Can we trust a cash-strapped government?
ONE of my darkest moments in journalism was reporting the closure in November 2008 of Metallon Gold’s five mines in Zimbabwe, which threw 5 000 workers out of employment.
Metallon had battled for a long time to cope with rocketing overheads, spares shortages, electricity and foreign currency supply bottlenecks, which placed its plans for a London initial public offer off the rails.
To avoid further bleeding, the group moved to close Red Wing Mine, Shamva Gold Mine, How Mine, Acturus Mine and Mazowe Mine.
These mines would later reopen in 2009.
On the fateful day, I met Metallone’s former chief executive officer, Colleen Gura in his plush office at Arundel Park, where he chronicled how the closure had been precipitated by macro-economic developments.
“It is not that we have decided to close, but we have been closed. There is a risk we might lose the mines,” Gura said.
What he meant was that despite efforts by gold mines to make government understand the dangers ahead, they had failed to convincece the authorities.
These mines were owed US$50 million in unpaid bullion deliveries to the central bank-controlled Fidelity Printers and Refinery at the end of 2008, which was one of their problems.
The State had pressed ahead with policies, such as the controversial indigenisation law, massive cash printing and an artificial exchange rate, which dampened investor confidence and caused capital flight.
In doing so, and as it has continued to do, government was sending wrong signals that Zimbabwe was now a no go destination for international capital.
Not only were gold mines under siege.
In February 2012 I witnessed the desperate state of Zimbabwean industries when Continental Fashions, a ladies’ wear producer, which had been in operation for close to a century, filed for bankruptcy after its cash flows were crippled by an avalanche of cheap imports, which government only acted on recently.
This action came four years after Continental had raised the red flag when it highlighted a crisis over ballooning overheads, exorbitant interest rates, ageing equipment, power blackouts and high electricity tariffs, which had discouraged fresh investment into the textiles sector.
Instead of acting on the crisis which had persisted since 2008, politicians have been campaigning to win elections, putting the country in perpetual election mode.
The hurdles that confronted Continental four years ago have since multiplied and operators are in a far more desperate situation than before.
Government has set the taxman to squeeze the little that loss-making companies are earning, to pay taxes.
Banks, which have been grappling with an aggravated cash crisis, are not in a position to fund industry’s capital requirements, while industrial output has fizzled out due to poor disposable incomes.
At the time of the closure of Continental, about 11 other clothing and textile firms were under judicial management. Kalahari Clothing Company had been placed under external administration. Saybrook Manufacturers had been slapped with a similar arrangement.
Still in the capital, Bernstein was instituting ruthless cost reduction measures, including retrenchments, to stay clear of collapse.
In Bulawayo, Archer Clothing Company had slipped into judicial management, throwing 800 workers into uncertainty, while Lancashire Clothing was bleeding.
The Zimbabwe Stock Exchange-listed AICO Africa Limited’s spinning business, Scottco; Chinhoyi-based Afroram Spinners; Merlyn; National Blankets; Textile Mills Holdings; David Whitehead Textiles Limited, (which employed 3 000 workers) and Modzone Enterprises, were either under judicial management or finding the going tough.
Textile Mills, which was 65 years old, having opened in 1947, was struggling.
The list is endless.
Given the crisis that has rattled industries since then, it is clear that government has failed to address the economic meltdown.
What authorities have failed to realise is that the more they delay in acting on de-industrialisation, the more they kill the “goose that lays the eggs”.
It should now be very clear, but probably a little late, to the Executive that by failing to pay its 500 000 strong workforce, government is paying the price for its animosity towards entrepreneurship as well as its reluctance to decisively deal with industrial matters.
Revenue to the fiscus has suffered a major knock owing to the worsening liquidity crisis that could result in government operations grinding to a halt unless Treasury secures a huge cash injection to avoid a catastrophe this second quarter.
We are not the only ones worried by the actions of government.
Last week, auditor-general, Mildred Chiri, said outstanding revenues to the Zimbabwe Revenue Authority (ZIMRA) moved by 22 percent to US$620 million in 2015, from US$508 million in 2014, which is catastrophic.
“This amount was owed to ZIMRA by its clients who were facing financial difficulties due to the harsh economic environment,” noted Chiri.
The key word from Chiri was “harsh” and it is important to note that this exposes how those we have entrusted with the stewardship of the economy have slept behind the wheel.
Instead of working flat out to improve the investment climate, we have seen ministers feasting on State resources, buying expensive cars for themselves, purchasing mansions and globetrotting on trips that benefit only their families. This has only spelt doom for the economy.
Across all sectors of the country’s tottering economy, the trading environment has further deteriorated, with nearly all companies struggling to stay afloat due to depressed demand and the inability by cash-strapped customers to pay for goods and services on time.
There has been an unhealthy working capital situation that has seen most companies lagging behind with payments for their raw materials and other inputs, salaries, medical aid and pension contributions as well as statutory payments such as taxes.
Recently, nostro accounts have run dry, and companies cannot import raw materials.
But instead of tackling the underlying fundamentals that have pushed companies to the brink of collapse, government, as expected, is pursuing a more lethal policy.
It seems it is trying to bring back the Zimbabwe dollar, which was ditched in 2009 after hyperinflation, estimated at 500 billion percent in 2008, ravaged its buying power.
The Zimbabwe dollar appears to be returning in the form of bond notes, described by President Robert Mugabe recently as a “surrogate currency”.
Government wants to print the equivalent of US$200 million in bond notes.
These would then be supported by a US$200 million facility from the African Export and Import Bank to fund a five percent export incentive.
The question many desperately want answered is: Why now? Has government only realised now that exporters require support? What is a surrogate currency anyway?
Why should this “support” come in the form of bond notes, and not United States dollars? And why has government only decided to be generous to producers, when it is failing to raise cash to pay civil servants their monthly salaries, as highlighted by the current impasse over shifting pay dates?
Already, confidence has been hammered and the stock of US dollars on the market is disappearing fast?
Was government not aware of the need to roll out export incentives three years ago when 10 companies were shutting down every month, when 300 workers were losing jobs every week? Or in 2012 when companies like Continental Fashions were staggering and limping alone? Or when 2 600 firms collapsed between 2011 and 2013, throwing 55 000 workers out of jobs?
Could government be trying to cheat us by bringing back the Zimbabwe dollar as a stop gap measure to bridge the void created by the externalisation of funds as well as to fill up the feeding trough for those in positions of authority who can easily access the bond notes?
On average, an estimated US$1,8 billion is being externalised annually. The situation is likely to be worse this year.
Interestingly, there have been no arrests, which suggests that those behind the externalisation of funds enjoy some form of protection.
I am not surprised at all!
My experience with this government is that ministers, many of the times clueless, have skirted away from real solutions to the burgeoning crisis and resorted to ad hoc measures.
We have seen this in the frenzy of meetings with civil service unions in the last week.
Everyone is running away from implementing growth stimulating policies.
In the wake of the externalisation of currency that has paralysed the economy, government is skirting away from the underlying issues again.
Amid clear revulsion and professional warnings, they are resorting to bond notes to run the economy.
What guarantees do we have that government will not direct the Reserve Bank of Zimbabwe (RBZ), as it did during hyperinflation, to resort to extensive money printing and trigger inflation and a deadly currency black market?
After losing substantial savings during hyperinflation, Zimbabweans have no reason to trust a government that comes up with suspicious measures.
In any case, government is facing bankruptcy, hence the public outcry over bond notes.
Everyone now knows the effects of rolling out massive amounts of cash into the market: In November 2007, there was a stock market crash after systems failed to cope with charging zeros as government printed cash.
The Centre for Peace Initiatives in Africa estimated that money supply growth had shot to a phenomenal 10 octillion percent by 2008.
It said year-on-year inflation moved to 10 sextillion percent in 2008, from about 70 percent in 2000.
From 2007 until 2008, at least 25 zeros were chopped off from several ranges of the Zimbabwean currency introduced by the RBZ.
Zimbabweans dread returning to this scenario.
If government can raise US$200 million to fund exporters, why can’t it raise funding to pay its workers? Is government not trying to divert us from the real issues affecting the country? Should civil servants trust government only now when it failed to deliver before?
We are clearly headed into the swamps!
The crisis is now chewing the bone, and the excruciating pain is a warning of more difficulties ahead.
Follow us on Twitter @FingazLive and on Facebook – The Financial Gazette