Financial Market Collapse in Zimbabwe

The local economy in Zimbabwe has been affected by a financial market that is not functional and that has led to the collapse of many firms as the financial intermediary has been lacking in its execution of its duties. There are a number of factors that have led to the collapse of the financial market in Zimbabwe and these problems have not only affected Zimbabwe but most of the developing countries in the world. Financial markets are of bigger importance to the economy of countries as they are there to facilitate the efficient allocation of resources which will spur development further. Dysfunctionality of the financial market will spell the doom of an economy as resources will be allocated inappropriately and this will lead to an imbalance within the economy thereby crashing the supporting systems of economic sectors or factors.

The main challenge in most developing economies has been a clash between Economics and Politics as populist political economic strategies have been used to woo voters but at the same time hurting the market and the economy. Political statements and policies tend to please the masses at rallies which will be on a shallow basis without getting deeper into the aspects of the whole issue. On the ground the sentiments will have a huge knock on the businesses, the economy and investor confidence. Populist political statements and policies are to an extent retrogressive to economic development as they are hard to implement with most of them failing to take off ground or leading to recessionary pressures in most developing countries. The famous ESAP policy formulated and implemented in the early 90’s degenerated to an epic disaster in Zimbabwe and now we await the full implementation of the Indigenisation and Empowerment Act together with the ZIMASSET which in the meantime have not boded well with the economy.

Still on the issue of policies and politics, there is no clear interpretation of these policies by the ministers who would have enacted the policies and thus leaving everything in a conundrum. The discord created by the misinterpretation of the policies leads to more challenges in the implementation process. Currently the ministry of Indigenisation and Empowerment has gone through 3 ministers in less than 8 years bringing inconsistencies and differing ways in which to implement the whole process. Each minister who came on board had his own explanation and execution of the policy with the President also echoing different sentiments which in all confused investors and the general public. Inconsistencies also within the policies lead to misunderstanding and instability in the market. Investors require an environment that does not change time and again which disturbs any future planning and forecasting as it will bring about instability and losses within business ventures. Government policies should be able to create a sound environment for efficient economic progress.

The streaming of information to all stakeholders is a big challenge in Zimbabwe as there is too much information asymmetry which affects viability and efficiency of financial markets. Information has to be available to everyone to avoid any disadvantages in trade and also for raising awareness to all locals. Proper channels of communication should be followed by all parties concerned in order to reach all targeted recipients of information. The Zimbabwe Stock Exchange (ZSE) was in February 2015 involved in an error of communication and information availability as it suspended the Meikles Group from trade on the national bourse and later on re-listed after a High Court ruling in favour of the Meikles Group. If the stock exchange is failing in relaying information to its participants first, then what about the general public, this in itself discredits the bourse and causes much concern on its efficiency and of the financial market at large. Lack of transparency in most of the dealings also leads to the lack of information availability as most of the details will be concealed and kept under wraps.

The lack of financial instruments has led to a less or next to none innovative financial market and this in turn strains ways with which to keep funds circulating within the economy and also does not attract foreign funds that might be interested in financial products. The local market used to have bonds, derivatives, credit guarantees and other financial instruments that kept the market liquid and provide both short to long term funding in the market. These products are no longer in existence, with only local government bonds being in circulation and mostly being offered to top companies as foreigners cannot take them up due to the debt overhang that the country has. Lack of financial products makes the market rigid as there is no diversity within the market.

Collateral is one of the 5C’s of credit and is a critical issue in Zimbabwe as the property rights lack protection and are not flexible enough to cover other forms of movable and immovable property which may be used as collateral in a developing country. Most Zimbabweans keep their wealth in the form of livestock such as cattle which is not properly registered in Zimbabwe and that does not stand fit as security for a bank loan or on any credit facility. The government and the private sector should come together and be able to set up ways with which to register cattle, keep check of any movements’ in order to protect the lender and instil confidence in the lender. The laws should be able to conform to the standards of the country and be able to be flexible enough to cater for the differing scenarios within an environment. The then TN Bank wanted to set up a cattle bank which was a noble idea that would have pioneered the use of cattle as collateral as it would have been registered but lacked support from the stakeholders. The country also carried out a land reform programme that availed land to the general public but since early 2000 up until this year 2015 most benefactors do not have title deeds, land leases or the 99 year leases that authenticate that they the owners of the land. Property registration lacks in a big way in the country with those that were availed 99 year leases are also failing to access loans from financial institutions, with government financial institutions also not accepting the papers. Authentication and education of such important documents by the government should be made in a very intrinsic way that instils confidence in the whole market about the legal documents. Commercial courts should be availed to deal with businesses cases especially on property rights matters rather than placing a heavy load to the general courts with all kinds of cases at once. 

Government debt of $10 billion dollars has had a huge effect on the economy and viability of the financial markets as foreign capital or funding for the markets cannot be attracted due to the country’s credit risk rating. Private companies are failing to lend from foreign financial institutions as the funds attract a high cost of lending. Lack of funding, a high debt has now led to an illiquidity challenge that is crippling all sectors, low income level earners now form the core of the employed percentage in the country and this has severely affected the savings function. Low liquidity levels have now made the banking institutions channel funds to risk free assets that keep their funds safe and depend mainly on service charges for their income.

The death of most industrial companies in the country which were the mass employers of the country has seen an up rise of small to medium enterprise (SME) which has led to sustainability of most families. This emerging sector is not accounted for by the economy in formal terms as it is still regarded as an informal sector. The informal sector term deprives these enterprises from things such as loans, training, advisory services among others but also deprive the government of the much needed revenue. Microfinances which are supposed to form a support base for the SME’s have failed in that regard as they have also focused on giving out short term loans mainly to government employees which is a risk free arrangement. Besides not offering loans, their loans are at a huge cost which in turn will make running the business a hard act to do. Structures were in place to help nurture SME’s have crumbled as rhetoric has taken centre stage with little to no action taking place. There have been mooted plans to have a SME’s bourse to operate separately from the main bourse, so as to help organise easy ways to raise funding for these enterprises. The idea is a great one as we would be taking cue on the NASDAQ in America but with the current economic situation it’s not feasible as most counters on the ZSE are trading below 10 cents per share with some trading below a cent and these are big companies which is a cause of concern. Also the lack of the supporting structures for SME’s will lead a biased listing. 

If we don’t act today, we won’t have an economy….. tomorrow!

On a chilly September 18 2008, deep in the financial crisis, top US lawmakers and financial regulators met for an emergency meeting where they sought to chart a way forward on how to deal with freezing credit markets, bank and company failures and the real estate bubble which was about to burst.

The resolutions adopted in the meeting would have an impact on the global economy which had become entrenched in a recession gravitating towards a depression.

It was a striking warning from the then Chairman of the Federal Reserve System, Ben Bernanke, that changed the atmosphere and intensity of this meeting held on a Thursday. Bernanke and Henry Paulson, the then Secretary of the US Treasury wanted the approval of lawmakers to inject US$70 billion in the US financial system. In a gentle and not so ornate or restrained manner, Bernanke told the top lawmakers present in the meeting, “If we don’t do this tomorrow (Friday) we won’t have an economy on Monday”


                                                            

Ben Bernanke

According to one commentator Bernanke’s statement literally resulted in a “pause in the room, with the little oxygen left.”

The financial crisis of 2008 is long gone but a small nation in Southern Africa finds itself on the verge of a depression just like the United States’ and global economy (in general) in 2008. In magnitude, action and response the economic problems of the US in 2008 and those of Zimbabwe now are not comparable. Of course the United States was quick to act and at least Henry Paulson had the bazooka at his disposal- in the form of a stimulus package. Unfortunately Zimbabwe is slow to act and it’s a pity our own Minister Chinamasa doesn’t have the bazooka.

However, something Zimbabwe could learn and take heed out of the US financial crisis are the simple words of Ben Bernanke- , “If we don’t do this tomorrow, we won’t have an economy an economy on Monday.” 

Zimbabwe is facing a plethora of economic problems most of which are out of reckless unviable economic policies and lack action from the policy makers.

As they do in literature where every Shakespeare phrase is critically analysed it is vital to scrutinise Bernanke’s statement in the context of Zimbabwe. Breaking it into two phrases….

“If we don’t do this……”

The challenges bedevilling Zimbabwe’s economy require systematic action and remedies which ought to be done or implemented. Failure to implement such remedies, the economic situation can degenerate into a severe depression.

What is it that Zimbabwe needs to do?

Most economists have argued that Zimbabwe’s problems stem out of liquidity challenges. This is flagrant oversight and wrong analysis of the economy. The liquidity problems playing out today are also a result of adverse economic movement and shocks. Money is always chasing productivity, and there is no production in Zimbabwe which is the reason why liquidity is a challenge.

A drive through Belmont (Bulawayo), Nyakamete (Mutare) or Willowvale (Harare) confirms the sorry state of industry in Zimbabwe where rust continues to build up.

What is required in Zimbabwe is fresh capital which in turn drives money growth inevitably enhancing the liquidity position of the country.

The reality on the ground is that, within the borders of Zimbabwe, there is no institution or an alter ego of Warren Buffet that can change the landscape of industrial activity.

Zimbabwe is in urgent need of foreign capital to spur economic growth and there is need for the policy makers to create a friendly environment for investment.

In traditional African belief, there are spirits that act as a medium between the people and gods. In the context of the economy the financial system acts as the medium between firms and economic growth. It is the financial system that specializes in the provision of credit, financial advice and even investment.

If the medium cannot execute her duties properly, both ends of the chain suffer. Firms will not be able to boost operations through credit inevitably resulting in subdued economic activity.

Zimbabwe’s financial sector is dogged by non-performing loans, undercapitalisation, chronic bank failures, abuse of depositor funds and overcrowding (especially in the banking and insurance sectors). Robust actions are required to enhance bank supervision and regulation so as to create an effective and reliable financial system.

It is therefore imperative for Zimbabwe to lure real capital and establish a strong financial system to ensure sustainable economic growth and avert a looming economic catastrophe.

These are things Zimbabwe needs to earnestly. If we don’t do this….

“…we might not have an economy on Monday”

Whilst the Americans at the time of the financial crisis were very much aware to the fact that they had to move with speed, the lackadaisical approach coming out of Zimbabwe’s policy makers to the economic crisis at hand is very disheartening.

To illustrate the intensity of how the American markets urgently required a deal to save the economy, Bernanke predicted that if no swift action was undertaken the economy would be in turmoil in a space of three days. Conceptually America would still have an economy but the devastation of the three days (in fact it’s one working day since the two other days fell on a weekend) of no action would have wiped off confidence and exacerbated losses.

Zimbabwe is at crossroads. Like Bernanke we might not be able to predict the day we wouldn’t have any economy to talk about, that is if we have an economy anyway, but the health of the economy requires urgent action.

If we don’t institute good economic policies and reforms which ensure attraction of capital and sustainability of the financial system today, we might not have an economy……..tomorrow!

 

Second Hand products in Africa……………Good or Bad

The influx of second hand vehicles, clothes, electrical appliances and other products to Africa is on an alarming increase from both the developed countries and emerging markets. These goods have been to some extent the saviour to impoverished or marginalised people of Africa as they cannot afford a brand new product due to its costliness. The USA, Britain, Germany, China Japan and others are the biggest importers of second hand goods to Africa. The question to be asked in all this is How developmental or detrimental are these imports to African countries and economies?

Second hand imports have created much of formal but to a greater extent informal employment to a continent that suffers from a high level of unemployment and poverty. Governments in Africa have been failing to map viable policies that will tackle unemployment problems and thus the ordinary but innovative people have taken the opportunity to fend for themselves through second hand imports. Informal sectors have been ignored by most governments but in true aspect they are a bedrock for most struggling African economies and they have contributed to the growth of economies despite them not paying taxes to the government.  Governments might not benefit from any tax remissions from informal traders but they benefit from the import duties that are generated from the second hand products. Some governments are against the second hand imports and thus ban or charge high import duties so as to protect their industries and promote high production in their own economies. The high import charges are much beneficial to governments as they will channel them to local production. City councils are not to be left out as they benefit from letting out space to vendors of second hand goods.

On the contrary the African continent has become so desperate for second hand imports thus stifling its own local production which will affect the overall GDP of the nation. Much is being imported with a less life of use and thus making Africa to keep paying as the goods will only be having a short limited lifespan. Africa has become a dumpsite for the developed countries and to worsen the situation the continent has no expertise or idea on how to deal with the second hand products after their use is done. We do not have any recycling plants for these products especially machines, cars and electrical gadgets if they become obsolete.

The continent is endowed with natural materials and also produces raw materials but we don’t have any processing factories for these raw materials which are then processed in developed countries used there, after productive use they are dumped to Africa. We need to have plants that process the raw materials we produce and resources we have into finished products boost local production, improve the standard of living of the African people, create employment, provide liquidity for our economies thus boosting our own economies.  

Africa has a serious dependence syndrome that needs to be uprooted from our minds for our economies to grow. India banned most second hand imports and now their economy is one of the fastest growing economies in the world. We have to adopt a mind that is self-reliant, independent but closely knit with each African economy. This will create positive ripple effect in all economies within the continent as we will be supporting each other. It’s time for Africa to be proud of its products boost its own production and take advantage of the innovative minds that are within but lacking support and a spring board to launch themselves and the continent to higher levels of competence and economic  efficiency.

Hair Business boom in Africa

The hair business in Africa is on the rise as women seek more ways to beautify themselves and go with the current trend. Africa not long ago was known for simple hairstyles such as the Afro, s-curl, plaiting, braiding among other styles, but now since the world has become one global village hair pieces have taken centre stage. Artificial hair is now popular with women and this has proven to be brisk business in Africa as the trend is growing and showing that it here for quite some time.  Synthetic hair and Human hair have become the talk of town with the bulk of it coming from countries such as India, Brazil, China and they all depend on the quality with some going well above $200.00 just for a piece.

The hair phenomenon has caused much of an increase in hairmarts or hair selling outlets around Africa with popular and the less popular brands opening up shop to sell their products to the public. Different brand names have and are emerging as the sector has become more competitive and profitable for all the players involved. Hair brands now have hair salons in their brand name so as to market their brand properly with their products on sale in those saloons making the shops a one stop shop for their clients bringing in convenience. Hairdressers associated with the brands are usually hired as they will bring in more clientele and help in marketing the brand with others also renting a chair in the branded saloons with some of their contracts stating the use of their hair brand.

Saloons are one of the informal sectors in most African economies but they have created employment for most women with men also venturing into this lucrative trade. Hair dressing schools have also emerged due to the booming business and a profession that is bringing financial stability and growth to most families in Africa.  

The Bubble will Burst!!

After having been dosed with a modest and articulate mid-term Monetary Policy by the Governor of the Reserve Bank of Zimbabwe everyone was very much convinced and hopeful that the mid-term Fiscal Policy which was to be delivered on a later date was to provide the same impetus and steer the economy in the right direction.  The Fiscal policy consists of two tools- government spending and taxation, which have the potential of galvanizing the economic growth or simply warrant a death sentence to the economy. With all due fairness the not so mid-term (it came almost two months past mid-year) delivered last week is the epitome of failure in its highest regard.

Every Zimbabwean is in agreement and can concur to the sorry state of the economy but that has not inspired a solution based Fiscal policy. Most of the measures spelt in the mid-term budget antagonize any efforts to drive economic growth let alone efficiency. Most of the measures are so detrimental to the economy and will rapidly accumulate into a bubble of hot air.  As the prices of real estate started to spiral out control in the United States, one Democrat congressman, Charles Schumer, asked, “…will there be soft landing or will the bubble burst?” This is a question which aptly confronts our economy today in light of contractionary fiscal measures instituted recently.

                                                                         

To begin with, the central government is facing an ever shrinking revenue base which has even prompted the tax collector to go after the informal sector. Instead of looking at the fundamental causes of the shrinking revenue base our policy makers have adopted an ignorant approach where they seek to devise all ways to spur revenue. Central to this approach is the review of duty upwards on certain imports and some services such as communication (airtime to be precise). One then wonders if such actions will pull the country out of the doldrums and the answer to the question is an undisputable “no”.These measures which have been suggested or already put into effect are not only catastrophic but deplorable in the strongest terms. They don’t work in the short term and neither do they succeed in the medium to long term. Income levels in the country are so low to an extent that any shift of policy towards a cautionary contractionary position will hurt incomes furthermore and the repo effect translates into low consumption spending which in turn stifles production or imports if there be. Imagine the impact of duty on petrol and diesel! Transport costs are likely to shoot and the contagion effect is felt in every sector, be it agriculture, industry or mining.

Other measures such as increasing rentals on government properties and duty on mobile handsets are not sustainable at all. No meaningful revenue can be realised from such actions.Whilst some might argue that a contractionary fiscal policy is inevitable in these current times one is also motivated to question government sincerity especially looking at its expenditure levels. Recently the government bought a fleet of top of the range vehicles for ministers and Parliamentarians. Fourteen years since the land reform the issue of inputs and subsidies on agricultural products dominate fiscal debate where much funds are allocated. Is the government not supposed to do away with such expenditure and divert the funds to productive endeavours rather than review duty and tax every time fiscal space is small?   Instead of dealing with the underlying causes to the problem, our policy makers continue to fight a losing battle. It is clear to everyone that the real challenge confronting Zimbabwe’s economy is liquidity. The way to deal with this problem has confused many such that some have thought mortgaging resources for cash is the best way. Some propose that we revert to the Zimbabwean dollar and some think a sovereign nation like China can just bail out Zimbabwe with cash. After all the Chinese are risk averse just like the Americans or the British for that matter.

The reason liquidity is a challenge is derived from a non-productive agricultural, mining, services and industrial sectors.The mid-term fiscal policy should have addressed challenges bedevilling these sectors whilst at the same time instituting catalysts which can drive growth. Most companies in Zimbabwe are operating below capacity and there is no justification for an additional burden in the form of high energy (petrol and diesel) prices driven by a review of duty. Instead there is need for the central planners or government to relax the cost of doing business in the country and attract capital from outside. The indigenisation policy is a hindrance in its entirety to the attraction of meaningful capital which can drive sustainable economic growth and the consequences of such adverse legislation should have been realised, reviewed and corrected by now.

John Mangudya, the Reserve Bank governor, is very correct when he says that the economic problems we are facing as a country are not insurmountable. Our problems are not insurmountable but arise out of mischief and failure to prescribe and diagnose any economic shock we encounter.

If the policy makers persist with measures premised on tax and duty as sources of steady and reliable revenue on the back of weak industry and economic activity it shall come a time when there would be no tax base to milk from. Only that time are we going to realise that there is no soft landing. The bubble will burst! Zimbabwe is fast approaching those times of economic implosion.

Currency is not the problem….Policy is the problem Mr Politician

There has been a raging debate on whether Zimbabwe should trash the United States dollar and adopt the South African rand as a measure to stabilise the ailing economy. This is a dangerous diagnosis considering the fact that there is no underlying reason or rationale for such course of action. No matter how much policy makers or economic commentators spend their energies debating on a currency to adopt the reality is that they are way offside and ignorant of the real issues which have stalled economic progress in Zimbabwe. The truth of the matter is that Zimbabwe’s economic policies are not globally competitive and robust to ensure the much needed growth and development. This is the problem with most African states they tend to major on the minor and major on the minor.

Ditching the United States dollar will not change the course of Zimbabwe’s economic direction by an inch but a new thinking in policy formulation and implementation will definitely result in the realisation of economic gains. Zimbabwe will not be granted billions of Rands by simply joining the Rand Monetary Union and neither will the economy flourish by adopting any form of currency and that means even adopting our own, whether we call it Ibwe, Pound or Dollar. South Africa will not accept the country into the Rand community due to policy inconsistencies and an uncertain economic future the country is heading to as this will also have an adverse effect on other countries in the community.

Money is always chasing production. This is the reason why China has got the largest foreign reserves in the world. China’s economy has been able to attract pounds, euros, dollars, pesos and francs amongst a host of currencies. The level of economic activity and trade which has come out of China has allowed a steady flow of capital which has further strengthened its economic growth and development. Liquidity or money is a function of production and investment, two qualities which are currently absent in the economic set up Zimbabwe finds itself in today. To quench the liquidity thirst the Zimbabwean economy is facing there is need for a radical policy shift which is able to propel the economy to greater heights and create the much needed employment, growth and development.

With all due rationale the US dollar has done no harm but much good to Zimbabwe’s economy and not any form of currency can avert the economic crisis which the country is sitting on. Only the right economic policy and strategy will deliver economic prosperity to Zimbabwe. Instead of wasting valuable time on a non-productive debate about ditching the United States dollar policy makers should be working overtime on making Zimbabwe an attractive investment destination which can pull some sustainable and profitable projects. There should be more emphasis on how to make the over hypnotised ZimAsset work and improved effort and action from the government.

Even if we chose to adopt the fanciest currency in the world the status-quo remains as long as the country is not able to churn out new production which can move the economy forward. Liquidity is a function of production and investment and unless we rectify the two factors any form of debate about currencies to adopt and ditch is mere noise and futile. After all we thought Zimbabwe adopted the multi-currency system not just the United States dollar.   

Mobile money innovation for financial inclusion

Zimbabwe’s mobile telecoms companies are changing the way banking should be done and they are making banks burn in the heat out of their innovation. The landscape of banking has surely changed as they keep introducing products that will make almost each Zimbabwean have a mobile money account. Telecel and Econet should be applauded for being the biggest engineers towards the quest for financial inclusion in Africa and Zimbabwe. They both have mobile money wallets which have been received well in Zimbabwe and the informal sector has taken advantage of this convenient product. Mobile money uptake in Africa has been slow with the pioneers M-Pesa enjoying brisk business in Kenya and so has Econet and Telecel. This kind of financial innovation should be spread across Africa and countries that have not caught wind of this should take leaf from the companies that have made it like M-Pesa Econet Telecel and Vodacom among others.

Telecel was the first mobile operator to introduce a debit card which could work on any POS device and ATM as long as it is Zimswitch compliant and this made banking easy. It partnered with other banks so that cash can be transferred from bank to mobile wallet or from mobile wallet to bank which is financial innovation at its best. This has also enabled clients to take advantage of channels such as Internet banking, ATMs and Mobile money wallets from their banks to transact with Telecash. The card is meant to cater for shopping bill payments as long as they are POS devices that are Zimswitch compliant which means it can do the same functions like a bank debit card.

Ecocash also has not lagged behind but it’s also appreciating competition from Telecel as it has set the bar high by introducing a Ecocash Mastercard Debit card. This means that the MasterCard will be linked to a mobile wallet account making it a first in Africa. The card will cater for both local and international transactions, thereby allowing access to anyone with a Ecocash account to be able pay for goods even via the internet using the MasterCard. The card also helps Zimbabweans who travel across borders in having paperless money as they will be making use of the card, bringing safety and security to them.

We have seen that M-Pesa has introduced BitPesa for Bitcoins which is the latest innovation in the market world and with Econet having a MasterCard linked to the Mobile wallet we await to see the next move from Telecel as they are also a force to reckon with in financial inclusion and innovation. Support should be given to these innovators as this will complete the cycle of financial inclusion in Africa.