By Alex Magaisa
It is hard to imagine how a well-travelled man of letters could have fitted in so well and become very comfortable in an administration that is directed by a provincial character known more for application of brawn than cerebral qualities. However, the last couple of years have shown that the two men, an economics professor and his boss, a veteran political operator share a common affinity for appearances over reality.
Both men draw comfort in saying one thing, even when they know they do not believe it. President Emmerson Mnangagwa will tell everyone, with a straight face, that he is as soft as wool. But he will still send soldiers to shoot unarmed civilians in the streets. He will set up a commission of inquiry ostensibly to investigate the violence but when it recommends prosecution of offenders, he just ignores it.
His Finance Minister, Mthuli Ncube a professor of economics will tell everyone that the country has a surplus even as the World Food Programme is reporting that 60% of Zimbabweans are in desperate need of food aid. He can tell an international broadcaster that the public health is doing well, while hospitals are closed with doctors and nurses on strike because of poor conditions of service.
Last year, when he presented the national budget, the professor promised Zimbabwe would send a satellite into space. It sounded ludicrous, given Zimbabweโs parlous circumstances and the issues that demanded more urgent attention. This year, the issue is conspicuous by its absence from the statement. It is as if it was never promised. But he returned with yet another show, which upon application of some critical lenses, sounds like something designed to please, but is bereft of substance.
They get on well because both men are comfortable with form over substance. As long as they are ticking the boxes, everything else is immaterial.
Compensation – what compensation?
The Government has undertaken to compensate depositors and pensioners who incurred losses when it directed the mandatory conversion of deposits and pensions from US Dollar denomination to RTGS at the exchange rate of 1:1 in February 2019. The Minister said there are resources equivalent to US$75 million for depositors and another US$75 million for pensioners under this compensation scheme. However, the undertaking is selective as it only applies to depositors who had less than US$1,000 in their bank accounts.
The compensation scheme represents a tacit acknowledgment by the government of the wrongfulness of its currency policies. Therefore, criticism of the government when it issued currency decrees was legitimate. This flies in the face of regime apologists who are always defending its policies even when they are wrong and it is foreseeable that they will lead to disastrous outcomes. A critical examination of government policies is an important part of the checks and balances that make for good governance.
However, the government is not being fully sincere because the problem it is purporting to solve for pre-dates February 2019. It locates the losses at February 2019, but their genesis is in 2016. The government was warned by vigilant citizens in 2016 that the introduction of bond notes was a misstep that would result in losses to the banking public. The Governor of the Reserve Bank of Zimbabwe, Dr John Mangundya defended the bond notes. He even pledged to resign if the surrogate currency failed to hold up against the US dollar.
Dr Mangundya did not keep his honour when the inevitable happened and millions lost their deposits as the value of the bond note plummeted. The fiction of the bond note was maintained against economic sense. It was just a matter of when, not if, the bond note would collapse. When Mthuli Ncube joined the government, he knew the bond note was a grievous error. He even pledged to get rid of it. He knew it was a fraud. But as soon as he became comfortable in the office, he began to publicly defend the bond note, perpetuating a myth that was unsustainable. Both men were complicit in misleading the public and misrepresenting what they knew to be incorrect and fraudulent.
The judiciary could have intervened earlier
The judiciary at the highest level should also take some of the embarrassment over its endorsement of the currency policies. On three occasions, the decree introducing bond notes was challenged and, on all occasions, they were dismissed by the courts. In the first case, veteran politician, Dr Joice Mujuruโs challenge against bond notes was dismissed at the preliminary stage by the Chief Justice on the ground that it was a pre-emptive strike based on speculation since the bond notes had not yet been issued.
When her second challenge came before the Constitutional Court in 2018, it was also dismissed, the court saying she should have made a different application. Mujuru had challenged the use of presidential powers under the notorious Presidential Powers (Temporary Measures) Act to issue the decree introducing bond notes. The court said President Mugabe had acted lawfully when he invoked those powers and that Mujuru should have challenged the constitutionality of the Act rather than the legality of his actions.
The court missed a great opportunity to develop constitutional jurisprudence concerning the constitutionality of conduct, even under an existing law. Section 2 of the Constitution says the Constitution is the supreme law of the country and any law or conduct that is inconsistent with it is invalid. The fact that conduct is lawful under an existing piece of legislation does not mean that its constitutionality cannot be challenged or determined by a court of law. President Mugabe may have acted according to the Presidential Powers Act but whether this conduct was consistent with the Constitution was a separate matter which the court should have determined.
In the third case, a businessman, Mutandi who operated a money transfer business also challenged the decree after the introduction of the bond notes. His case was dismissed on the ground that the matter was not urgent, and he had come too late to the court. This was in sharp contrast to the decision in the earlier Mujuru case, where the Chief Justice had dismissed her case on the ground that it was premature. As I wrote in a previous BSR on currency law jurisprudence, โIt seems there was a never a right time to bring a challenge – go early, and you are told it’s too soon and speculative; go later, and you are told it’s too late and not urgent.โ
More pertinently, considering what has since happened, Justice Chiweshe was dismissive of Mutandiโs fears that the introduction of bond notes would cause him significant harm. The judge said, โthe applicants have not established, to the satisfaction of the court, that the introduction of bond notes would cause them irreparable harm. The [Governor and the RBZ] have clearly spelt out, as monetary authorities, the objectives sought to be met by the introduction of bond notes โฆ The concerns of the applicants are not based on any objective facts. What the applicants foresee as the inevitable consequence of the introduction of bond notes is, to all intents and purposes, based on speculation.โ
These judicial statements have not aged well. Both Mutandi and Mujuru were right to be concerned about the introduction of bond notes, as were millions of other Zimbabweans. They saw through the pretence that the bond notes were equal to the US Dollar. It marked the start of the great fraud which is only now beginning to be acknowledged. Perhaps if the courts had been more courageous, they could have entertained the legal challenges and prevented the disastrous path taken by the government, which it is now acknowledging with the offer of compensation.
Realisation of the damage
The risks that Mujuru and Mutandi had tried to prevent were realised when the Supreme Court made a ruling in the case of N.R. Barber Pvt Ltd v Zambezi Gas Pvt Ltd in 2019. Zambezi Gas had been found liable to pay a debt of US$3,9 million to Barber under a contract. However, the government issued SI 33/2019 which recognised RTGS as legal tender and provided for the compulsory conversion of all US dollar-denominated assets and liabilities from US Dollar to RTGS. Zambezi Gas took advantage of this decree and converted its judgment debt to Barber from US dollars to RTGS. The outcome was an enormous loss to Barber, which had expected payment in US dollars.
Naturally aggrieved by the loss, Barber went to the High Court insisting that it must be paid its debt in US Dollars. It won its claim. However, Zambezi Gas appealed to the Supreme Court which overturned the High Court decision. In other words, Zambezi Gas was right to convert the debt into RTGS currency. This represented an injustice not only for Barber but many other creditors in its position. Those who owed debts in US Dollars could simply convert into RTGS and pay a fraction of what they owed. Of course, many debtors benefited from this situation, but lots of creditors suffered great losses.
Although there is a more recent High Court decision which contradicts the Barber ruling, the latter represents the law because it was decided by the Supreme Court, which is a higher authority. In the case of Stone Beattie Studio v CABS and others (2020), Justice Zhou of the High Court held that a government decree which directed the separation of accounts into foreign currency and local currency accounts and allowed for conversion to RTGS was unconstitutional.
The facts were that Stone Beattie had held US$142,000 in its bank account at CABS since 2011. However, when there was a separation of FCA Nostro and RTGS Nostro accounts due to the directive in 2018, their funds were placed in the RTGS Nostro account and were subsequently converted from the US dollar to RTGS at the rate 1:1. Suddenly, they were holding RTGS funds when they had originally held US dollars. They sued their bank and the government to recover their losses. Justice Happias Zhou ruled in their favour, echoing what was in the minds of many people when he said,
โIt is offensive to any sense of justice that a person who holds money in a bank can wake up on any day to be told that his money means something else different from what it has always beenโ.
However, the matter is currently on appeal at the Supreme Court.
It is against the context of these legal challenges that one can have a better appreciation of the step taken by the government to compensate those who lost their funds due to its currency decrees. It is notable that while the government is appealing the High Court decision in the Sone Beattie Studio case, it is also conceding in the National Budget Statement that its currency decrees were wrong because they affected citizensโ deposits at the banks and pensions. This is why it is offering compensation. Yet at the courts they are filing affidavits telling judges that they did nothing wrong. The government is hunting with the hounds and running with the hares at the same time.
Selective Application of the Compensation Scheme
The problem of selectivity of the compensation scheme is quite evident considering the Barber and Stone Beattie cases. Neither of the two victims of the currency decrees qualifies for the compensation scheme because of its narrowness and arbitrary thresholds.
First, the scheme only covers funds that were held in bank accounts at the time of the decree. Barber does not qualify because its debtor, Zambezi Gas, is not a bank. It was a debt arising from a contract and a judgment of the court. This means all those who lost funds in similar situations are not eligible for compensation. If someone owed you a debt in US dollars and he gave you an RTGS equivalent instead, causing you losses in the process, you are not eligible for this compensation under this scheme. It only covers those who had money in a bank account. How fair is this when the currency policy applied to all assets and liabilities far beyond those found in a banking relationship? This is arbitrary as the government does not explain the rationale.
Second, the scheme only covers funds less than US$1,000 in an account. Therefore, even if Stone Beattie Studioโs funds were held in a bank account, they do not qualify because they had US$142,000 in their account. Anyone with more than US$1,000 in their account at the relevant time does not qualify. The rationale for this maximum threshold is not explained in the budget. The government refers to the beneficiaries of the proposed scheme as โsmall and vulnerable depositorsโ as if bigger depositors are not also vulnerable.
The reality is that every depositor, whether big or small, who was negatively impacted by the currency decrees was left in a vulnerable position. This is why most compensation schemes are based on a proportional basis โ depositors get a certain percentage of their deposits. This means while bigger depositors may not get all of their lost deposits, they at least get something and their loss is recognised. Such a scheme is based on a defined and generally accepted formula, not the arbitrariness of the Mthuli Ncube scheme.
Therefore, the difference between usual compensation schemes and the proposed scheme is that it is arbitrary. He simply plucked a figure out of thin air and declared that depositors holding less than US$1,000 are the ones who qualify as โsmall and vulnerableโ while the rest are excluded. The rationality of this decision can be challenged. As much as it sounds good for those who qualify, it is highly discriminatory against those who are excluded. It is a serious assault on property rights and large creditors or depositors are likely to be investor organisations, one would expect a government policy that considers their interests.
However, the governmentโs tacit admission that its decrees were wrong cannot be ignored by the courts. Justice Zhou recognised this in the Stone Beattie case and it remains to be seen how the Supreme Court will handle it. However, it is not to be forgotten that Justice Mathonsi had also ruled in favour of a large creditor in the Barber case before the Supreme Court overturned that decision, upholding the patently unfair decree.
How valuable is the compensation?
When the government issued the decree for the conversion of US Dollar assets and liabilities to RTGS in February 2019, the command rate was 1:1. Soon after, however, it was 1:2.5, also a controlled rate. It rapidly went down drastically. It now stands at around 1:80 on the on the Foreign Currency Auction Market, which is also still controlled by the government. It is now offering to compensate citizens for the loss that occurred when the rate moved from 1:1 to 1:2.5. This what the Minister said,
โTherefore, the Government has made a decision to compensate the small and vulnerable depositors who had US$1,000 and below, for the exchange rate movement loss from US$1:RTGS$1 to US$1:RTGS$2.5, with resources equivalent to US$75 millionโ
It is clear that the compensation proposal does not extend beyond that narrow loss from 1 to 2,5.
Based on these figures, it is easy to see that a person getting compensation based on the rate of 1:2,5 is hardly being compensated at all because the rate has since moved to the current 1:80. If a person had US$500 in her bank account in February 2019, she will get RTGS$1,250 based on the 1:2,5 compensation rate. However, since the exchange rate is 1:80, she should be getting RTGS$40,000. The magnitude of loss is not even comparable. It would make more sense if the compensation was based on the current exchange rate. In this regard, the compensation is no more than an exercise in tokenism. In other words, it is meaningless.
Lack of Critical Reporting
A note should be made on the quality of reporting of this compensation proposal by the media. Most of the papers simply regurgitated what the government proposed without any critical reflections of what it means. They just announced a compensation scheme without analysing whether it has any substance or demonstrating the historical context.
Worse, some of the papers even got the figures completely wrong. ZIANA for example reported that the government had offered compensation for losses due to the exchange rate movement from โ1:1 to 1:25โ and that the government was offering compensation for those losses, which is false and misleading. The state-run news wire misread 2,5 as 25 leading to the erroneous reporting. Now, the error had a domino effect. All the papers which relied on the ZIANA report repeated the error, which suggests that the journalists did not even bother to read the budget statement. If they had read the budget statement, they would have seen the error. Itโs a good illustration of why one must be careful with secondary sources of data.
It is also a textbook example of how and why a comma can make a vast difference because 2,5 and 25 are totally different. This lack of accuracy and critical reporting by the media is a disservice to the reading public. It is misleading and leaves readers none the wiser regarding issues of public interest.
Public Debt: the long-standing albatross
Zimbabweโs economic prospects remain dim because of a burden of public debt which is estimated at 78.7% of GDP by the end of 2020. The GDP represents the total value of all the goods and services produced with a country. It is an indicator of the size of a countryโs economy. Therefore, measuring public debt as a percentage of the GDP is essentially a sign of the burden that an economy carries. Our law, the Public Debt Act recommends no more than 70% while the SADC threshold is 60%.
The Minister said domestic debt as at 30 September 2020 was ZWL$12.5 billion. This is 1.8% of the total public debt. Although the Minister does not say so, the government was a beneficiary of the currency changes and related exchange rate movements thanks to its decrees. Where it previously owed US dollar denominated domestic debt, it benefited from the conversion to RTGS and subsequently the new Zimbabwe Dollar.
The largest part of public debt is owed to external creditors. The external debt is US$8.2 billion. The biggest portion of the external debt (US$6.34 billion or 77% of the external debt) is made of arrears owed to multi-lateral financial institutions and bilateral lenders. The arrears mean external debt is growing through the accrual of penalties and interest charges. Between last year and now external debt grew by US$106 million, made up of mostly penalties and interest charges. Therefore, the longer we do not pay our arrears, the more the public debt grows.
This is a huge problem for us as a country because it means our capacity to borrow is extremely limited. Taxes alone are not enough to meet our needs. Like all countries, we must borrow to finance development. However, when we cannot borrow, we become constrained, and our economy struggles. But when you are notorious for not paying your debts, nobody wants to lend to you. Those who risk lending to you will charge you very high-interest rates or demand onerous collateral. In return, you might end up mortgaging your key resources, which might be taken over if you fail to meet the terms of borrowing.
Finance Minister Mthuli Ncube knows the scope of this handicap. As he said when presenting last yearโs budget statement, โThe external arrears prevent the country from accessing new financing from the International Financial Institutions (IFIs), traditional bilateral and commercial creditors.โ This is the sad reality of our situation. We are in bad books with lenders and they wonโt lend to us unless we repay, which we are not able to do in the short term or reschedule the debts, a process which requires trust and goodwill, both of which are sorely lacking.
The Minister says we are making token payments to these lenders. These are small amounts paid to register our presence and willingness to pay but also reflecting incapacity to make proper payments. The problem is that instead of focusing on strategies to deal with this debt problem, the government invests lots of time creating scapegoats. It blames sanctions. But these debts are largely of our own making. They were not caused by sanctions. They existed before any sanctions were imposed.
To be sure, Zimbabwe is not the first country to have arrears. Many of its African counterparts have had debt problems. Zambia got relief in 2005, under the Highly Indebted Poor Countries (HIPC). Sadly, the northern neighbour is back in arrears again, reflecting a problem economists refer to as a moral hazard โ that a rescue only causes the rescued to be more reckless, knowing that if things go bad, they will be rescued.
Zimbabwe needs to fix its political profile to get the attention of lenders. As long as political risk remains high, there are human rights violations, authoritarianism is increasing and there is a lack of trust in the government, there will be little headway in the resolution of the public debt problem. And the countryโs prospects will remain dim, whatever economic gymnastics Ncube tries. Chinamasa nearly made headway with the so-called Lima plan. But it collapsed and the political project that culminated in the coup in November 2017 disappointed those who were backing it because it did not live up to the hype.
Mbanje Tax: Ministerโs High Hopes
Finance Minister, Mthuli Mncube has placed his bets on mbanje (cannabis) as one of his โrevenue enhancing measuresโ. Mbanje has moved from the fringes in recent decades, gaining acceptance around the world for its medicinal properties but also for recreational purposes. It has long been normalised in liberal countries like The Netherlands, while in the US, several states have opened and legalised its production and use both for medicinal and recreational purposes.
It is here that Mthuli Ncube thinks he has seen a gap. He thinks mbanje has โimmense potential to generate export receipts and tax revenuesโ. He estimates the potential value of mbanje exports at US$1,25 billion by 2021. These are exceptionally high hopes. Clearly, the Minister is generous in his estimation.
However, the method by which he reached that figure is unclear. He might have provided an idea of how much has been produced so far. He could also have indicated the number of licences that have been granted so far. There was a flurry of applications when the gates opened two years ago when Zimbabwe legalised the production of mbanje for medicinal purposes. The Deputy Minister of Agriculture told a conference that 37 out of 200 applicants had been granted licences to grow mbanje. However, how many of those have begun production and their yields and exports so far is unclear.
It is surprising that the Minister has already slapped taxes on such an infant industry. He calls it the Cannabis Levy (Mbanje Tax) which is charged on the value of mbanje exports. The Minister is seeing not just exports of mbanje but processed products. Hence, he has fixed a 10% levy on โfinished packaged medicinal cannabis oils that are ready for resaleโ and 15 to 20 percent taxes on semi-processed and raw cannabis products.
Granted, there is an incentive in the sliding taxes in favour of local value-addition, so that there are less taxes on finished products than on raw exports. However, it seems odd that an industry that is still in its infancy and requires large investments is already being taxed at these levels. The licence fee is not for small actors. An applicant must part with US$50,000 for the licence. This already a major barrier to entry, which limits the potential for small-scale growers.
The cost of high entry fees is that people will gravitate towards the black market. People have always grown mbanje, and they will continue to do so, illegally. Those with licences will be a ready market for the black-market growers. But high taxes discourage investment, especially when the industry is only just starting. It is possible for mbanje to become an export earner but maybe it is far too early to slapping taxes. The minister may have allowed the excitement over mbanje to get to his head and he might end up strangling the baby before it can walk.
-WaMagaisa
