The Zimbabwean economy has lost economic impetus since 2012 after there was indication of an economic resurgence in the period 2009 to 2012, with economic growth averaging 11% annually. In 2009, Zimbabwe introduced a multiple currency system, accepting the US dollar and the South African rand as legal tender. Conversely, GDP growth slowed cuttingly from 10.6% in 2012 to 4.5% in 2013; 3.1% in 2014 to 1.5% in 2015 and 0.4% in 20161. The economy is rapidly de-industrialising and economic activity is shifting to the informal sector, which is an alarming trend. This economic malaise is on the back of a liquidity crisis and poor production, emanating from China’s economic slowdown and subsequent decline in demand for Zimbabwean raw materials.
The Zimbabwean economy has experienced encouraging spill-overs from the Chinese economy, for instance China’s investment led growth paradigm bred an appetite for metals, thus enhancing the Zimbabwean economy’s export volumes and terms of trade. However Beijing has moved away from an investment led growth paradigm to a domestic consumption led paradigm. This does not bode well for the Zimbabwean economy, as China has taken a policy pivot of looking within and restructuring her economy away from being an epicentre of manufacturing and construction – now focusing the economy on domestic consumption and the services sector. Extractive-based and emerging economies will feel the brunt of this policy modification, as their economies are intrinsically linked to the demand of Beijing.
Zimbabwe’s economy is cripplingly dependant on the Chinese economy for international capital inflows. Zimbabwe’s trade exposure to China is astounding, so much so that the rate of China-Zimbabwe trade is greater than Zimbabwe’s collective trade with both the US and the EU. Additionally, in FY2015/16, there was a significant drop in China-Zimbabwe trade which decreased from USD 1.24 billion (approx. R16.6 billion) to USD 462 million (approx. R6.1 billion) and Chinese investment into the Zimbabwean economy decreased from USD 238 million (approx. R3.1 billion) to USD 46.53 million (approx. R617 million) 2. The Chinese economy decreased to a growth rate of 6.9% in FY2015/16 (FY2014/15: 7.4%) and continued the downward trajectory by recording 6.7% FY2016/17; the lowest in over a decade.
Furthermore Zimbabwe is wrestling with exogenous and policy shocks which are caused by the global commodity price dip, along with the appreciation of the US dollar. The economy has to contend with the currencies of Zimbabwe’s key trade cohorts weakening significantly in comparison to the US dollar. The depreciating of the South African rand when compared to the US dollar has occasioned a condition whereby prices of imports from South Africa have declined. Negative inflation in the Zimbabwean economy has been caused by difficult liquidity circumstances, decline in commodity and food prices, along with weak domestic demand.
During the period 2009-2015, market liquidity was sourced primarily from exports, which contributed 59% of foreign exchange inflows, remittances contributing 29%, external loans contributing 8%, along with foreign direct investment contributing 3%. The current situation in Zimbabwe illustrates the deficiency of sources of liquidity, thus echoing the degradation of the balance of payments. Put simply, Zimbabwe is consuming more than it is producing.
In a ploy to mitigate the liquidity crisis, the government has tabled the Movable Property Security Bill in the House of Assembly3, this bill aims to widen access to credit by seeing debtors being able to index their movable assets such as livestock and machinery as collateral at the central bank register. This policy is being advocated on the notion that it would drive production, if more Zimbabweans had access to credit they would be more economically productive.
This policy intervention however well-meaning, is going to lead Zimbabweans to a further crisis of indebtedness. The bill does not mitigate the source of the economic problem, which is the lack of production, thus commodifying assets will only centralise the wealth at the banks. In another manoeuvre by the Zimbabwean government to stave of the liquidity crisis, the Reserve Bank of Zimbabwe sanctioned a pay out of a 5% export for tobacco farmers for FY2016/17 to incentivise production for the forthcoming season, but what has been evident is the cash shortages as farmers lamented the delays in payment due to currency shortages4. The higher yields will not necessarily benefit farmers as buyers purchase on the formal market only to sell for more exorbitant prices on the informal market.
Zimbabwe could stimulate higher production through policy interventions that will allow for lower production costs and lower tax rates. The aging infrastructure is a key issue to address. Refurbishing blockages in transportation, electricity or water will encourage increased production. As a result of improved infrastructure, competiveness will surge, thus driving more investment. Furthermore, the government should address Zimbabwe’s high import bill, as it will remain as a drainage of foreign exchange capitals. Zimbabwe needs to enhance its assortment of international economic relations partners and overcome its reliance on commodities. Zimbabwe must attain healthier economic growth by putting more emphasis in more engines of growth, such as agriculture and its emanating industries. To abate the liquidity crunch, there must be a concerted effort to diversify Zimbabwe’s export portfolio.
1 African Development Bank
2 Chinese National Bureau of Statistics
3 Zimbabwean House of Assembly
4 Reserve Bank of Zimbabwe