Boosting Competitiveness through Reviewing Productive-Sector Value

Chains, Cost StructuresBy

Dr. K. MlamboDeputy Governor

Reserve Bank of Zimbabwe

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Presentation OutlineINTRODUCTIONWHY ZIMBABWE IS NOT COMPETITIVETHE ROLE OF BANKS AND VALUE CHAIN FINANCING

CONSTRAINTS TO VALUE CHAIN FINANCING

RBZ INITIATIVES TO BOOST COMPETITIVENESSOTHER HIGH LEVEL SUGGESTIONS FOR IMPROVING

PRODUCTIVE SECTOR VALUE CHAINS

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INTRODUCTION Competitiveness a key driver for growth and development

However, Zimbabwe continues to rank poorly competitiveness

rankings by international organisationsRanked 125 out of 144 countries in the 2016 Global Competitiveness Report

Ranked 155 out of 189 countries in the World Bank’s 2016 Ease of Doing

Business Report

Suggests a need to deal with some of the challenges affecting

competitiveness in the economy

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A competitiveness position reflects the state of efficiencies and

other operational dynamics in various value chains across the

productive industries

These value chains comprise a set of players who conduct a

linked sequence of value-adding activities involved in bringing a

product from its raw material stage to the final consumer.

WHY IS ZIMBABWE UNCOMPETITIVE?

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The 2016 Zimbabwe National Competitiveness Report identifies

three areas affecting competitiveness in Zimbabwe:

Costs and fees relating to Government

e.g. Taxes, EMA fees, tariffs and trade taxes

Utility charges by public enterprises and municipalities

Energy Costs

Private sector inefficiencies and structural rigidities

WHY IS ZIMBABWE UNCOMPETITIVE?

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Challenges of operating in a dollarised environment:

Lack of liquidity

Strong USD against trading partner currencies, esp. ZAR,

which affects export competiveness

Shortage of Capital as a binding constraint (for retooling,

new investment, technology, product development, etc)

OTHER FACTORS AFFECTING COMPETITIVENESS IN ZIMBABWE

Example: Transport Costs and Time to Trade Comparisons

  Cost to Export

(US$ per container)

Cost to Import

(US$ per container)

Import to

Export Cost Ratio

Time to

Export (days)

Time to

Import (days)

Cost to Export as % of Freight Value

Cost to Import as % of Freight Value

Zimbabwe 3 765 5 660 1.50 53 71 18.8% 28.3%Botswana 3 045 3 610 1.19 27 35 15.2% 18.1%South Africa

1 705 1 980 1.16 16 21 8.5% 9.9%

Zambia 2 765 3 560 1.29 44 49 13.8% 17.8%SSA 2 108 2 793 1.32 31 38 10.5% 14.0%

ROLE OF BANKING SECTOR AND VALUE CHAIN FINANCING

Finance plays a critical role in development Intermediates between savings and investments (get to decide

which firms use society’s savings)

In an economy, banks (Corrigan (1982):provide transaction services and administer national paymentsprovide back-up liquidity to the economyare a conduit for monetary policy

Banks and other financial institutions help solve the problems of adverse selection and moral hazard, thus reduce the cost of finance

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ROLE OF BANKING SECTOR AND VALUE CHAIN FINANCING

How important is bank financing in Zimbabwe? Loan/GDP ratio (1/4 of the economy)

2009 2010 2011 2012 2013 2014 2015

8.6%

17.6%

24.7%

28.4%26.8% 26.5% 26.0%

LOAN TO GDP RATIO: 2009/15

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Manufacturing; 15.38%

Mining; 12.04%

Agriculture; 15.05%

Services; 10.13%Construction; 1.27%State; 0.52%

Distribution; 12.07%

Financial Services; 1.99%

Individuals; 16.57%

Other; 14.98%

DISTRIBUTION OF CREDIT BY SECTOR (JUNE 2016)

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CHALLENGES CONSTRAINING BANKING SECTOR SUPPORT TO INDUSTRY

Limited access to credit lines which affects funding costs

Lack of long-term investible resources

High non-performing loans has led to risk aversion

Changing economic structure and associated growth in

informalisation especially SMEs

Other issues internal to banks such as weak corporate

governance and risk management practices

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COSTS OF FUNDS (%) RELATIVELY HIGH IN ZIMBABWE

Botswana Mauritius Zambia Zimbabwe South Africa

Kenya0

2

4

6

8

10

12

14

6

4

11.5 11.4

7

10.5

Financing costs are comparatively higher in Zimbabwe and Zambia, compared to other countries.

In Zimbabwe, interest are too high given use of USD

Spreads large in Zimbabwe given –ve inflation

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LACK OF LONG TERM SOURCES OF FINANCE

L02 – Main changes in the BPM6

Under 30 Days12.9%

Over 30 Days18.9%

Demand55.8%

savings12.3%

Short-term deposits dominate investible resources

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NON-PERFORMING LOANS (NPLs)

2 01 1 2 0 1 2 2 0 1 3 Sept'2 0 1 4 Dec'2 0 1 4 Sept'2 0 1 5 Dec'2 0 1 5 Mar ch'2 0 1 6 June'2 0 1 60%

5%

10%

15%

20%

25%

7.6%

13.5%

15.9%

20.5%

15.9%14.3%

10.8% 10.8% 10.1%

BOOSTING COMPETITIVENESS THROUGH VALUE CHAIN FINANCING

Value chain financing is comprehensive approach to productive sector financing which offers opportunities to reduce cost and risk in financing

For the banking sector it entails looking beyond the direct recipient of finance to understand the competitiveness and risks in the sector as a whole and to craft products that best fit the needs of the businesses in the chain

BOOSTING COMPETITIVENESS THROUGH VALUE CHAIN FINANCING (cont’d)

Often, the finance available to value chains is not only from financial institutions but from others within the chain as well

Value chain financing helps the chains become more inclusive, by making resources available for smallholders or SMEs to integrate into higher value markets.

17Source: IFC, 2011

Finance and Supporting Services

Example of Agricultural Value Chain

Role of Reserve Bank & Banking Sector in Promoting Competitiveness The role of Reserve Bank in promoting competitiveness and Ease of

Doing Business is two dimensional: direct and indirect.

Directly the Reserve Bank is instituting measures to promote

competiveness and the ease of getting credit, in particular:

Lowering lending rates from above 35% to 15-18%

Establishing a Credit Registry to deal with agency problems

Movable Collateral Registry to broaden range of eligible instruments

Resolution of NPLs through establishment of ZAMCO

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OTHER RBZ INITIATIVES TO ENHANCE PRODUCTION SECTOR VALUE CHAINS AND COST STRUCTURES

RBZ resuscitated the inter-bank market, to allow for increase circulation of

credit, at lower margins

Increased the threshold for external loans without prior Exchange Control

approval from US$10m to US$20m to ease of securing offshore loans

Introduced an export incentive of up to 5% (will also cover tobacco farmers)

Other measures to minimize cash shortages (daily withdrawal limits; use of

plastic money; nostro stabilization facilities)

Foreign currency management system (priority list)

Role of Reserve Bank in Promoting Competitiveness

Indirectly, the Reserve Bank plays a facilitatory role to the attainment of factors that promote the Competiveness and Ease of Doing Business. e.g. As part of the National Financial Inclusion Strategy, RBZ has

partnered with financial institutions and development partners in operationalising the value chain financing model through implementing projects that can be replicated across the country

The initial focus is on small-scale agriculture and rural financing and beneficiaries will be supported in groups / clusters

Each model project is envisaged to have high impact in transforming people’s lives and will involve many actors along the value chain.

RBZ INITIATIVES ON VALUE CHAINS Each model project is expected to address the following minimum

expectations: Production requirements Financing Capacity building programs Access to markets Access to an information centre; and Use of digital finance, agent banking etc as enablers.

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OTHER HIGH LEVEL SUGGESTIONS FOR FURTHER IMPROVING PRODUCTIVE SECTOR VALUE CHAIN COMPETITIVENESS Development of efficient infrastructure: There is need for elaborate

and transparent policies on Private-Public Partnerships to enable participation of the private sector in infrastructure development

Adoption of Policies for Innovation that encourage creativity and adoption of new technology

Institute policies that foster entrepreneurship development and formalisation of MSMEs. Policies should encourage formation of technically innovative SMEs which improves competitiveness.

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OTHER HIGH LEVEL SUGGESTIONS FOR FURTHER IMPROVING PRODUCTIVE SECTOR VALUE CHAIN COMPETITIVENESS

Adoption of Policies for Cluster Development: e.g. take advantage of particular resources in specific regions and form clusters around them. Clusters can also be linked to specific scientific and educational institutions

Policy Consistency: Business thrives where there is policy consistency which provides certainty and supports business continuity. Policy consistency breeds business confidence

Flexibility of Labour Laws: The labour laws should promote productivity based rewards instead of promoting labour security.

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• Competitiveness remains a key pillar for sustainable economic development in Zimbabwe

• Collaborative effort is required to deal with the key competitiveness

challenges in the country

• The country needs to expeditiously deal with Ease of Doing Business Reforms

• Finance is to promoting competitiveness and reviving productive value chains

CONCLUSION

THANK YOU