Constraints on Zimbabwe’s 2017 Growth

PESA Editorial – Zimbabwe - 1Q2017/18

The Zimbabwean economy is currently experiencing severe challenges of slow economic growth, low commodity prices and drought impacts. Slow economic growth and low commodity prices are intrinsically linked, as the global downturn has brought about a situation whereby the world’s leading economies, such as China, are slowing down, and this has a trickledown effect on emerging economies such as Zimbabwe, as demand for their raw material wanes. The declining economic performance is further exacerbated by low domestic savings, due to low disposable income which is a mitigating factor in the informalisation of economic activity.

 

 

The Reserve Bank of Zimbabwe noted that the sources of liquidity are primarily exports, which accounts for 62%, remittances contribute 25%, whilst loan proceeds, income receipts and foreign investments contribute 6%, 4% and 4% respectively1. The current situation in Zimbabwe illustrates the deficiency of sources of liquidity, thus highlighting the degradation of the balance of payments. In essence, Zimbabwe is consuming more than it is producing, and for the economy to spark back into life, there should be more production taking place. This is aggravated by the fact that the government has maintained high expenditure levels despite experiencing subdued revenues2.

 

As of 2008, Zimbabwe has experienced record hyperinflation. As a mitigating measure the government introduced a multicurrency regime, in a bid to restore macroeconomic stability and resultant economic growth. In the period 2009 to 2012, positive effects of this policy intervention were witnessed as economic growth averaged 8.7% annually and inflation steadied. As a result, revenues and bank deposits improved immensely. Zimbabwe is currently 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 devaluation of neighbouring currencies, along with a liquidity crisis following an inopportune fiscal expansion. The depreciation 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 may have been caused by difficult liquidity circumstances, decline in commodity and food prices, along with weak domestic demand. The annual inflation rate was at 2.19% in January 2016 and decreased to -0.93% at the close of 2016. The average annual inflation for 2016 was -1.5% from a rate of -2.4 in 2015. Prices of goods increased on the back of the decline in agricultural production, due to drought conditions. The Deputy Governor of the Bank of Zimbabwe expressed that the economy has excessively dollarized, as illustrated in the corresponding graph.

 

Since January 2013, the year-on-year rate of inflation, as measured by the Consumer Price Index, has been on a declining trend. In 2014, the year-on-year inflation rate turned negative, with the lowest rate being -3.3% in October 2015. Inflation will remain negative in FY2017/18, whilst GDP growth declined from 3.8% in FY2014/15 to an estimated 1.5% in FY2015/16 but there is positive headwinds that it could recover to a rate of 1.6% in FY2016/17.

 

The national budget for FY2017/18, which was valued at USD4.1 billion and presented by the Minister of Finance and Economic Development Mr Patrick Chinamasa. He projected the economy to grow by 1.7% and furthermore expressed confidence that the economy would have a turn around and achieve moderate growth on the back of anticipated improvements in global commodity prices, the fulfilment of envisaged mining investments and the benefits from the ease of doing business. Minister Chinamasa’s growth forecast is more moderate when contrasted with Treasury’s Strategic Paper for FY2017/18 which forecast growth of 4.8%. Since then, Minister Chinamasa stated that the growth projection of 1.7% had been revised to 3.7% on the back of an expected bumper maize harvest.

 

The elixir to remedy the country’s economic malaise would require policy consistency in order to ensure a functioning monetary system, and the payment of debt to international creditors, to ensure access to development financing. As such, the country’s fiscal situation in FY2017/18 will continue to come under pressure, as global recessionary conditions continue to constrain revenues, even with an increase in exports. This will likely lead to more taxation by the government in FY2017/18, but will not be enough to clear debt with International Financial Institutions (IFI), which will effectively block access to concessional credit. Although, the Finance Minister contends that the government will clear its debt in FY2017/18 with IFIs, namely the African Development Bank (USD 610 million), the World Bank (USD 1.16 billion) and the European Investment Bank (USD 212 million). This confidence stems from the fact that the government has cleared its USD 108 million debt with the International Monetary Fund. It should be noted that, notwithstanding net capital outflows, as the performance of key export industries are expected to improve, the deficiency of trust between industry and the government will necessitate investors to move capital to different markets.


1 Reserve Bank of Zimbabwe
2 International Monetary Fund


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