Mthuli signals end to ‘shock therapy’, but fresh rate hike still in his arsenal

Zimbabwe economy
Finance Minister Mthuli Ncube: Softening his big bang?

Finance Minister Mthuli Ncube reckons he’s done with his “shock therapy” of the Zimbabwean economy, saying he believes he’s made progress towards mending the fiscal deficit and the exchange market.

However, he is keeping a fresh rate hike as a weapon against speculative behaviour, Ncube told a business meeting Monday.

From splitting local and foreign accounts in October, introducing a new 2% tax, ditching the 1:1 parity rate, introducing an interbank market and most recently abandoning the multicurrency system, Ncube has taken a series of tough and often controversial steps under his Transitional Stabilisation Programme.

The steps are part of his belief, expressed just after his appointment last September, that the economy needed a “fiscal shock and a big bang” to wean it off subsidies and controls. But his measures have brought uncertainty and damaged confidence even further, business leaders told him in Harare on Monday.

“In my view, in terms of macroeconomic reforms, I think we’re done now. We’ll need to fine tune, but I can’t think of any major macroeconomic reform that’s left out there. These are the two things in my view; fiscal consolidation and currency reform,” Ncube said. “There will be less upheaval.”

He said by eliminating the budget deficit – this has included limiting the issuance of Treasury Bills and the central bank facility – he has ensured that the state of government finances no longer pose a threat. Government is required to limit its use of the overdraft facility to less than 20% of the previous year’s revenues. The overdraft had, however, exceeded $3 billion, well above the limit. Last year, Ncube lowered that limit to 5%.

“Fiscal deficits were financed through TBs and recourse to the central bank’s overdraft window.
I can assure you that in the last six months we have not used the overdraft window. John Mangudya (central bank governor) is missing us right now as a client; we’re not giving him business,” Ncube said.

However, Ncube is keeping the option of a fresh rate hike open. Reserve Bank of Zimbabwe has recently raised the overnight lending rate to 50%, the first hike in over two years, as part of a raft of measures to weaken speculative borrowing that authorities partly blame for feeding rising inflation.

“We will not hesitate to raise them further. This is a signal to speculators that we will use interest rates to deal with speculative behaviour,” Ncube said.

To manage its books better, government will no longer borrow on behalf of private companies. He told the meeting that he is negotiating a US$750m private equity fund with an unnamed American fund, plus a trade facility with South Africa.

“These are your facilities, they’re not sitting on my books,” Ncube says.

However, business leaders criticised Ncube for making major policy shifts with little consultation. Antony Mandiwanza, CEO of Dairibord, said businesses did not want the new currency regime to fail, but government was damaging confidence by going it alone on major policy decisions. He said to restore confidence, RBZ must act on its promises to support the interbank market with US$330 million worth of lines of credit and a separate US$500 million facility.

“We do not want the currency reform to fail, we want it to succeed,” Mandiwanza said.