Our last set of Notes coincided with the introduction of Zimbabwe’s latest new currency, the ZiG. Our early thought at that time was that it was simply a redenominated ZWL with a new name. We suggested that since the domestic and foreign investor had close to zero trust in Zimbabwe’s economic authorities, the ZiG could only succeed when and if the currency performed as it was supposed to. This would be a long process as trust would need to be rebuilt. As has been the custom during such times, the Government unleased its henchmen ‘to ensure its success’ throwing into jail any suspected currency dealer and fining any business that was not pricing its goods at the official exchange rate. At that early time there were no ZiG notes in circulation and it was not possible to go to a bank to exchange ZiG for a USD officially so it was not obvious to the general public how they could convert their money into USD so that they could buy fuel, for example, that was only sold in USD. The black market was the only place to go whether it is illegal or not. Quarterly July 2024 Imara Asset Management not trading the USD in any kind of interbank market. In theory, what should be happening is that the ZWG issued to the exporters for their USD should be backed by those same USD held in reserves by the Central Bank so that when there is a need for USD those ZWG can be converted back into those same USD.
In reality the USD is not being held in foreign exchange reserves but some of it is being spent by Government to fund themselves. Needless to say there are not then sufficient USD for the newly issued ZWG that was issued for conversion as they have been spent. Three months on and the official exchange rate is unmoved. The parallel rate trades somewhere between ZWG15 to USD1 (ZWG being the new official currency code for ZiG) and ZWG18, if indeed that market exists. We understand that the RBZ is selling USD to the banks for onward distribution to their clients at a rate above ZWG14. The official rate is ZWG13.7 to USD1 which we assume is the rate the Government gives to the exporters for their USD thereby allowing it to make a tidy profit when they on-sell it to the banks. Companies who require USD for their operations are then buying for ZWG any USD from their banks (again at a further premium, around 5% above the selling rate before factoring in transaction costs like IMTT and RBZ Levies, which forces businesses to operate at ZWG15); but not to the extent that they require it. On the other hand, formal sector operators are no longer allowed to put a margin on their selling prices, formerly capped at 10% above the then auction rate. In short the ZWG is not freely convertible into USD.
Further the banks are Further, so terrified is the RBZ of the ZWG weakening, it is keeping a very tight grip on ZWG money supply. Indeed any surplus ZWG that a bank may have is immediately swept up into Non-Negotiable Certificates of Deposits (NNCDs) that cannot be liquidated when required and then only after one year, even though we are told some exemptions have been given. So the banks have no ZWG available to lend even for the short term needs of its customers who may need some ZWG for payments. As far as we can see therefore, the only ZWG around in electronic form are used for paying some wages – for the sectors that have not fully dollarized – which are then used for payments in the formal economy; physical notes and coins perhaps are being used in the commuter buses. All other transactions are principally being conducted in USD. The authorities’ heavy handedness – utilising the police, the CIO and the FIU – to enforce the use of the ZWG – and at the official exchange rate – mostly in the formal sector, has resulted in a growing proportion of corporate revenues in ZWG. Then again this comes from a low base as the collapse in the ZWL in February and March this year was fast making it extinct anyway (similar to the ZWD in 2008), with corporates reporting over 90% of revenues in USD.
Now with the ZWG that percentage may have fallen to 70-80% in USD. At face value, an increase in the portion of local currency sales, but in reality an artificial one. It could be argued therefore that the whole ZWG conversation is just that – an intellectual exercise for Zimbabweans to debate as the English do about the weather. In the overall scheme of things it is no longer of much relevance given that the majority of trading continues to be conducted in USD. This actually might suit Government; they can claim to SADC and to the population at large that the new currency is working and is holding its own, but in reality most business is being done in USD and in the informal sector, almost exclusively so. Enough said then on the ZiG/ZWG for now. Given that the USD is paramount for the time being, it is of equal importance that electronic USD are indeed backed by real USD and are not being created to help settle Government obligations as occurred in 2014 2018.
The public at large are fully aware of this issue and are naturally cautious; once bitten, twice shy. It is interesting then that the bankers are discussing their concerns about “Zollars” more regularly than before. We believe that it is probably a concern for the new Reserve Bank Governor who would rather not be tainted by Zollars as the previous incumbent was. That may explain why the Reserve Bank is also keeping a tight leash on local USD lending by the banks, who could increase Zollars through credit creation through a phenomenon called the multiplier effect. Rather lend real USD acquired through international credit lines that are serviced though exports. The problem here is that these loans are expensive and limited. To all intents and purposes therefore, the banking system has very little ammo to lend, despite having issued credit facilities to numerous of their clients.
Corporates are therefore having to find their own liquidity if indeed that is possible, making doing business all the more difficult. Working capital management in Zimbabwe is hard enough as it is and for some companies it was made harder by having their ZWL/ZWG unilaterally converted into an illiquid twelve month ZWG denominated bill when the auction system was cancelled. ‘Money makes the World go round’ so with no bank lending other than from external and expensive credit lines, growth can really only come from growth in USD cash. This latter source is hard to estimate or calculate; gold panners finding and selling for cash more gold perhaps, or small scale tobacco farmers enjoying a good season. A property sale for a suitcase of cash that is spent in Zimbabwe would be another source of money. Money flows from the diaspora may also be an important source of cash. Looking at agriculture, the tobacco harvest is down on last year but probably not as bad as had been expected (220 million kg perhaps?) but the quality, due to the bad rains, for the small scale farmers will mean low prices and less income. Maize was a disaster due to El-Nino so no money flowing in from there. The Government seems unduly optimistic for this year’s wheat crop, estimating it to be a greater harvest than last year – 120,000 hectares planted versus 90,000 hectares last year.
ZESA, under difficult circumstances appears to be doing its best to supply power to the farming areas but even so, farmers are also having to revert to expensive generators. At best then we may achieve last year’s crop but in all likelihood well below that. Even so, and putting that into context, wheat production will be a lot higher than it was five or even ten years ago. The forthcoming summer cropping season must also be in the balance with huge uncertainty over potential rainfall not to mention the lack of funding to grow the crops. Good prior harvests usually allow farmers to plough monies back into seed and fertilizer but this year this looks a lot less likely. The forecast suggest we will move from El Nino to La Nina but that does not necessarily ensure consistent rains as we are increasingly seeing elsewhere in the World. Meanwhile the formal mining industry is having a hard time with falling or stagnant prices, poor electricity generation and then having to give up 25% of revenues for ZWG. That would be enough to make many mines marginal at best.
So we should not expect much growth from this sector. Speaking with consumer orientated businesses, it is a mixed picture. The formal supermarkets continue to suffer although stability in the local currency recently would have come as a welcome relief to them. It is the availability of USD from the banking system for restocking that is always the snag! Demand from the informal sector is always hard to measure for obvious reasons but it would appear to be reasonably strong still despite the difficulties in the agricultural sector. You only have to look at the number of cars on the roads, the new retail outlets being formed on the outskirts of towns or in the rural areas to realise that the informal sector is still thriving.
For Zimbabwe’s manufacturers and distributors, success comes by ensuring a presence in these areas which has forced them to adapt their route to market strategies. Building and construction is going on everywhere all funded through private funds which is ensuring that the suppliers of building materials in all forms are performing relatively well. The sector is certainly hiring a growing number of skilled artisans and labourers all of whom are earning an income in some form or another. For those living in Harare, the upheaval caused by the upgrading and dualisation of various major roads is causing chaos for now but should serve to be of huge benefit when completed.
The upgrades, we are told, are to impress our regional neighbours who will be attending the SADC conference in August, the conference being held at the New Parliament buildings out at Mount Hampden. The road construction together with the construction of a new town to house the delegates does not come for free and it remains anyone’s guess as to how it is being funded. What it is serving to do is to employ thousands of people – albeit for a short period for now- who will be earning monies for the jobs they are doing. That implies more consumer spend. There is also no doubt that ‘informal exports’ from Zimbabwe’s porous borders of gold, other minerals, cigarettes and other products are another source of income for the country.
Whilst the proceeds of such exports may not return in the form of bank transfers through formal channels, it may explain the proliferation of second hand car dealerships and fuel stations. Whatever, it all adds to a buoyant informal economy that formal statistics cannot easily capture. The IMF completed and published its 2024 Article IV Review for Zimbabwe in late June. This could not have been very easy to compile given the introduction of a new currency in April, not to mention the lack of reliable statistics on the informal sector. Nevertheless they were upbeat on the Zimbabwean economy forecasting growth of 2% in 2024, after 5.3% in 2023 and rebounding to 6% in 2025 on the back of an anticipated stronger agricultural season and on-going capital projects. With regard the ZWG they recommended that controlling monetary growth would be better achieved by issuing interest bearing instruments rather than illiquid NNCDs.
These instruments, if offered at higher rates than inflation, could be attractive to pension and insurance funds and indeed to the banking sector. Once again they stressed the need to allow the market to determine the level of the exchange rate by allowing a foreign exchange interbank market. Their big concern remains on Government expenditure and how it is funded. They specifically refer to the amount of RBZ funded debt (through Quasi Fiscal Operations) and the issuance of USD Treasury Bills which alone they estimate to be the equivalent of as much as 8% of GDP in 2023. That would be a massive fiscal injection into any economy. There would appear to be little transparency with regard these Bills such as to whom and for what they are issued for. The IMF remains concerned about excess spending in 2024, not helped by the need for drought relief measures or for that matter, expensive road construction. They hope that this does not undermine the new currency as occurred in the past. In our view, Government has very few deficit funding options, having already opened the year with a bout of tax increases. That probably explains why Treasury has ruled out a supplementary budget, but has proposed a ‘resource re-allocation plan’. The only real alternative, in the short term, is a cut in government spending. Other sustainable funding options could include a sale of some perennially troubled State Owned Enterprises (SOE’s). At this stage, an opaque Mutapa Investment Fund SOE consolidation structure does not give much confidence of any future dividends for Government coffers anytime soon. Of importance though is their concern on Zimbabwe’s overall foreign debt as stated below from their Article IV review: “International reengagement remains critical for debt resolution and arrears clearance, which would open the door for access to external financing.
The reengagement efforts, authorities’ through the Structured Dialogue Platform, are key for attaining debt sustainability and gaining access to concessional financial support. In this context, the mission encourages the authorities to continue adhering to high standards of public debt transparency, including through the inclusion and appropriate treatment of recently issued debt in its public and publicly-guaranteed debt statistics. But they go on to make clear: “However, the IMF is currently precluded from providing financial support to Zimbabwe due to its unsustainable debt situation—based on the IMF’s Debt Sustainability Analysis (DSA) and official external arrears. An IMF financial arrangement would require a clear path to comprehensive restructuring of Zimbabwe’s external debt, including the clearance of arrears and a reform plan that is consistent with durably restoring macroeconomic stability; enhancing lowering poverty; economic governance. inclusive growth; and strengthening Herein lies the rub. Zimbabwe in late 2022 began the process of re-engagement with its creditors by initiating a ‘Debt Resolution Forum’ chaired by the former President of Mozambique, HE Chissano and the President of the African Development Bank, Dr. Adesina where Zimbabwe’s debt problems could be assessed and analysed. Unfortunately, after a promising start, it appears that talks faltered after the August 2023 elections which were not deemed to be free, fair and credible, a necessary condition of the talks. In addition, Zimbabwe’s consolidated debt was at around that time estimated at USD17.5 billion. By the IMF Spring Meetings this year, the Minister of Finance suggested that they had increased to USD21 billion! We believe that this has occurred through the issuance of undocumented USD Treasury Bills and RBZ funded debt as alluded to in the IMF’s statement above. We are well aware from the money market brokers in Harare that Government has been issuing USD Treasury Bills to many of its service providers to fund its current spending. Unfortunately we fear that this carefree attitude by Government toward its spending and the manner in which it is funded could well endanger a future IMF Staff Monitored Program (SMP) and the whole Debt Restructuring Dialogue.
The last planned SMP in 2018 was jeopardised by another Treasury Bill scandal. Considering all that has been going on financially speaking during the first six months of this year, the ZSE and VFEX have been performing relatively well, especially the former. The ZSE rose by 465% (ZWL/ZWG) over the first six months which, taking a black market rate, equates to around 41% in USD terms which is a commendable return even off a low base. The VFEX on the other hand stagnated with a minor gain of 2.7%. Another currency change has created presentation challenges for companies, particularly those in the listed space. Valid questions remain around the methodologies to be used to report in ZWG not least since it was introduced in the middle of the financial year for almost all companies. Thankfully more companies on the ZSE are now reporting in USD and paying dividends in USD, Delta being a case in point. This makes it far easier for investors (and management) to understand what is happening financially to these companies; publishing accounts in ZWG remains an expensive waste of time for all since they will always be totally meaningless. Sadly foreign investors continue to stay well clear of Zimbabwe for good reason given the way in which they have been treated by the authorities. As such valuations in Zimbabwe will be lower by historical standards that they might have been had foreign investors been present to take advantage of cheap assets. Which for domestic investors means sustained low price earnings ratios, higher yields but lower returns ……until the foreign investors can be attracted back.
For a SADC delegate who may be returning to Zimbabwe for the first time since 2018, one would have to believe that they would be impressed with what they see. A brand new airport to greet them, newly paved roads, a construction boom in residential areas in and around Harare, not to mention new warehouses on Harare Drive or new shopping malls in and around the suburbs. A drive out into the farming areas of Zimbabwe would highlight residential construction in the rural areas and the investment that has taken place on the farms. A quick trip to the Victoria Falls would reveal new and redeveloped hotels. They may well wonder how all of this has been achieved whilst Zimbabwe has been under so called “sanctions” that SADC has been asking to be removed; reading the IMF reports may not provide all the answers except for the obvious and substantial increase in Zimbabwe’s US dollar debt. What is happening in the informal economy may help to explain much of the investment and development even if the numbers don’t. What happens after the SADC Summit is anyone’s guess – one hopes more of the same. For now all roads lead – or should lead by August – to the New Parliament. John Legat, Chief Executive Imara Asset Management (Zimbabwe) Ltd
