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An economic collapse? –

LADIES and gentlemen, before the headline makes you uneasy, hold onto your horses. There is no harm in asking a question.

Someone put this question to me: will our economy survive or will it collapse? I am just forwarding the reader some probable answers and thoughts.

Let’s begin with a quote.

“Although Pakistan’s exports have increased in recent years, the country continues to suffer from chronic balance of trade deficits. Pakistan remains dependent on imported petroleum products. Remittances from Pakistani workers abroad have reduced somewhat the growth in the current account deficit, but it is uncertain that rapid annual increases in remittances would be sustained… Pakistan’s agri­culture sector continues to be plagued with serious problems of low cropping intensity and low productivity…because of existing policy constraints”.

Sounds familiar and present-day, right? Except that this is from a 1982 USAID report (Pakistan Agricultural Commodities and Equipment)!

Ironically, the firefighting that passes for economic management in Pakistan is couched either in terms of ‘welfare’ or ‘incentives’.

I can share innumerable quotes that will sound recent but are actually old. For example, I can share a 1971 report on the government being urged to ask international creditors for extending the payment period for loans (we also got extension on our paybacks post Covid-19).

Point of the argument is that we are travelling in a circle, without trying to understand why. The examples are endless. Every government wants to build universities in every nook and corner of the country despite graduates having the highest unemployment rate in Pakistan, while 23 per cent of the ‘employed’ often work without a salary (read Opportunity to Excel: Now and the Future). What are we getting out of around 230 universities, most of whom don’t even have full-time faculty? We want to expand the welfare dole but don’t want to create an entrepreneurial, enabling environment that could nurture self-employment and ambition. Our public ‘development’ programmes (PSDP) are centered on big-ticket, brick-and-mortar projects only (especially roads) because the probability of rent-seeking is larger. Taxes are forcefully extracted out of people for others’ failures (Neelum-Jhelum, IPPs, etc). Unchecked horizontal expansion of cities has made them ungovernable, but our system (especially the courts) is averse to mixed-use and vertical expansion. And the same colonial, rent-seeking edifice still stifles our lives. It ends up creating more liabilities that everyone has to pay for.

Priority areas like population control and productivity are given short shrift. Finance ministers seem to be so out of sync with realities that it’s hard to fathom (one claimed tomatoes were selling for Rs17 per kg when the price had reached Rs300, while another believes that a mini-budget and hike in petrol prices won’t push inflation!).

And we have the same faces in terms of economic management that we’ve had for the last two decades or so. How barren are Pakistan’s intellectual reserves!

In all this, which is basically firefighting devoid of any vision, it’s the home-based Pakistanis who always end up paying an excruciating price. The irony, though, is that this firefighting is couched either in terms of ‘welfare’ or ‘incentives’. Does anybody remember the wholesale nationalisation of the early 1970s touted as ‘welfare’, for which we are still paying a price? The trend continues!

The latest craze to ‘incentivise’ overseas Pakistanis is another example, undertaken in the vain hope that dollars would rain down upon us. As the coffers of the banks fatten further with peoples’ deposits, courtesy partly of devaluation and ‘incentives’ for overseas Pakistanis, the financial elite have never had it as good before. More than half these deposits end up being ‘invested’ in riskless government treasuries that pay a handsome return.

But what about the ‘underseas’ Pakistani who toils in this land? What good does he realise? We see the government’s repayments to creditors have already crossed Rs2 trillion and will rise further as the leviathan keeps spreading its unproductive footprint (since the major portion of tax collection remains indirect, it’s the middle and poor classes that have to bear the brunt). He does not get anything by parking his money in banks like the ‘incentivised’ (besides having pathetic service levels, they give peanuts on saving accounts while enjoying outsized returns by investing their money), and neither from different government departments whose service levels have either stagnated or declined. Just look, for example, at your current electricity bills that don’t make any sense. But what’s the service level? Zero! When will we be incentivised?

What’s the use of such incentives if our PM has to dash to Riyadh to get an emergency credit line?

The circle, though, does not move endlessly. At some point, it will stop. Our debts and liabilities now stand above Rs50tr, of which Rs40tr is public debt (meaning you and I, the hoi polloi, will have to repay that). Foreign debt is nearing $130 billion. Despite our exports and remittances (FDI is negligible), we have to contract around $15bn of new debt every year to stave off a default. This is notwithstanding our leaders frequently dashing to Beijing, Washington or Riyadh, which keeps the circle moving precariously.

It might just take one ‘NO’! What if our dollar creditors refuse to play along anymore? Briefly put, a simple headline in an international paper will set the ball rolling and become a juggernaut of fear and uncertainty (abroad and at home), evolving into a chain reaction.

For those who want to brush this away as fearmongering, read Venezuela or Zimbabwe. For those who doubt, Bear Stearns and Lehman Brothers were just two financial firms in a corner of New York that brought the whole global economic machine to its knees within days in 2008. In comparison, where does our international credibility stand?

Or do we still want to cling to the fancy that we are special (this fancy should have seen its end after 1971).

I love my country like you all do. So let us all pray that I am wrong (amen). But then let us also try to figure out what we have, and where (and how) are we headed?

Frankly, I can’t come up with much.

The writer is an economist and research fellow at PIDE.
shahid.[email protected]

Published in Dawn, January 14th, 2022

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Biti throws toys out of the pram on Mthuli Ncube's global award – The Zimbabwe Mail

Tendai Biti and Mthuli Ncube

FINANCE minister Mthuli Ncube came under fire at the weekend after blowing his own trumpet following a controversial award that ranked him among Africa’s top five treasury bosses.

The award by a little known francophone magazine, Financial Afrik, baffled many critics, who queried how a minister who has been presiding over a hyperinflating economy could be included in the high-fliers’ league.

After the announcement, Ncube immediately took to Twitter, hailing the magazine for its “qualitative analysis of candidates”.

There were blowbacks by a string of experts, including ex-finance minister, Tendai Biti and leading economist, Tony Hawkins, who argued current levels of economic decay spoke louder than the award.

“I find those tweets (by Ncube) so disturbing,” said Biti, one of Zimbabwe’s most successful finance ministers who presided over the ministry during the inclusive government.

“They are pathological, sycophantic. Who blows his own trumpet? The magazine in question, from Senegal, is an innocuous little publication. More than that, it is a very skewered publication. The economy does not need a spokesperson; it speaks for itself. When the economy functions the citizen is happy, buoyant and aggressive. The average Zimbabwean is battered, bitter,” Biti added.

“Of all economic indices, there is one thing that doesn’t lie; it is the exchange rate. The exchange rate tells you whether the economy is performing well, whether the stewardship of the economy is in good hands. We have one of the worst exchange rates on the African continent,” added Biti.

“You have to have a value system. Humility is so important. You have to have ubuntu. There are those who judge people. We have newspapers that say ‘this is best minister’, let them do that. We have organisations that give awards to ministers, let them do that but you don’t speak. Now, you go pick an unknown publication and say ‘look at me’ I mean it’s really sick,” Biti told Standardbusiness.

Tony Hawkins, a leading economist and former economics lecturer at the University of Zimbabwe’s Graduate School of Management, said with the second highest annual inflation rate in the world and a string of unachieved targets, there was little that Ncube could celebrate for.

“If you look at his track record, first of all, the quantitative targets in the Transitional Stabilisation Programme (TSP) were not met,” noted Hawkins.

Ncube come up with TSP when he was appointed in 2018, before it was replaced with the National Development Strategy 1 last year.

“Secondly, since he has been minister of Finance, we have had the world’s second or third highest rate of inflation. We have moved from a very low rate of inflation to a very high rate,” said Hawkins.

“Thirdly, the value of the currency when he took over was theoretically 100 US cents, that is what the Zimbabwe dollar was worth. Today, it’s worth less than one US cent. We have seen a rise in poverty, we have seen a rise in unemployment so I think the guys who decided that his policies were working either didn’t know what they were talking about or think it’s probably the truth or were making premature judgements,” Hawkins told Standardbusiness.

In the past few months, while government spin doctors have scale up a campaign claiming that the economy has been on the mend, the cost of living has rocketed, reaching $73 000 for a family of six in December 2021, from
$58 000 previously.

In contrast, firms have failed to raise wages and salaries, citing the economic crisis.

Incomes now fall way below the cost of living.

On the parallel market, the Zimbabwe dollar has plummeted from about US1:$120 in January 2021, to more than US$1:$200.

Added Biti; “In terms of poverty levels in this country, 79% of our people are living in extreme poverty. Public service has collapsed, Look at the services in health. People are dying, there are no drugs or medicines”.

In his Twitter post, Ncube said: “I am very pleased to have been voted and ranked in the top five ministers of finance in Africa in 2021 by the French publication “Financial Afrik”. This is based on a popular vote and qualitative analysis of candidates, and considered by a jury. The list of the top five Finance Ministers ranked in Financial Afrik include those of Mauritania, Benin, Nigeria, Zimbabwe and DRC. These ministers were judged to have implemented transformative economic policies with results”. – The Standard

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US planning to sanction Zimbabwean companies road constructions and repairs – The Zimbabwe Mail

LOCAL banks have raised concerns over capitalisation demands by the Reserve Bank of Zimbabwe (RBZ) compelling the financial institutions and deposit-taking micro-finance

firms to meet their targets on a cash-to-near-cash basis.

According to international benchmarks, capital requirements are regulatory standards for banks that determine how much liquid capital (easily sold assets) they must keep on hand.

This is the criteria that the RBZ uses to decrease the risk of default or bank failure while ensuring that depositors have access to funds on a needs basis.

Some local banks and some small deposit-taking financial institutions have been battling to meet the stipulated minimum capital requirements due to several challenges.

Central bank regulations demand that large commercial and foreign banks (tier 1) should have a minimum capital of US$30 million, while merchant banks, building societies, development banks, finance and discount houses (tier 2) should have a minimum capital of US$20 million.

Smaller deposit-taking microfinance banks (tier 3) are required to have at least US$5 million capital.

The Zimbabwe Independent understands that the minimum capital requirements are now an industry-wide concern. Some financial institutions are petitioning the RBZ to consider other financing models
to meet the capitalisation targets.

Analysts pointed out that there are various non-cash models that can still be used in capitalisation although some financial institutions are battling to use those systems.

Several banks that spoke to the Independent on condition of anonymity said the cash-to-near-cash demands by the RBZ were not sustainable. They suggested that monetary authorities should consider capitalisation using assets like properties among other financial instruments.

A well placed banker said there was a need for the RBZ to take into account the current economic situation, which is volatile for a cash capitalisation model.

“We believe that until the economy has stabilised, it’s advisable for the RBZ to be considerate in its demands.

“Also any intention to increase the current minimum capital requirements will be ill advised. For instance, the demand on using monetary assets on capitalisation needs to be looked at again,” said the banker.

There are also fears in the market that a number of commercial and foreign banks have been struggling to meet deadlines due to various challenges but some have remained resilient in the face of the headwinds.

In an interview, Bankers Association of Zimbabwe (BAZ) president Ralph Watungwa said the majority of banks met the capitalisation targets and any engagement happening with the central bank was on an individual basis.

“I am not aware of discussions happening on the banking sector as a whole because the majority of banks have managed to achieve the targets. But there are some individual banks that are yet to meet the requirements,” he said.

The strategies pursued by banking institutions to comply with the new minimum capital requirements towards the end of 2021 were based on organic growth and capital injection by the shareholders.

Contacted for comment, RBZ governor John Mangudya promised to check with his bank supervision unit before issuing a response.

“I will check with our team in the bank supervision unit and revert to you,” Mangudya said.
He had not responded by the time of going to print.

According to the 2021 RBZ mid-term monetary policy review , the banking sector remained adequately capitalised, with an aggregate core capital of ZW$57,54 billion (US$533 million) as at June 30, 2021, an increase of 8,09% from ZW$53,18 billion (US$492 million) as at December 31, 2020.

The banking sector average capital adequacy and tier one ratios of 35,32% and 25,05% were above the regulatory minimum of 12% and 8%, respectively.

In line with the Monetary Policy Statement of August 2020, banking institutions submitted updated capital plans to the RBZ by June 30, 2021, which were reviewed for credibility.
RBZ established that banking institutions were making significant progress towards meeting the new minimum capital requirements which were effective December 31, 2021.

Zimbabwe currently has 13 commercial banks, five building societies, one savings bank, eight deposit-taking micro-finance institutions, two development financial institutions and 178 credit-only micro-finance institutions. – Zimbabwe Independent

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Zimbabwe picks foreign firm to collect taxes from e-commerce, crypto and content creators – News24

E-commerce, cryptocurrency transactions and content creators are among new businesses included into the tax bracket in Zimbabwe.

E-commerce, cryptocurrency transactions and content creators are among new businesses included into the tax bracket in Zimbabwe.

E-commerce, cryptocurrency transactions and content creators are among new businesses included into the tax bracket in Zimbabwe.

“The Republic of Zimbabwe entered into a public-private partnership agreement with Daedalus World Limited of Tortola, British Virgin Islands, in terms of which Daedalus World Limited will assist the Republic of Zimbabwe by providing a revenue collection service through taxing qualifying companies that provide digital advertising, content, cloud computing, e-commerce [and] gambling,” reads part of a general notice published by Zimbabwean ICT Minister Jenfan Muswere on 19 January.

The notice says companies offering “betting, gaming and cryptocurrency services to persons and organisations within the territory of the Republic of Zimbabwe” will also now be subject to taxation, with the revenue set to be collected by Daedalus World.

Zimbabwe currently outlaws banks from cryptocurrency transactions. The inclusion of cryptocurrencies into the list of companies to be taxed has raised expectations that Zimbabwe could now be moving towards regulation and taxation of digital currencies such as Bitcoin, joining South Africa that already taxes such transactions.

The new tax revenue collection agreement will target content and digital advertising companies such as YouTube, Google, Facebook and others in addition to e-commerce entities.

Zimbabwe’s increasingly informal economy has witnessed a boom in e-commerce activities, with trade between Zimbabwe and South Africa as well as China and Dubai – from where most e-commerce traded goods are being sourced – increasing.

According to BDO, the global accountancy firm, there will be separate legislation for a compliance framework covering submission of returns, payment of tax and the due date for such payments, among other compliance requirements” for the new e-commerce levies.

The new e-commerce regulations will also likely encompass satellite broadcasters, adds BDO in a note on Zimbabwe’s tax framework.

The government has been seeking ways to prop up revenue collections and is levying a $50 fee on imports of smartphones for which import duty would not have been paid. Telecom and tech industry players say the new measures are a set back for e-commerce and efforts to boost the internet penetration rate in the country.

In a separate notice published 19 January, the Zimbabwe Revenue Authority directed that the “provision of data and airtime by employer to employee for use at home or outside work premises is a benefit which is taxable in the hands of the employee”.

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