired stakes through its own version of loans for shares scheme.
The president's inner circle assumed that it had only a short time in which to act on privatization “empowerment”: it therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents. The team quickly devised a plan to co-opt potentially powerful interests, including enterprise directors and regional officials, in order to ensure Yeltsin's re-election.
When Zimbabwe was implementing ESAP in the 1990s Russia followed similar trade liberalization policies as well . The process of liberalization would create winners and losers, depending on how particular industries, classes, age groups, ethnic groups, regions, and other sectors of Russian society were positioned. Some would benefit by the opening of competition; others would suffer. Among the winners were the new class of entrepreneurs and black marketeers that had emerged in the early 1990s.The trend is very similar to the various empowerment schemes that have been implemented in Zimbabwe over the last few years.
The new capitalist opportunities presented by the opening of the Russian economy in the late 1980s and early 1990s affected many people's interests. As the Soviet system was being dismantled, well-placed bosses , career politicians and technocrats in the Communist Party, the KGB, and the ruling party Youth League were cashing in on their Soviet-era power and privileges. Some quietly liquidated the assets of their organization and secreted the proceeds in overseas accounts and investments. This development could yet be replayed in the Zimbabwean scenario .Others created banks and enterprises in Russia, taking advantage of their insider positions to win exclusive government contracts ,tenders, exclusive licenses and to acquire subsidised loans and supplies at artificially low, state-subsidized prices in order to transact business at high, market-value prices.
During the same period, a few young people, with limited much social status, but with lots of entrepreneurial spirit, saw opportunity in the economic and legal confusion of the transition. During the period 1987 and 1992, trading of abundant natural resources and foreign currencies, as well as imports of highly demanded consumer goods and then domestic production of their rudimentary substitutes, rapidly enabled these pioneering entrepreneurs to accumulate considerable wealth. In turn, the emerging cash-based, highly opaque markets provided a breeding ground for a large number of racket gangs. Its clear Zimbabwe has followed a similar path. The black market has become the dominant market for all basic items. Whilst this has created opportunities for enterprising individuals it has left the state coffers bleeding during to the limited ability to tax such activities. The problem is worsened that some state enterprises have become main actors in black market activities especially in the case of foreign currency.
By the mid-nineties, the best-connected former leaders accumulated considerable financial resources, while on the other hand the most successful entrepreneurs became acquainted with government officials and politicians. The privatization of state enterprises was a unique opportunity, since it gave many of those who had gained wealth in the early 1990s a chance to convert it into shares of privatized enterprises. Zimbabwe has had its on start -stop privatization programme which has occasionally been put on the back burner. However in its place Zimbabwe developed its own unique empowerment model from the land reform to farm mechanization to subsidised funding .Whilst the intentions are noble what has been queried in both countries is the after effect results plus the skewed distribution of the beneficiaries.
The Yeltsin government hoped to use privatization to spread ownership of shares in former state enterprises as widely as possible to create political support for his government and his reforms. This presents a clear similarity with the Zimbabwean land reform. The government used a system of free vouchers as a way to give mass privatization a jump-start. But it also allowed people to purchase shares of stock in privatized enterprises with cash. Even though initially each citizen received a voucher of equal face value, within months most of them converged in the hands of intermediaries who were ready to buy them for cash right away.
As the government ended the voucher privatization phase and launched cash privatization, it devised a program that it thought would simultaneously speed up privatization and yield the government a much-needed infusion of cash for its operating needs. Under the scheme, which quickly became known world wide as "loans for shares", the Yeltsin regime auctioned off substantial packages of stock shares in some of its most desirable enterprises, such as energy, telecommunications, and metallurgical firms, as collateral for bank loans.
The scheme had at least three desired outcomes. Firstly to make any policy reversal very expensive and complicated for Yeltsin’s rivals should they win power .Secondly to raise cash for a cash strapped government which was running out of sources of money after printing money had caused massive inflation and currency collapse. The third desired result was to extend patronage , buy loyalty and support from the new and fast developing capitalist class.
Whilst the initial transaction is disguised as a loan it is in fact a deeply discounted outright disposal of a valuable state asset at a fraction of its value. This is clear since the state is in fact bankrupt which is why it is engaging in such a transaction. And it well known upfront that the state can not repay the loan and as such the security for the loan (shares) are already exchanging hands permanently.
When the rumour mill went into over drive speculating that one of Russia’s most well known billionaires was in Zimbabwe ahead of a crunch election one should be forgiven to think Zimbabwe was just about to unveil its own mini version of loan for shares scheme.
In exchange for the loans, the state would hand over assets worth many times as much. Under the terms of the deals, if the Yeltsin government failed to repay the “loans” by September 1996, the lenders would automatically acquire title to the shares and could then immediately on-sell the stock or take an equity position in the enterprise.
The first auctions under the loans for shares scheme were held in late 1995. The auctions were usually structured in such a way so to limit the number of banks bidding for shares and thus to keep the auction prices extremely low. By summer 1996, major packages of shares in some of Russia's largest firms had been transferred to a small number of major banks, thus allowing a handful of powerful banks to acquire substantial ownership shares over major firms at shockingly low prices. These deals were effectively giveaways of valuable state assets to a few powerful, well-connected, and wealthy individuals.
This trend creates very powerful interest groups who have to be co-opted into any change in the status quo agenda.Zimbabwe has some valuable assets which could end up going this route. In addition under the recently passed 51% local ownership law the requirement to cede or sell a stake to the state can easily end up feeding such a scheme. This would be possible since the certain businesses would be forced to sell or give up stakes to the state .The state would in turn liquidate such acquired stakes through its own version of loans for shares scheme.
Sunday, April 13, 2008
Zimbabwe's Inflation rate to worsen
Zimbabwe’s economic meltdown may show signs of receding should the political impasse be amicably resolved. The latest official inflation figure for February is reportedly 165 ,000%.Should the inflationary pressure maintain its recent momentum till year end then Zimbabwe’s official inflation will be 2,017, 000 % by mid year further declining to 24,672,000% by year end .Once inflation reaches such high levels as Zimbabwe's it tends to move at an accelerated pace . This is based on current trends, price controls, shortages ,money supply and exchange rate disequilibrium.It should be noted only three months ago inflation was around 20,000 now its 10 times higher. Whilst price controls and other strong arm tactics can temporarily delay the slide the presence of the black market make it difficult to contain inflation by simply price controls or threatening business. Major policy shift will be required to get Zimbabwe back on track.
It is difficult to conceive how inflation can be stabilised first then reduced subsequently without political settlement. During the election period every province got some ploughs, tractors, combine harvesters ,computers and a whole lot other goodies as is normal in our motherland ahead of elections. The policy is give now and pay later. So the full price of such unbudgeted expenditure will have to be factored into future inflation since the money printing machines worked overtime ahead of elections.Inflation rate is therefore expected to worsen before it can be tamed.
This could get worse should there be a run-off election since more money will be printed to fund that campaign as well. So the above inflation forecasts could turn out to be very conservative.
Price controls in an effort to control inflation have created a new problem that of having driven up activities in the informal market. Zimbabwe’s formal sector has been shrinking at an alarming rate since everything is now available on the black market or underground. This trend has disastrous consequences for the fiscus. Black market activities are difficult if not impossible to tax. This means the Government loses an important tax base which would have normally been available under normal circumstances. This represents multiple revenue loss since under ground hustlers cant be taxed, no income tax, no V.A.T and no sales tax. Once the tax base starts eroding its almost impossible to re-cast the net effectively to return to optimal revenue collection through taxation.
The Tax system is central to the Public finance system. This is why Governments the world over try to please tax payers. But once the nation relies on printing money the importance of tax payers and the tax systems is diminished .Only but temporarily because any other Public Finance pattern that’s materially divorced from the tax system is likely to result in fatal outcome such as unsustainable budget deficit or hyper inflation as in Zimbabwe’s case.
Given that Zimbabwe is at such an important transitional period it is important that the tax base be widened and strengthened. This requires deliberate and careful planning as many stake holders are likely to be suspicious of any attempts to make them accountable in a manor that does not show any clear benefits for them. This will build a long term revenue base for Zimbabwe without over reliance on donor aid and borrowings.
Zimbabwe's Financial markets do not yet possess the width and depth required to support an isolated Economy .The lack of access to foreign financial markets and normal balance of payment support has limited the options available to raise funds for the Government.The shrinkage of the formal sector and closure of many businesses has eroded the revenue base in form of taxes.
A starting point would be for the Authorities to acknowledge the critical role played by the informal sector. There will be need absorb and transform this sector into the formal infrastructure and assist this sector to be able to have infrastructure that will allow the sector to access technical expertise, financial resources and grow.
Obviously the informal sector alone can not be expected to resolve the economic challenges facing Zimbabwe. In order to help a speedy recovery of the formal sector Zimbabwe can borrow ideas from leading nations such as Israel which have well developed policies and systems to help non- resident citizens to return home and fill in a skills gap and strengthen the tax base. This is central in resource mobilisation to sustain any reconstruction effort .Whilst foreigners will come and invest it is important that Zimbabweans take their destiny into their own hands in terms of developing the nation.
It is difficult to conceive how inflation can be stabilised first then reduced subsequently without political settlement. During the election period every province got some ploughs, tractors, combine harvesters ,computers and a whole lot other goodies as is normal in our motherland ahead of elections. The policy is give now and pay later. So the full price of such unbudgeted expenditure will have to be factored into future inflation since the money printing machines worked overtime ahead of elections.Inflation rate is therefore expected to worsen before it can be tamed.
This could get worse should there be a run-off election since more money will be printed to fund that campaign as well. So the above inflation forecasts could turn out to be very conservative.
Price controls in an effort to control inflation have created a new problem that of having driven up activities in the informal market. Zimbabwe’s formal sector has been shrinking at an alarming rate since everything is now available on the black market or underground. This trend has disastrous consequences for the fiscus. Black market activities are difficult if not impossible to tax. This means the Government loses an important tax base which would have normally been available under normal circumstances. This represents multiple revenue loss since under ground hustlers cant be taxed, no income tax, no V.A.T and no sales tax. Once the tax base starts eroding its almost impossible to re-cast the net effectively to return to optimal revenue collection through taxation.
The Tax system is central to the Public finance system. This is why Governments the world over try to please tax payers. But once the nation relies on printing money the importance of tax payers and the tax systems is diminished .Only but temporarily because any other Public Finance pattern that’s materially divorced from the tax system is likely to result in fatal outcome such as unsustainable budget deficit or hyper inflation as in Zimbabwe’s case.
Given that Zimbabwe is at such an important transitional period it is important that the tax base be widened and strengthened. This requires deliberate and careful planning as many stake holders are likely to be suspicious of any attempts to make them accountable in a manor that does not show any clear benefits for them. This will build a long term revenue base for Zimbabwe without over reliance on donor aid and borrowings.
Zimbabwe's Financial markets do not yet possess the width and depth required to support an isolated Economy .The lack of access to foreign financial markets and normal balance of payment support has limited the options available to raise funds for the Government.The shrinkage of the formal sector and closure of many businesses has eroded the revenue base in form of taxes.
A starting point would be for the Authorities to acknowledge the critical role played by the informal sector. There will be need absorb and transform this sector into the formal infrastructure and assist this sector to be able to have infrastructure that will allow the sector to access technical expertise, financial resources and grow.
Obviously the informal sector alone can not be expected to resolve the economic challenges facing Zimbabwe. In order to help a speedy recovery of the formal sector Zimbabwe can borrow ideas from leading nations such as Israel which have well developed policies and systems to help non- resident citizens to return home and fill in a skills gap and strengthen the tax base. This is central in resource mobilisation to sustain any reconstruction effort .Whilst foreigners will come and invest it is important that Zimbabweans take their destiny into their own hands in terms of developing the nation.
Saturday, April 5, 2008
Zimbabwe’s investment opportunity amidst the uncertainty
Zimbabwe’s political and economic crisis seems to have reached a decisive phase. Whilst politicians take time to size each up as they prepare for the second round of the “mother of all elections” this presents investors with excellent opportunities to take long term positions on under priced assets. The asset class and the magnitude of the position will require careful and informed analysis. Whilst investors should take positions they need to be reminded by one of the first laws of investment that you only invest what you can afford to lose. Its important to respect this law since investing in Zimbabwe during this period is similar to a risk arbitrage transaction whereby investors take positions ahead of a business being restructured anticipating huge upward gains upon the restructuring exercise succeeding. Should the restructuring fail the investor potentially could lose most of their investment.
During this period investment opportunities spring up on a daily basis as the market adjusts and re-adjusts with investors struggling to accurately forecast the likely out come of the current stalemate. Whilst the politics plays out asset prices and asset classes become very difficult to price as the risk premium becomes virtually impossible to quantify.
The current election season besides adding newborn babies names such as Runoff Moyo ,Senatorial Chirumhanzu, Godfather Manheru ,Candidate Pote ,Independent Maposa ,Rigging Hamadziripi ,Electoral Commission Ndlovu ,Foreign Observer Chimunda ,Neck To neck Nyamadzawo ,Sadhaki Sibanda ,Heavy Weight Untarnished ,Rural Stronghold Khaliyathi, Fifty-three Percentage Ndlondlo , Released Results Matongo, Ballot box & Ballot paper Kunonga (Twins) will create a new class of millionaires ( real dollars).These alert investors are those who are ready and prepared to take risky positions whilst others take their time.
Due to rapid currency depreciation Zimbabwe’s assets are heavily discounted and represent a bargain when compared to its regional peers. Whilst some discount is relevant due to high political risk there are indications that most asset classes are now trading way below their replacement cost. This represents buying opportunities for investors (individual and institutional).
Various assets classes such as listed and unlisted equities, real estate and stock holdings represent outstanding opportunities as they are likely to lag behind their replacement costs. Whilst listed equities may be prone to price controls in the short term it is clear we may be witnessing an end of and era and such assets will recover and in most cases the upward potential is way higher than the investment holding cost.
It is interesting that a number of companies ( manufacturers, bakeries, trucking firms, etc.) have found that (after some years) their real estate was in fact worth more than the rest of the business! This has also been true for many farmers ( assuming the title is secure and there is confirmed long term “letter of present interest“ from government. This indicates investors should target those companies or assets that include verifiable real estate assets on their balance sheets. This is so because even in the case of a further economic meltdown such assets will hold their own and will not only ensure that the investor gets the return of capital but also the return on their capital.
In addition should the investor be looking at equities listed or unlisted they need to pay particular attention to companies or assets with extremely good cash management skills. This important considering that before the economy normalises the assets have to be maintained in reasonably good shape.
Cash management is the difference between profits and bankruptcy during hyper-inflationary transition period such as the one Zimbabwe is about to enter. The single fact that influences every decision is: Time eats money. In addition to investing in companies with solid assets and real estate investors should look for assets that exhibit the following qualities.
Make absolutely certain business managers understand the time value of money.
Never allow your cash to remain idle (i.e. spin money quick and fast.)
Good cash management can provide a major source of profit, while poor cash management can destroy a company in a matter of months as it fails to match working capital needs and fails to cover replacement costs.
Constantly be prepared to convert dollars into a stable foreign currency, real assets or stocks.
Be aware that the stock market may become an uncertain source of capital. Even though companies should now be taking advantage by listing during excess liquidity periods.
Be prepared to maintain more than one set of books.
Need to be aggressive with stock management. Inventory valuation should be based on NIFO (next in first out) rather than LIFO.
Develop an appropriate inflationary adjustment for capital replacement or the value of your capital will disappear.
Whilst the whole Zimbabwe Stock exchange seems very cheap in terms of replacement cost and regional peer comparison there are certain Companies that are more likely to withstand any further meltdown. These include Old Mutual, AFRE Corporation, ZPI, Pearl Holdings, Dawn Properties and Mash Holdings. These are companies with solid asset base and generate strong cash flows. In addition asset rich companies such as ZECO Holdings represent excellent value given that they own so much real estate which is fully paid for. There are opportunities to further unlock more wealth from ZECO Holdings by separately listing the Real Estate owning division. Further balance sheet restructuring for ZECO Holdings and other similar companies represent opportunities for those investors who have a medium to long term view of the market. These stocks have potential to wither a storm and offer remarkable upside should the good times start to roll.
PROFFESSIONAL DISCLAIMER
The views expressed are personal and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You are encouraged to consult your tax or financial advisor. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Investing in shares may not be suitable for all investors. Seek independent advice if necessary. Past performance is no guarantee of future results.
Gilbert Muponda is a Zimbabwe-born entrepreneur, living in exile. He can be contacted at gilbert@gilbertmuponda.com .Read more of his articles at his website www.gilbertmuponda.com
During this period investment opportunities spring up on a daily basis as the market adjusts and re-adjusts with investors struggling to accurately forecast the likely out come of the current stalemate. Whilst the politics plays out asset prices and asset classes become very difficult to price as the risk premium becomes virtually impossible to quantify.
The current election season besides adding newborn babies names such as Runoff Moyo ,Senatorial Chirumhanzu, Godfather Manheru ,Candidate Pote ,Independent Maposa ,Rigging Hamadziripi ,Electoral Commission Ndlovu ,Foreign Observer Chimunda ,Neck To neck Nyamadzawo ,Sadhaki Sibanda ,Heavy Weight Untarnished ,Rural Stronghold Khaliyathi, Fifty-three Percentage Ndlondlo , Released Results Matongo, Ballot box & Ballot paper Kunonga (Twins) will create a new class of millionaires ( real dollars).These alert investors are those who are ready and prepared to take risky positions whilst others take their time.
Due to rapid currency depreciation Zimbabwe’s assets are heavily discounted and represent a bargain when compared to its regional peers. Whilst some discount is relevant due to high political risk there are indications that most asset classes are now trading way below their replacement cost. This represents buying opportunities for investors (individual and institutional).
Various assets classes such as listed and unlisted equities, real estate and stock holdings represent outstanding opportunities as they are likely to lag behind their replacement costs. Whilst listed equities may be prone to price controls in the short term it is clear we may be witnessing an end of and era and such assets will recover and in most cases the upward potential is way higher than the investment holding cost.
It is interesting that a number of companies ( manufacturers, bakeries, trucking firms, etc.) have found that (after some years) their real estate was in fact worth more than the rest of the business! This has also been true for many farmers ( assuming the title is secure and there is confirmed long term “letter of present interest“ from government. This indicates investors should target those companies or assets that include verifiable real estate assets on their balance sheets. This is so because even in the case of a further economic meltdown such assets will hold their own and will not only ensure that the investor gets the return of capital but also the return on their capital.
In addition should the investor be looking at equities listed or unlisted they need to pay particular attention to companies or assets with extremely good cash management skills. This important considering that before the economy normalises the assets have to be maintained in reasonably good shape.
Cash management is the difference between profits and bankruptcy during hyper-inflationary transition period such as the one Zimbabwe is about to enter. The single fact that influences every decision is: Time eats money. In addition to investing in companies with solid assets and real estate investors should look for assets that exhibit the following qualities.
Make absolutely certain business managers understand the time value of money.
Never allow your cash to remain idle (i.e. spin money quick and fast.)
Good cash management can provide a major source of profit, while poor cash management can destroy a company in a matter of months as it fails to match working capital needs and fails to cover replacement costs.
Constantly be prepared to convert dollars into a stable foreign currency, real assets or stocks.
Be aware that the stock market may become an uncertain source of capital. Even though companies should now be taking advantage by listing during excess liquidity periods.
Be prepared to maintain more than one set of books.
Need to be aggressive with stock management. Inventory valuation should be based on NIFO (next in first out) rather than LIFO.
Develop an appropriate inflationary adjustment for capital replacement or the value of your capital will disappear.
Whilst the whole Zimbabwe Stock exchange seems very cheap in terms of replacement cost and regional peer comparison there are certain Companies that are more likely to withstand any further meltdown. These include Old Mutual, AFRE Corporation, ZPI, Pearl Holdings, Dawn Properties and Mash Holdings. These are companies with solid asset base and generate strong cash flows. In addition asset rich companies such as ZECO Holdings represent excellent value given that they own so much real estate which is fully paid for. There are opportunities to further unlock more wealth from ZECO Holdings by separately listing the Real Estate owning division. Further balance sheet restructuring for ZECO Holdings and other similar companies represent opportunities for those investors who have a medium to long term view of the market. These stocks have potential to wither a storm and offer remarkable upside should the good times start to roll.
PROFFESSIONAL DISCLAIMER
The views expressed are personal and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You are encouraged to consult your tax or financial advisor. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Investing in shares may not be suitable for all investors. Seek independent advice if necessary. Past performance is no guarantee of future results.
Gilbert Muponda is a Zimbabwe-born entrepreneur, living in exile. He can be contacted at gilbert@gilbertmuponda.com .Read more of his articles at his website www.gilbertmuponda.com
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