Liquidity and illicit financial flows

Illicit financial flows and liquidity constraints are among the foremost encumbrances standing between Zimbabwe and its economic dream.

Exporting liquidity through leakages suffocates the economy by reducing aggregate demand thus causing deflation.
It also stifles positive multiplier effects derived from money circulating in the economy and stunts economic growth.
Operating in a multi-currency environment means Government — through the instrumentality of the Reserve Bank Zimbabwe — is unable to manage liquidity by printing new money.
From a fiscal perspective, financial resource leakage exists with negative effect on national liquidity.
Therefore, there is need for transparency, accountability and self-discipline in the utilisation and management of financial resources within a multi-currency system.
This will ensure money circulates within the domestic economy.
Illicit financial flows should be viewed in the broadest sense, encompassing smuggling (precious minerals, wildlife trophies, etc), non-remittance of export proceeds, unwarranted remittances and offshore investments.
Also in this bracket are tax evasion/avoidance, porous borders, misappropriation of foreign loan receipts, irregular and/or wasteful expenditure.
The January 2016 Monetary Policy Statement presented by RBZ Governor Dr John Mangudya states that Zimbabwe was prejudiced of US$1,8 million in the year ending December 31, 2015. Corporates accounted for US$1,2 billion of those externalised funds and individuals US$600 million.
US$1,8 billion could be an understatement.
In 2014, former South African President Thabo Mbeki tackled illicit financial outflows and inequality in Africa at a meeting in Abuja, Nigeria.
He said Africa loses US$50 billion to US$60 billion to illicit financial flows annually, with the loss over the past 30 years topping US$1,4 trillion.
I maintain that the US$1,8 billion mentioned by the RBZ is way below what we could be losing.
Further, the Monetary Policy Statement was silent on the justified and possible lawsuit that can be instituted against those who exported more than 100 000 tonnes of our diamond ore from the Chiadzwa diamond fields on the pretext of taking samples for testing.
Rigorous measures need to be instituted if we are to stem this diamond and gold smuggling through our porous borders and/or by air mainly from the 500-plus airstrips in farming areas previously occupied by whites.
The long-standing issue of reparations to Africa by Europe and the United States over the evil, barbaric and historic system of slavery should also be pursued with vigour. Other matters worth pursuing are crimes against humanity perpetrated in the First and Second Chimurenga by an illegal colonial regime and inhabitants of British extraction and the adverse effects of the illegal sanctions imposed on Zimbabwe by the West.
Skulls of some of our ancestors beheaded during the First Chimurenga and kept at some London museum should be shipped back home, too.
Atrocities perpetrated in camps in and outside Zimbabwe during the Second Chimurenga were horrendous, impossible to forget. The net effect of legal action against such illegality is that the resultant compensation will make a world of good to our liquidity position.
We should be motivated by the recent successes of the victims of the Mau Mau uprisings that took place in Kenya before our Second Chimurenga.
The lifting of US sanctions on Cuba after 50 years is another factor to consider. On fiscal policy, the lack of space resulting from high expenditure dominated by civil servants’ salaries and dwindling tax revenues deserves urgent attention.
Such low revenues are linked to many company’s closures, leading to a decline in company tax and Paye receipts to the Zimbabwe Revenue Authority and emergence of an informal economy.
Many SMEs, through genuine ignorance of tax laws or deliberate tax evasion/avoidance or both, are not meeting tax their obligations. This means Zimra must re-strategise in the short term and reconsider tax heads like VAT and excise duty or other taxes on fuel.
Taxes on fuel are now lucrative and acceptable given the drop in petroleum prices on the international market, and this provides leeway to raise taxes way above the current estimated 35 percent of retail prices without causing a steep fuel price hike.
The same action has the positive effect of partly ameliorating problems associated with deflation.
Similarly, the VAT rate can be raised to the same effect on deflation.
However, it must be realised that given our low disposable incomes, this tax head may not perform to expected levels.
An accurate estimation of duty leakages on second-hand vehicle imports would turn out to be huge if accurately computed.
I reckon it should be sufficient to at least finance the nation’s annual budget of US$4 billion.
There is, nevertheless, nothing that can be done about this revenue collection; it is akin to crying over spilt milk.
The very best that can be done in the circumstances is to recover any known duty arrears and collect and monitor vehicles coming out of bonded warehouses more closely to better collect taxes on vehicle sales.
On the positive side, this surge in vehicle numbers could be a good indication of the revenue generation potential of an increase in taxes on fuel consumption.
The tax amnesty that expired on September 30, 2015 should have enabled us to come up with a reliable and robust tax payers’ data base, which, together with other appropriate measures, should have facilitated better Paye and company tax collection from SMEs.
This warrants a downward review of VAT and taxes on fuel rates in the medium to long term.
Such measures should work hand and glove with cost-cutting measures, particularly the long-standing civil service staff rationalisation exercise.
On Zimbabwe’s external debt, we should urgently re-prioritise our proposed debt settlement plan as follows:
1. Settling the US$50 million arrears owed to Chinese entities so that Sinosure will be able to provide credit guarantee insurance to financial institutions that are giving us funding for the mega deals already signed with China. Such insurance guarantees may also be called for if we are to benefit from the US$60 billion package for Africa, signed at the Sino-Africa Summit in South Africa in December 2015.
If this US$50 million is not available now, there is a compelling case to use part of the bridge loan arranged with the African Export-Import Bank;
2. Repaying the US$110 million owed to the IMF from the country’s Special Drawing Rights. This money is already in hand and there is no need to keep international reserves given that we are already operating a multi-currency system at home. Terms such as free funds and import cover are now inappropriate, obsolete and superfluous in our multi-currency environment;
3. The third priority would be paying the US$601 million we owe the African Development Bank using the bridge loan from Afreximbank;
4. Settling arrears to the World Bank (US$218 million to the World International Development Association and US$891 million to the International Bank of Reconstruction and Development). One major reason why the World Bank arrears should be given least priority is that their settlement is unlikely to lead us getting new and fresh IMF or World Bank financial resources since Zidera is still in force.
The recent letter by Mr Corker, the chair of the US senate foreign affairs committee, to US treasury secretary Mr Lew and the fining of Barclays to the tune of US$2,5 million for facilitating payments of designated entities by the Office of Foreign Assets should be clear testimony that Zidera is very much alive and kicking.
In terms of Zidera and how the IMF and World Bank are constituted, the US enjoys veto powers on any new funding to Zimbabwe and nothing has happened to suggest those powers will not be invoked. We should, however, settle our arrears to the IMF and World Bank as per agreement reached last year in Lima.
Zimbabwe should even borrow from the East to settle these arrears and debts outstanding to Western creditors as borrowings from the East usually come relatively cheaper and without unreasonable conditionalities.

Mr Edmore AM Ndudzo was the lead consultant on the Public Finance Management Act and the first clack City Treasurer of Harare. This is the first instalment of a two-part series on illicit financial flows and liquidity