Zimbabwe: Finance minister Patrick Chinamasa tells Paul Wallace

Zimbabwe’s economy is on the verge of recession, with low consumer request and a liquidity crunch putting its businesses under plenty of strain. Against this backdrop, finance minister Patrick Chinamasa tells Paul Wallace how he has started to rebuild its ties with multilateral lenders in a bid to access new credit.

Zimbabwe’s recent economic history makes for torrid reading. In the eight years following the start of land expropriations in 2000 – a time at the same time as most of the rest of Africa was growing rapidly – gross domestic product (GDP) shrunk by additional than 30% and hyperinflation wreaked havoc on the lives of Zimbabweans.

The country’s inflationary woes ended in 2009 at the same time as it abandoned its local currency for a multi-currency system in which the US dollar predominates. This ushered in a few years of quick recovery.

Return to struggles

However, this buoyancy proved short-lived. Zimbabwe is once again struggling, with a liquidity crunch depressing consumer request and causing factories to close on a weekly basis. A fall in mineral exports has left the country with a gaping trade imbalance. The International Monetary Fund (IMF) says the government lacks enough foreign reserves to cover two weeks of imports and believes the current account registered a deficit of 29% of GDP last year. The World Bank forecasts increase of just 2% in 2014 and half that in 2015.

Zimbabwe got a new government next president Robert Mugabe won elections in July 2013, ending a four-year coalition between his Zanu-PF party and the Movement for Democratic Change (MDC). Patrick Chinamasa, before justice minister, took over as finance minister from the MDC’s Tendai Biti, who was widely praised internationally for his efforts to turn the country around.

Some analysts feared that Mr Chinamasa, a long-time ally of Mr Mugabe, would start his tenure by reintroducing the Zimbabwe dollar. But he insists that will not happen. “The multi-currency regime will remain,” he says. “I would be suicidal to reintroduce our currency at this stage. We would be out of our minds to introduce it presently without any reserves. The currency would collapse overnight.

“There’s no way we can introduce our own currency until the macroeconomic fundamentals are right. That would include building some reserves to act as a buffer [and reducing our deficit].”

Courting the IMF

Mr Chinamasa has sought to improve ties with the IMF, which launched a staff-monitored programme for Zimbabwe in June last year. He cites the IMF’s recent appointment of its initial resident representative in the country for 10 years as evidence that relations are strengthening and says the two sides broadly acknowledge on what structural reforms Zimbabwe needs. “We’ve had a very constructive engagement,” he says. “There are some challenges, which are talked about openly. The ratio of wages in the budget is too high, for instance. It’s 85%. We’ve indicated to the IMF that we can’t correct it overnight.”

The discussions are part of attempts by Zimbabwe to get its roughly $12bn of external deficit, amounting to almost 100% of GDP, written down and pave the way for it to access new loans.

That process will be a long one. In the meantime, Mr Chinamasa knows it will be tough to revive the economy. He admits it is in a weak national, but lays the blame on Western sanctions, despite them mainly targeting individuals linked to the government and doing little to prevent foreign companies operating in Zimbabwe. “Over the completed 15 years our economy has been battered by the imposition of sanctions by Western nations,” he tells The Banker. “Because of the sanctions, we are basically on our own. We have to look inward to see what we can do to leverage our own resources and mobilise fresh money.”

Some sanctions could be lifted any minute at this time. Since 2002, the EU has halted direct payments of aid to the government under so-called Article 96 sanctions. Mr Chinamasa says these will be removed this year. “The EU has indicated to us that come November 1, it will lift Article 96,” he says. “In anticipation, we have commenced discussions to prepare for aid assistance. [The EU has] indicated the size of the envelope we should expect . It is [likely to be] €234m.”

This would mark significant evolution for Zimbabwe and perhaps lead to other sanctions, inclunding those imposed by the US and former colonial power the UK, to be lifted as well.

Infrastructure drive

Zanu-PF launched a five-year economic plan last year called the Zimbabwe Schedule for Sustainable Socioeconomic Transformation, or ZimAsset. Although derided by opposition politicians for offering few realistic solutions, a core part of ZimAsset is to rehabilitate Zimbabwe’s power and transport networks, which, while still fairly good by African standards, have suffered from a lack of investment in the completed two decades. “We have focused on putting infrastructure right,” says Mr Chinamasa. “Our roads are run down. Our water systems and railways are as well run down.

“We have a huge power deficit. We produce 1200 megawatts and our request is 2200 megawatts. We want to ramp up generation to 3000 megawatts or 5000 megawatts.”

Mr Chinamasa visited China before this year to lure investment in the energy sector. He says China EximBank has agreed to put $320m towards a 300-megawatt hydro project on the Zambezi River and that discussions are under way for financing two large thermal power plants.

The mining sector is a priority for the government, which is desperate to boost exports. Mr Chinamasa says a geological survey needs to be completed to help attract foreign investment into Zimbabwe’s reserves of, part others, gold, platinum and diamonds. “If we do this survey, we hope to be in a position to approach would-be funders to leverage new resources,” he says.

But one of the major concerns for foreign investors looking at Zimbabwe is its indigenisation laws. These have caused mining investment to fall in recent years, with the government still wrangling with miners over its stipulation that they cede 51% of their equity to black Zimbabweans or national entities.

Mr Chinamasa claims other industries, inclunding finance, will be treated differently. “We have been misunderstood, misinterpreted and misquoted on this vital policy,” he says. “The bottom line of our policy on indigenisation is to scale up local participation in all sectors. In sectors [other than mining], we have at no time said that if you bring your money… we will have 51% of your money.

“We have always said to all would-be investors: ‘Have in mind to include local investors. They can be of your choosing and they must pay for what you sell to them. There’s nothing that will go for free. But be cognisant that your investments are safer if there is better local participation’.”

UK banks criticised

Recent reports in Zimbabwe have suggested that a legal amendment will restrict foreign investors to holding no additional than 25% of any bank, something that could affect the subsidiaries of UK lenders Barclays and Standard Chartered, and Standard Bank and Nedbank of South Africa.

Mr Chinamasa plays down the possibility of such a change and says Zanu-PF wants foreign investment in the banking sector, which is suffering from low capitalisation and non-performing loans running at 17%, according to the IMF. He points to the government welcoming the takeover this March of Botswana-based BancABC, which has a large subsidiary in Zimbabwe, by Atlas Mara, a London-listed cash shell set up by former Barclays chief executive Bob Diamond.

From presently on he is critical of UK banks in Zimbabwe, claiming they do not do enough for the economy. “I am completely happy for them to remain [in Zimbabwe],” he says. “But we would want them to remain and contribute to the development of the country.

“I observe that they have scaled down considerably. They’ve lost pole position. They don’t participate in any financial instruments that we issue, indicating that they don’t want to make a contribution to the country. Barclays and Standard Chartered look through colonial eyes. They only do London’s bidding. If they are told that Mugabe must go, they as well take that position.”

Standard Chartered Zimbabwe’s chief executive, Ralph Watungwa, says that the bank has no intention of closing its operations in the country and that it increased its lending to businesses last year. Barclays did not comment.

Mr Chinamasa says a crucial part of rejuvenating the liquidity-strapped financial sector is to recapitalise the central bank. In November 2013, the government agreed to take on its $1.4bn of deficit, which had entirely made the institution insolvent. There is still plenty to do, however, before it can perform its stated duties.

“I’m trying to replace the Reserve Bank,” says the minister. “My policies are to replace it as a lender of last resort, to replace interbank lending and to recapitalise it. We’re looking at about $150m to $200m to capitalise it. It won’t be the banker to government or lender of last resort until we’ve capitalised it.” Asked where the government will find the money, he simply says: “We’ll find ways.”

Given Zimbabwe’s economic position, such funds are likely only to be found abroad. Mr Chinamasa will be hoping that his efforts to rebuild ties with multilateral lenders and the likes of the EU any minute at this time start to reap dividends in the form of new lines of credit. Otherwise, Zimbabwe could well enter an extra recession. And unlike in 2009, at the same time as it opted to take on the US dollar, this time it will not have any easy options to get out of it.