eBusiness Weekly
When businesses look into 2023 quite probably three things form the top tier of their agenda: A better power supply, predictable exchange rates with low inflation, and political stability with a fair measure of policy continuity even in an election year.
The rest of the bits and pieces are largely in place, at least until mid-year elections and probably beyond, so it is these variables that matter.
The power supply is critical. It is vulnerable. But it is not quite as bad as it has looked in recent weeks, and is probably the easiest to solve so long as more creative tariff structures can be put in place to cope with extra investment and a wider range of sources.
The first big breathing space comes with Hwange 7 and 8 coming on stream early in the year. That 600MW is crucial. It will not solve the problems but will at least make them tolerable to a large degree while other stuff happens.
Kariba South since early December has been using just half of what comes over the Victoria Falls each day to generate an average of 300MW, having used up its share of the stored flood water but rains are now falling in Angola, and in a few months that water comes south and that 2023 will see tighter management of the stored flood water.
But while Kariba South can cope with the brief peak demand, that is why it needs 1050MW, about double its average output, Zimbabwe requires a second source to supply the base load, and Hwange was built for that. Although it is rated, before the extensions, at 920MW, we have been lucky to get half of that in recent years, and when there is a breakdown a lot less. This is why units and 7 and 8 can replace what is there, and allow the major refurbishment to start without any extra load shedding. But in two or three years seeing Hwange at just over 1 500MW will give us a 24/7 supply to build on.
Solar is great, since despite the high investment the fuel comes at zero cost and you can install a decent solar installation in a few months. But it comes in daylight. So any large-scale reliance on solar needs storage, either expensive battery farms or, conveniently for Zimbabwe, using Lake Kariba with its oversized power station as a storage facility.
Basically from the commissioning of Hwange 7 onwards there should be a steady increase in power supplies, fairly quickly from Unit 8 and better Zambezi water flows, then over two years steady refurbishment of older Hwange units and new solar capacity coming onto the grid. But even without the Zambezi floods we could be looking at an extra 1000MW in the next 12 months, and with good management of stored floods significantly above that.
Electricity will become more expensive as a lot of new or rebuilt capacity comes on line, but will still be dwarfed by the incredible costs of using back-up diesel generators.
The second area is the exchange rate and the rate of inflation, with these two existing uneasily as a pair that influence each other. So far the exchange rate has tended to be a main driver of inflation, but inflation can be a major driver of exchange rates, at least in a normal economy rather than one where speculators own the exchange rate.
Falling monthly inflation rates, and the Confederation of Zimbabwe Industries wanting monthly inflation in single digits, does not necessary produce very low inflation. We need to remember that annual inflation is the result of compounding monthly rates.
So we get an average of 1 percent a month annualises to 12,7 percent; 2 percent/month to 26,8percent; 3 percent to42,6 percent; 4 percent to 60,1 percent, 5 percent to 79,6 percent, 6 percent to 101 percent, 7 percent to 125 percent, 8 percent to 152 percent; 9 percent to 181 percent; and 10 percent a month comes to 214 percent a year. So we want something a lot better than single digits, like very low single digits.
The last 12 months saw changes in strategy to control inflation, tame the black market and create a better official market through the interbank system. The big change came in mid-year with the switch to strategies based on market forces rather than enforcement of Reserve Bank of Zimbabwe diktat. This was made up of three main factors: shoving interest rates up so borrowing could not fuel speculation; allowing far more freedom for the banking system to set an interbank rate; and mopping up surplus liquidity by offering gold coins but also preventing suppliers from skinning the Government and creating huge pools of cash profits without providing accompanying value.
Even the Government giving civil servants bonuses in foreign currency, while looking good, did avoid dumping a huge pool of extra local currency into the systems so some smart people won smiles from their workforce and kept the economy stable.
A lot of the work that got monthly inflation below 4 percent from September, when it fell sharply to 3,5 percent, was done in some ways by the authorities flying by the seat of their pants. It worked with monthly inflation falling again to 3,2 percent in October, a bigger dip to 1,8 percent in November and then marginally up to 2,4 percent in December, which could just be averaging out with November. The four months produced an average of 2,75 percent, and even that saw the two above average being the first two months and the two below being the second two. So as long as the December rise was just an adjustment on November, and not a new trend, we should be fine.
But this shows the need to be very careful of adjustments to interest rates and liquidity. Even 2,75 percent a month is 38,5 percent annualised, and that would be considered on the high side by most, although a lot better than we have seen in recent years. We have had periods of monthly inflation that is lowish by Zimbabwean standards, but so far the longest run has been less than 20 months, the period from the start of the auctions to early 2022, and even that saw rates rising in the later months.
We can assume that the bank rate of 200 percent will start falling sooner rather than later, but annual inflation thanks to the mid-year spike is still above 200 percent, 244 percent to be precise, so perhaps the authorities want to see those spike months removed from the calculations before they get excited.
So we might be looking at mid-year before rates start inching down. What perhaps needs to be balanced is the risk of rapid rises if something goes out of kilter and the authorities now move swiftly whenever it does, and having too high a rate over a longer period. Businesses probably dislike erratic interest rates as much as high rates, but which do they hate the most?
The other problem is the way the interbank rate continuously creeps up, by a bit more than inflation. We have this curious spectacle in Zimbabwe of a net inflow of foreign currency, which should apply downwards pressure on exchange rates and certainly keep them stable, yet rising exchange rates. We have for some time seen the problem being the fact that the inflows effectively end up in three pools: surrendered export earnings, retained export earnings and diaspora remittances. The pools are becoming better connected without the assistance of the black market, but largely in the area of the diaspora and surrendered earnings pools.
In yet another ad hoc decision, a large chunk of our petroleum imports are now funded from diaspora remittances, directly or indirectly, by having most retail sales in foreign currency and imports bought with free funds. There are Government-funded imports and net exporters must use some of their nostro money, but we get something close to trade balance by using petroleum to move diaspora money into the formal economy.
The cutting of the black market premium, along with retailers allowed their own 10 percent premium and bank charges and transfer taxes adding a bit more, means that another large slice of diaspora money, and now civil service bonus money, is going directly into the tills. The effective rates are around the same and it is a lot less bother to get the till operator to take the US dollar money. So petroleum and the till premium have partially merged the surrendered export earnings and the diaspora pool.
That still leaves our retained export earnings, and the huge nostro reserves that dwarf what the authorities have. And this is our next challenge. There are a lot of solutions, but the fairest, when you consider why export incentives were started in the first place, is to compel the sale of a percentage of retained earnings unused after six months. In theory that now exists, but it needs to become the norm.
Once what is sold or spent from the retained pool and the diaspora pool, plus the surrendered pool, equals or exceeds what is needed for imports, we suddenly cease to see most of the devaluation pressure on the local currency. Market forces, in the single pool set up normal in most countries, would actually give us a remarkably strong currency.
The political pressures in an election year from the point of view of business is to keep everything cool, calm and violence free and for winners and losers to all accept the results. It probably also requires a commitment for common pro-business and pro-investment policies, and removing temptation for anyone to print money.
Since it is difficult to imagine any politician saying they want no more investment, or want to have another round of hyperinflation, the rest of the policy argument can be more on who is more likely to make these policies work, and that just needs a peaceful election.
