Saturday, July 03, 2010

European Union, Zimbabwe Dialogue Moves to Harare

EU, Zim dialogue moves to Harare.

By Tafadzwa Chiremba
Zimbabwe Sunday Mail

THE European Union says Zimbabwe’s three main political parties have made progress in implementing the Global Political Agreement (GPA) and has agreed to continue with talks to normalise relations between the 27-member bloc and the inclusive Government in Harare.

In a statement after a Zimba-bwean delegation visited Europe last week on a mission to thaw the frosty relations between Brussels and Harare, EU’s High Representative for Foreign and Security Policy Catherine Ashton said they were ready to continue with dialogue after noting progress in the implementation of the GPA.

“The EU appreciates some progress made in implementing the Global
Political Agreement in Zimbabwe and remains ready to continue the
dialogue and to respond flexibly and positively to any clear signals
of further concrete progress,” said Ashton.

The Zimbabwean team which travelled to Europe comprises the Minister of Justice, Legal and Parliamentary Affairs, Cde Patrick Chinamasa, Regional Integration and Co-operation Minister Mrs Priscilla Misihairabwi-Mushonga and Energy and Power Development Minister Mr Elton Mangoma.

EU’s Commissioner for Development Andris Piebalgs, who also met the Zimbabwean delegation, said the commission was committed to providing further assistance to the country.

The parties strengthened their wishes to move the political dialogue forward.

“They (EU and Zimbabwe) engaged in open and constructive discussions with the ultimate objective of progressing towards normalising relations between European Union and Zimbabwe.

“It was also agreed to intensify the dialogue in Harare,” the EU statement read.

Netherlands Vice-Minister of Foreign Trade Roderick van Schreven also met the delegation separately to discuss bilateral issues.

Cde Chinamasa told The Herald on Friday that the meeting with the
Dutch minister was about the Dutch-owned farms that were acquired for resettlement.

“We said we would forward their concerns to the Minister of Lands and
Rural Resettlement,” Cde Chinamasa told The Herald.

The inter-ministerial delegation was expected back last night.

The EU-Zimbabwe dialogue started in June 2009 with a ministerial
troika meeting in Brussels and continued with an EU Troika visit to
Harare last September.

Another meeting scheduled for February this year was cancelled after
the EU delayed in giving Zimbabwe the date for the political

The meeting was supposed to be held before the EU extended the illegal sanctions against the country.

The trip to Europe was deferred again in May after volcanic eruptions
in Iceland filled the skies in Europe leading to a number of flights
being put on a temporary freeze.

Zimbabwe has been reeling under the illegal sanctions that were
imposed on the country in 2002 under the EU’s Article 96 that
prohibits government-to-government co-operation.

Debt crisis looming

Market Watch By Brains Muchemwa

THE dollarisation of the Zimbabwe economy eroded many other
economy-wide risks that haunted corporates for almost a decade, from
price controls to the inaccessibility of foreign currency.

With the much-celebrated stability, a new crop of risk has emerged,
and that relates to the debt crisis at both the national and private
household level.

A decade of high inflation made borrowing a lucrative pastime in
Zimbabwe. Zimbabwe dollar asset prices kept rising whilst the real
cost of debt diminished rapidly as the central bank kept printing more
money to cover the fiscal deficits.

The subsequent inflation impoverished not only the Government but the households and corporates and the increasing despair was met by
economy-wide subsidies, which ignited more inflation. Indeed borrowers were the biggest beneficiaries of inflation.

By 2008, s/he who borrowed the equivalent of ZW$1 on January 1 2008 had to pay back ZW$0,01 by December 31 2008 to the bank in settling the whole debt! The borrowers, including the central Government, were the biggest winners whilst the consumers and the economy at large edged towards bankruptcy.

In May of 2007, the Government borrowings were about 18 percent of
bank balance sheets and, by December 2008, that had evaporated to
almost nothing! Only fiscal moralists would not marvel at these great
works of inflation in reversing the debt burden on central Government.

And indeed the death of the local currency sealed the fate of banks,
pension funds and insurance companies that held the bulk of Government debt and today our Government is better off with only US$8 billion debt overhang.

The moral opinion that the Government created inflation and was among the major beneficiaries is therefore very hard to dismiss. With
winners equally come the losers and as the borrowers, including the
Government, benefited from inflation, the banks and ordinary consumer
lost their capital positions in real sense. Real wage rates plummeted,
and indeed, the banks were left clutching to capital in the form of
largely investment properties and equipment.

The tables have turned. A new crisis is lurking in the shadows of the
optimism. And that relates to burdening real and expensive debt that
may, if corporates are not careful, infect balance sheets and define a
new chapter of corporate bankruptcy.

In a bid to revitalise a weak balance sheet and inject working
capital, corporates in Zimbabwe have plunged into fresh debt
arrangements. Physical capital formation had almost ceased for over
seven years in Zimbabwe and, considering the pace of global
technological developments that swept across the past decade, most
production processes are now outdated and, more importantly,

The domestic unit costs of production are, therefore, not competitive
when compared to the rapid advancements and competition from low-cost producers such as China and equally competitive producers like South Africa.

Inasmuch as the Zimbabwean corporates could have enjoyed the borrowing binge of the past four years, the exchange control regulations and the associated scarcity of foreign currency meant that the cheap credit could only do but very little for the borrowers in terms of enhancing capital goods, hence key components of balance sheets remained weak.

Today’s new race for debt, thanks to the reluctance by banks to lend,
has been influenced by the notion, misplaced at times, that the
existing operational structures are still profitable and corporates
can easily turn to producing profitably if they get working capital.

Unfortunately most corporates are finding the going tough, and the
recent results coming out of some of the listed companies are
revealing how septic corporates balance sheets are getting by the day.
With credit so pricey due to the current liquidity crunch, interest
cost is proving to be a huge operational burden for many companies
and, unfortunately, the debt heaping on the balance sheets is
increasing at a rate that will soon compromise the solvency of many

On the other hand, the rising wage levels are adding to the woes on
the cost functions, implying therefore that worker productivity will
be taking a more important role in corporate planning going forward.
In the past only US$100 could pay all wages, water and electricity for
a medium-sized company as the magical “burning” of foreign currency
immensely benefited owners of capital.

Now the times have changed and all these costs are real on companies’ operation structures, and hyperinflation, then “father miracles”, is no more to do the “Christmas tricks”. Just as the miraculous hyperinflation Christmas tree dried, so has the subsidy mentality where Bacossi and Aspef created artificially low operating cost structures at the nationwide expense of even more inflation.

Interrogating the debt markets to revitalise operations has become one
last option for companies stuck with rising real operational costs and
the need to restart operations that had been stopped for years. And it
is indeed the way out, but equally with landmines.

Loans to the private sector stand at 30 percent of GDP in Zimbabwe
today, and considering the shallow depth of the financial market and
indeed the liquidity crunch, Zimbabwe’s private sector is highly
geared compared to Zambia with only US$1,6 billion in loans, about 8
percent of GDP and Tanzania with loans at 15 percent of GDP.

However, upon factoring in the relative potential of Zimbabwe’s GDP,
considering very low capacity utilisation below 45 percent in industry
as well comparing with the debt-addicted South Africa where private
sector debt is 90 percent of GDP, the temptation to encourage gearing
remains very high in Zimbabwe.

This temptation may prove to be rewarding for those that will be able
to restructure operations and processes to embrace the dynamism and
indeed thin-margin environment that is shaping out for sectors such as
banking, manufacturing, retail, hospitality, insurance and, of course,
those other sectors competing directly with low-cost global producers.

And contracting debt in such sectors, more so expensive debt obtaining in Zimbabwe, the survival chances narrow with each extra day it stays on the balance sheet. For central government, the fate has been decided already.

The Government debt overhang, at about US$8 billion, is stagnating
economic growth already, and indeed, some corporates are falling into
the same trap as central government.

The recent raid on RBZ assets by numerous creditors bears testimony to real debt challenges facing the Government where its assets are being stripped and, without a doubt, in the same fashion, more foreclosures will be coming to corporate doorsteps.

Shunning debt completely is not a viable option for Zimbabwean
companies, considering the poor capital structures after a decade of
inflation and the need to carry on but, equally, contracting debt
blindly is not the answer in restructuring of balance sheets.

A delicate balance would have to be struck and, in the process, some
will likely lose the balance completely and plunge into bankruptcy.

The intoxication and resultant addiction that comes with debt is so
hard to fight. The recent global financial crisis tells the complete

For the banks that are going to lose money in foreclosures, learning
from South African banks ABSA and Standard Bank, that had impairment charges of US$1,2 billion and US$1,6 billion respectively in 2009, could provide some valuable lessons.

The lessons will, unfortunately, result in more stringent lending and,
in the process, constrict the credit flowing into the economy as is
the case currently, compounding the bankruptcy fears.

These are difficult times. Can the corporate sector rise to the challenge?

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