Prospects for 2005: hope springs eternal

By Dzika Danha

AS the page turns on 2004, one of the worst years in the short history of Zimbabwe, we attempt an economic prognosis for 2005.



ans-serif”>Our focus starts on the prospects for economic growth in 2005. Following seven years of declining gross domestic product (GDP), the total cumulative contraction is estimated at 30%. However, growth of 1,8% is forecast for this year by the IMF.


Following the imposition of the now well-documented monetary policy statement in December 2003, the Reserve Bank of Zimbabwe (RBZ) has essentially become the sole arbiter of the economic climate. We attempt therefore to dissect the RBZ assumptions for recovery. The RBZ forecasts GDP growth of 3%-5%.


The Zimbabwean economy remains heavily dependent on agriculture (16,5% of GDP provides a third of foreign currency earnings). Accordingly, there has been a concerted effort to divert resources to the sector. As of September last year, 43,4% of the $2,057 trillion productive sector fund was directed to agriculture. Consequently, the RBZ estimates the sector to grow by 28% in the current year. Optimistic, to say the least, given the vast structural changes experienced in the sector in recent times.


A prime example of this can be seen in the tobacco crop output, once the foremost hard currency earner for the country. In recent years the number of growers has increased from 7 192 in 1999 to 12 700 in 2004. Production however has plummeted from 236,7 million kilogrammes in 2000 to 65 million kilogrammes for the just ended season. This can be explained in part by the land reform programme, which has seen a proliferation of smallholder farmers who have been constrained by a lack of scale, secure property rights, technical know-how and access to capital. Thus the unavailability of inputs, which have been in erratic supply, hampered preparations for the 2004/2005 season in so doing dispelling the notion of a potential “bumper” harvest. Consequently, the government’s tobacco crop target of 160 million kilogrammes will remain unattainable and a crop of even last season’s size will be a feat in itself. Another crop, once a preserve of large-scale commercial farmers, wheat, has seen a precipitous decline in production. In 2004, wheat production was estimated at 110 000 tonnes, almost half of the 2002 crop. While maize production may rise from its current low base it is generally acknowledged that a food deficit will persist.


Crops traditionally grown by communal farmers such as cotton, and sorghum have largely been unaffected by the upheaval. In fact, cotton has overtaken tobacco as the leading agricultural export earner and has seen positive real growth in recent years. The just ended 2003/2004 season saw production at 330 000 tonnes compared with approximately 250 000 tonnes for the 2002/2003 season. Despite predictions of growth for the forthcoming season, earnings will be hampered by poor international cotton lint prices.


Of concern is the continued plight of the manufacturing sector (18% of GDP provides a third of foreign currency earnings), which even according to RBZ estimates is expected to see output decline by 8,5%. The alarming “de-industralisation” of the economy is an issue that needs the urgent attention of the authorities. The sector’s problems include escalating costs, poor availability of foreign exchange for critical raw materials, spare parts and capital equipment, as well as an unviable exchange rate rendering exports uncompetitive. While some will note that the export incentives now on offer can yield an effective rate of U$1:$7 130, it has to be noted that this benefit tends to tilt towards the horticultural sector where pre-payments are more easily obtained.


The mining sector’s potential hinges on the continued development of the platinum industry which, if looked after, could become the country’s leading foreign currency earner. Of concern has been the announcement of a series of measures to regulate the platinum sector’s mostly foreign controlled companies in the governor’s third quarter monetary policy review. Any foreign direct investment is critical to the country’s wellbeing and it is imperative that investor’s interests are looked after. At the last monetary policy review the RBZ governor adjusted the gold support price to $92 000 a kg implying an exchange rate of $6 520,39 on the assumption of a gold price of US$400/oz. Whilst this is a premium on the ruling exchange rate the price has to be consistently reviewed to ensure the viability of the industry.


Despite the significant and commendable decline in the rate of inflation in 2004, the coming year may see the RBZ struggling to maintain its momentum. The budget released by the Minister of Finance late last year offers a remainder of government’s insatiable appetite for spending. In keeping with the RBZ’s inflation forecasts, average inflation is expected to be 100%. Thus the envisaged 214% increase in budgeted expenditure to $27,5 trillion is inflationary and a cause for concern, especially as the bulk ($22,5 trillion) has been devoted to recurrent expenditure. Not helping matters was the recent announcement of a 600% wage increase granted to civil servants. This will only serve to prompt demand-pull inflation which had been kept in check in 2004 largely due to a tight monetary policy discouraging spending, particularly effective in the first quarter of 2004.

The continued indiscriminate hiking of prices by parastatals in the face of declining inflation poses a significant pressure on costs throughout the economy. These increases are largely unchecked and appear to bear no resemblance to any index of prices, international or otherwise.


The auction rate in the last half of 2004 highlighted the dearth of foreign currency in official channels. A re-emergence of parallel market activities can only add to cost-push pressures.


At best, we believe that economic growth is set to remain static. There is a considerable threat to the country’s movement towards macro-economic stability in the form of a renewed inflationary spiral, and scarce foreign currency inflows are likely to be exacerbated by poor domestic production inducing a greater demand for imports. It may need a further monetary shock to stabilise the economy.


However, one has to ask whether an already stressed nation would be capable of sustaining yet another blow of this nature?

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