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Which forecaster do you believe?

By Admire Mavolwane

LANGUAGE, like culture and fashion, changes with time and usage. Since 2004, a number of new terms have joined mainstream commentary and now dominate

almost every debate. Detractors; externalisation; challenges; and governor are some of the words that are now in common usage.

According to the Miriam Webster Dictionary, to “detract” is to speak ill of somebody. As such, a detractor is an individual or institution that undertakes such an exercise. Due to the extraordinary circumstances that we find ourselves in, oftentimes those that forecast a bleak outcome of events in the country are labelled by certain sections of media and the authorities as “detractors”. Even the governor in his half-year fiscal policy review fired a broadside at the so-called detractors for what he called “venomous outpourings”.

One foreign institution which is often vilified by the authorities is the International Monetary Fund (IMF). If its previous reports have resulted in the organisation being branded a detractor, then its latest forecast on Zimbabwe will make some people go ballistic. The IMF projects that this year the economy will shrink by 5,1% and annual inflation will average 1 216%. For 2007, it forecasts that real GDP will shrink by a further 4,7% whilst inflation will hit the 4 278,8% level. The inflation forecast for this year could be close to the mark, given that with four months to go average year-on-year inflation is sitting at 960,5%. The 2007 figure, however, will make many hot under the collar as it is at wide variance to the official double-digit inflation figure forecast.

The issue of whether the economy will contract, stagnate or expand this year into next year is also one on which the official, and IMF’s, views are diametrically opposed. According to theMinister of Finance, the economy is anticipated to grow by between 0% and 2,5% predicated upon a 23% growth in agriculture only, whilst mining will decline by 10,8%, tourism, 4%. No figure for the manufacturing sector was given.

From the above, one can conclude that the improvement in farm output will cancel out the declines in the other sectors. The other view, especially from “local detractors” is how much further can the economy contract after having shrunk by about 50% over the past eight years, and it is not surprising that the rate of contraction has declined. “Local detractors” are putting the level of decline at between 6% and 7%.

Notwithstanding all the threats and commands to slow down, inflationary pressures do not seem to be taking heed. On the other end, regardless of all the tonnes of Zimbabwean dollars poured into the sector, the country seems not to be able to produce enough grain. Rather than the nation benefiting from all the various schemes and funding channeled into agriculture, farmers and Agribank are the ones who have been smiling all the way to the bank. After accessing funds at 50% per annum, fuel at highly subsided prices, cheap inputs, and subsided electricity, come harvesting time, the farmers get a hefty 2 321% increase in the producer price of wheat to $217 913,40 per tonne.

In the meantime, the Grain Marketing Board (GMB) will continue selling the wheat to the millers at the old price of $12 339 per tonne. On a projected output of 200 000 tonnes, the total subsidy for wheat alone would be $41 billion (revalued).

This is before working out the subsidy on the balance of 200 000 tonnes to be imported, which by our calculation, based on the information in this Wednesday’s Herald, would amount to a further $17 billion. At the auction rate, it works out cheaper to import wheat than buy it from farmers!

So in addition to the subsidies that the farmers got, the cost of which will be borne by the fiscus/RBZ, the nation will be saddled with huge losses by the GMB which will manifest themselves in higher taxes and inflation. If farmers were to get the above inflation producer price, then why were they availed all the subsidies? Kind of difficult question to address but down the line, the impact of this double whammy will be felt when one takes a trip to the supermarket.

Coming to the markets, it appears that the low interest regime is here to stay with the yield on the 91-day treasury bill being reduced from the previous 200% to 66,93% per annum. On a compounded basis, assuming rollover every quarter, the yield works out to 85,68% per annum. Other tenors like the six months and one year are attracting straight yields of 100% and 150% per annum. So with inflation currently at 1 204,6% for August and with projections of close to 2 000% by December, it becomes difficult to justify investing in the money market, even for two hours.

The result of the low interest rate environment has been an aggressive switch to equities, foreign currency, motor vehicles and real estate. The stock market, which is usually the first option, has enjoyed a considerable amount of buoyancy in the last two weeks, with the benchmark industrial index gaining 49,48% since the September 15. Players in the other three markets will accede to the fact that since the middle of the month market values have appreciated significantly.

Inflation comes with it volatility in policies such that the sustainability of the current low interest regime environment with its attendant inflationary consequences is being questioned. The biggest worry is the asset price inflation bubble that is being created. Asset price inflation has the psychological effect of making holders of assets feel rich and in that, they tend to spend and borrow more based on the valuation of their assets. This results in demand-push inflation and a potentially overstretched property market and banking sector. Fair and fine, but the problem reveals itself when the time for a correction comes. Case studies in a number of countries including Japan show that when an asset price bubble bursts, it leads the country into a deep recession accompanied by a weakened financial and property sector.

Whether the IMF and all other forecasters (detractors) or the government forecasters are right or wrong, it is now only a question of time before either party is vindicated.

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