2022 National Budget 

The minister of Finance yesterday announced a $$927,3 billion budget which various publications and officials have called “lifeless.” Contrarily, publications such as the Herald have labelled this budget as “people centred.”

In his budget presentation, Mthuli Ncube drew attention to the tax burden that was being faced by low income earners. Resultantly the tax bracket was adjusted. Ncube stated:

“In order to provide relief to taxpayers and also boost aggregate demand for goods and services, I propose to adjust the tax-free threshold from $10 000 to $25 000 and also adjust the tax bands to end at $500 000, above which a marginal tax rate of 40% will apply with effect from January 1, 2022.” 

You can download the full budget here.

Criticism of The 2022 National Budget

The Progressive Teachers Union Zimbabwe (PTUZ) General Secretary Raymond Majongwe lamented over this national budget stating that it did not take into account the teachers and the challenges they face. He commented the following:

Former Finance Minister, Tendai Biti also had some sentiments of his own to shared with regards to the 2022 National Budget. Biti dismissed the budget as “ritualistic formality bereft of substance”. This is as a result of its failure to take into consideration  exchange rate distortions and structural challenges around the free-falling local currency.

What do you think of the 2022 National Budget?

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By Eddie Cross

When I first started work in 1957, the rate of exchange for the Rhodesian Pound against the British Pound was 1 to 2.5. My salary as a farm Assistant was small, but I could buy quite a lot, even a small car after 6 months. At Independence in 1980 the local dollar was worth 2 to 1 against the United States dollar and again I could live very well on my salary in local currency which had real value. It was taken for granted that our currency was stronger than the international currencies in which we traded. In fact, we were proud of the fact although I thought as an economist and businessman, that we should rather have a weak currency and build up our reserves of hard currency for a rainy day and to encourage exports.

After Independence we maintained a strong local currency for a long time but gradually the foundations of fiscal prudency and sound State management of our affairs began to undermine the local currency. The crunch came in 1997 when the State paid out Z$3,6 billion to war Veterans and entered the war in the Congo to remove Mabuto and replace him with Kabila. The combined cost to our economy led to an immediate and catastrophic collapse of our exchange rate to 12 to 1. In the following decade we were to see our currency simply go down the tube and by 2008, a billion local dollars could not buy a loaf of bread.

Even today, I do not know how we survived – many did not of course, many famous firms that had operated here for a century, vanished. To survive we had to break the law and trade in hard currency. But the overall effect of that period was that we wiped out over 100 years of savings and value. In 2008 the total value of all the local currency in circulation was a few cents in real money per capita.

On the 17th February 2009, I sat in Parliament as a new Member just elected, and listened to the Minister of Finance dismantle the economy of the past and usher in a new dispensation that was to transform Zimbabwe in the next 4 years. The speech was short – 15 minutes, but its impact was enormous. He allowed us to trade in the currency of our choice, lifted all controls on the exchange rate and on prices and liberalised the marketing of gold. Inflation collapsed.

In the next four years the revenues to the State grew exponentially – US$280 million in 2009, US$900 million in 2010, US$1,7 billion in 2011, US$2,8 billion in 2012 and our budget for 2013 was US$4,3 billion. In 2012 we liquidated all local currency bank balances for the paltry sum of US$19 million.

The problem then was that we were starting to trade very substantially on electronic platforms. The traditional role of the Banks and currency was changing very rapidly. Cheque books vanished, cash transactions declined to a small fraction of the local market. The Reserve Bank printing machines resumed activity after four years of inactivity – not to produce paper money, but electronic money. Suddenly we were wealthy again – Zimbabweans had bank balances worth US$23 billion. Compare that with the paltry US$19 million in January 2009.

But it was not real money, it was mainly air. When Mthuli Ncube took over the chair of Minister of Finance in 2018, he quickly stated the obvious – our RTGS balances were not real money, it was something else and did not, in any way represent the real value of our currency holdings. I said at the time that if you wanted to know whether our currency was worth US dollars at 1 to 1, just take $1000 bond notes to the Reserve Bank and ask for real USD. If you were paid, then in about 5 minutes the queue outside the Bank would stretch to Mbare.

He set the local dollar lose, called it the RTGS Dollar (electronic dollar) and allowed it to float. In June 2020, just two years later, the local currency was trading at 135 to 1. Inflation in local currency, tied almost directly to the exchange rate went to 850 per cent in mid-year. Suddenly we were poor again.

The common expectation at that point was that it was ‘business as usual’ and that the local currency would be at 200 to 1 by the end of the year. However, we had not read the game plan, it was called the Transitional Stabilisation Programme or the TSP. This had been published in August 2018 by the new Government and most of us had dismissed its contents as just another State false vision of where we were going. The reality was very different.

But we were wrong, the new Government implemented the TPS! They balanced the budget, reduced recurrent expenditure and raised taxes. They allowed inflation to devalue our stock of electronic US dollars to more realistic levels and they curbed the printing of money. Someone said they threw away the printing press. Slowly the fundamentals started to assert themselves.

In June 2020, the decision was taken to start a formal market for foreign exchange. The reason for this was the failure of the Banks themselves to do this, the appreciation that, at 135 to 1 the local currency was seriously undervalued and the direct correlation between the exchange rate and inflation. Money supply was no longer the cause of our inflation.

The auction had an immediate impact – at the first auction we sold US$15 million with a wide spread of bids, rapidly the market settled at 82 to 1, we were right the local currency was worth much more than 135 to 1. Over the next year the turnover on the auction rose to nearly US$2 billion per annum, sales on the interbank market to about US$800 million and transactions for local US dollar bank accounts to US$2,8 billion – all at the indicative rate of 85 to 1. This means that the parallel market had shrunk from almost 100 per cent of trades in the early part of 2020 to perhaps 20 per cent today. Even on that market the rates strengthened and then declined to where they are today at about 125 to 1.

Debate rages as to what the correct exchange rate is – many arguing that the only real market is the street where you can change money day and night. They claim the auction rate is somehow manipulated. To the extent that the auction rate is determined by the weekly bids by about 600 companies, they are right. What is now required is for the people holding USD balances to offer them on the auction at a rate they demand. This has happened only three times – right at the start two NGO’s sold US$550 000 on the market at 90 to 1. Just recently a major mining company put US$15 million on the market and accepted the weighted average exchange rate. If this happened, then we could gradually move to a more normal system, where the Banks fix the rate every day on the basis of supply and demand.

Given that we have a small surplus of hard currency on the formal market and maybe a significant surplus when the informal market is included, it is my view that under such conditions the local currency would quickly become overvalued. At that stage I would argue that the Reserve Bank should intervene as a buyer and build up our hard currency reserves. That is exactly what the Asian Tiger economies have done with great success.

But there is no doubt in my mind that we Zimbabweans are now much better off than we were, that what we earn, even though it is less than we want, has real buying power. But even better than that, our economy is now on a sound footing and starting to grow rapidly in real terms. If we stay on course into the future, it is just possible, that we could join that small group of national economies that are now delivering a higher standard of living to their people.

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Speaking to journalists in Bulawayo, Finance Minister Mthuli Ncube pointed out that the remittances received in all of 2020 amounted to US$1 billion.

The minister further attributed the massive inflow of cash from Zimbabwe’s diaspora to the use of formal channels of sending money. These channels remained operational during Covid-19.

Remittances are said to be on the rise in other African countries as well. Leader of the African  Diaspora Global Network, based in South Africa, Vusumuzi Sibanda applauded diasporans all over. He had the following to say:

“Most of the households now have at least one sibling or relative in the diaspora, and as a sign of Ubuntu, they have to send help back home. They have to because the Zimbabwean economy is harsh for locals, which is the reason why people seek greener pastures elsewhere.”

While it is noteworthy that Zimbabweans are working hard to support their families. The families dependence on their funds reflects negatively on the economy and also means that diasporans have to work several jobs just to make ends meet.

However, this goes hand in hand with the diasporans resolve to assist Zimbabweans last month which we discussed in a previous article.

What are your thoughts?

Let us know in the comment section below.

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By Eddie Cross

Because these deliberations were always on a strictly private basis and none of us talked about these encounters or their outcome, I will not talk about this process here, except to give tribute to two incidents which highlight my topic today – that of the role the private sector can play in Zimbabwe, if it is allowed to do so.

A year ago we were plagued by shortages and queues for basic necessities – fuel, cooking oil, maize meal and other items. In addition, our money markets were chaotic, the ‘market rates’ set by our shadowy world of informal sector traders, were going through the roof, 135 to 1 and rising. Business was talking about 200 to 1 by Christmas and all the consequences. Inflation peaked at over 800 per cent, driven mainly by the collapse of the local currency.

Our informal group was invited to attend a Cabinet Committee led by the then Minister of Foreign Affairs, General S B Moyo (now late) and comprising of a number of senior Ministers and Civil Servants. We arrived at the venue at 14.30 hrs, not knowing what to expect and were told to wait until we were called. When we finally went into the meeting we were told where to sit and then the Chairman asked us for our ideas on how to resolve the market problems we were experiencing.

We then simply stated that in our view, the problems with supplies could only be solved by handing over responsibility to the private sector. He was most surprised and asked us if we had the capacity in terms of both financial and physical capacity? We responded in the affirmative and to bolster our position we had representatives of very large corporates in our team. S B Moyo was a very effective Minister and with his military background, used to decision making. He stated that he supported our point of view and thanked us for our contribution. We left the meeting.

I am not sure of what transpired afterwards, but in a series of decisions and actions, the supply of five critical basic commodities was transferred to the private sector and liberalised using market principles. Fuel, maize, soyabeans, wheat and crude vegetable oil were involved. The market problems vanished.

Some months later, one of our group in a meeting with Mr. Moyo reminded him of that crucial meeting and the decisions made and said ‘Minister, I hope you understand just how much you helped the country by those decisions.’ We are going to miss him very much going forward.

The chaos in the money market remained. We did a mathematical analysis of the problem and concluded that the main driver of inflation was the depreciation in the exchange rate. We were not satisfied it was justified. We knew that the bubble created by artificial exchange rates in 2014/17 had to be burst and the local currency devalued, but we also felt that the extent of the depreciation we were experiencing, was no longer justified by the fundamentals. We had stopped printing money, in fact there was a shortage of the local currency, we had a fiscal surplus and a cash budget process and a balance of payments surplus. We had authorised a return to the multi-currency system used when we dollarised in 2009 while retaining our own currency as the main means of exchange.

In early June 2020, the President called us in for a light supper at State House with the Minister of Finance who had suggested the meeting. The President went around the room asking each of us what we thought should be done to bring a halt to the chaos in money markets. We gave our views and were thanked and went home. He sat on this issue for two weeks and then gave an instruction that the Reserve Bank should initiate a formal auction for foreign exchange at the Bank. The Governor advised on the technicalities and the auction was launched on the 23rd of June.

The rest, as they say in the classics, is history. In the first few auctions we were able to put US$15 million a week on the auction and with several hundred companies participating, the rate quickly settled down at about 82/83 to 1. Over the next 6 months we were able to increase the weekly volume of hard currency to over US$35 million a week and with the currency stabilised, the inflation rate began to fall, declining from a high of over 800 per cent to 350 per cent by the year end and just over 4 per cent per month. The rate of exchange had devalued slightly to just under 84 to 1. The month on month inflation rate today is 2,19 per cent.

The private sector was taken by surprise, ‘was this sustainable’ they asked, we responded that in our view it was. It was being funded by our own cash flow from exports and other sources. It was exciting to see, week after week, hundreds of companies, small and large, buying hard currency on the market at rates they set themselves and funding the real heart of this economy with raw materials, machinery, spares and equipment. This process established a new sense of stability in all markets although the informal sector continued to report transactions at 100 or 110 to 1.

I am not concerned about this wide gap between the formal market rates and the informal rate for two main reasons:

Firstly, the majority of funds being used by the private sector to support imports of all kinds, are now taking place at the auction, or formal sector rate. Right now at the level of about US$5,4 billion a year or 96 per cent of all formal sector imports;

Secondly, those individuals and companies who are using the informal sector to secure hard currency and doing so either to protect value in the mistaken belief that the authorities are going to allow another bout of money driven inflation or they need money to fund smuggling in one way or another.

As far as I am concerned the much higher rates paid for currency being traded outside the formal system is essentially a tax on these activities. It gives a much higher return on remittances from abroad and this in turn is fed into the economy to buy food, pay for education and health services and to build homes. All positive and contributing massively to the welfare of our people and to the economy at large. The good thing about the stability created by the auction is that it has also stabilised the informal market rates which have changed very little in the past 8 months – in fact they have strengthened when compared to the rates that were running when the auction was started.

Listening to the voice of the private sector. Taking key decisions to unlock its potential for growth and market driven stability. That is what it is all about. What concerns me is that so few business leaders have the national interest in mind when they seek the ear of our political leadership. So often it is their own narrow interests that prevail when they get an opportunity to talk to power. If we can get around that, this will be a very different place in a very short space of time.

Eddie Cross
Harare, 27th March 2021

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You can download the  full statement in PDF below:

DOWNLOAD 2018 Fiscal Measures PDF

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