By Best Doroh
THE 2008 national budget, whose thrust is “geared towards stabilising the economy, increasing productivity and lowering inflation”, was crafted under very
difficult conditions, emanating from rising inflation, shortages of foreign currency and energy and continued economic decline.
Despite acknowledging the gravity of these challenges, the Minister of Finance surprisingly predicted that the economy will recover from an estimated decline of 5,7% in 2007 to register a positive growth rate of 4% in 2008.
However, the International Monetary Fund, in its October 2007 World Economic Outlook, predicted that the Zimbabwean economy will decline by 3,6% in real terms in 2008. Economic growth in sub-Saharan Africa (excluding Zimbabwe) is expected to increase from 6,1% in 2007 to 6,8% in 2008 underpinned by economic stability, solid capital injections and strong international demand for primary resources from Africa, particularly commodities.
Global economic growth, on the other hand, is expected to decline from 5,2% in 2007 to 4,8% in 2008 as a result of ongoing financial and credit crisis in the US and high oil prices.
The Finance minister’s economic growth projections for 2008 are premised on an anticipated, but unspecified, growth in the SMEs sector as well as a recovery in the agricultural sector, driven by the government’s ongoing Farm Mechanisation Programme and continued funding support under Aspef.
In fact, the minister seems to have based the 2008 projections on a continued recovery in tobacco, groundnuts, soyabeans, sunflower and horticulture sub-sectors, whose output is estimated to increase by 39%, 51%, 46%, 24% and 3%, respectively, in 2007.
However, given that activity in the other real sectors, particularly mining, manufacturing and services is anticipated to remain depressed in the short to medium term, and considering that the agricultural sector contributes only 15%-20% of national output, the minister’s overall economic growth projections are rather optimistic.
In fact, the mining sector continues to be adversely affected by shortages of skills, undercapitalisation and smuggling of minerals, with gold, nickel, asbestos and chrome output reported by the Chamber of Mines to have remained depressed during the first 9 months of 2007. The minister appears to believe that the RBZ-initiated small-scale miners recapitalisation programme and the budget allocation of $6,3 trillion (US$1,9 million using the Old Mutual Implied Exchange rate) to the Mining Industry Loan Fund will resuscitate capacity utilisation in the capital intensive sector.
The US$1.9 million seems too little to effectively cater for the country’s many small scale miners, considering that large entities like Murowa have earmarked funds amounting to US$250 million for expansion of only one mine.
In addition, in spite of the negative inflationary impact of previous production sector support facilities such as PSF and Aspef, the minister hopes that the Basic Commodities Supply Side Intervention (Bacossi) fund will successfully rejuvenate activity in the manufacturing sector and result in improved production levels and economic growth for the sector.
However, although data on the manufacturing sector continues to lag behind, with latest RBZ figures indicating that the sector declined by 7% in 2005, the Confederation of Zimbabwe Industries noted earlier in the year that the sector was operating at 30% capacity. Thus, given the adverse effects of the foregoing foreign currency shortages and price controls, the manufacturing sector is expected to continue underperforming in the short to medium term. In addition, distortions in the manufacturing sector are expected to adversely affect activity in sectors such as distribution, hotel and leisure, among others.
Despite the 26% increase in tourist arrivals from 1,5 million during the first nine months of 2006 to two million during the corresponding period of 2007, the number of tourists from major foreign currency generating markets like Europe and America remains depressed. In fact, mainland Africa accounted for 92% of total arrivals in 2007, up from 91% in 2006. The continued decline in tourist arrivals from European and American markets is, however, no longer entirely due to negative international publicity, but it is also caused by the overvalued exchange rate which makes Zimbabwe a relatively expensive tourist destination.
In addition, the exchange rate volatility and ongoing high cost of fuel have resulted in a withdrawal of direct flights by Zambian Airways and British Airways, among others, which adversely affects the performance of the country’s tourism industry. In view of these developments, therefore, there is a need to reduce operational constraints and pricing distortions through restoration of exchange rate and price stability.
For the construction and allied sectors, the minister hopes that budgetary allocations for housing development will resuscitate activity and contribute to positive economic growth. However, the problems that are being faced by the construction sector are not necessarily due to lack of funding, but generally emanate from unavailability of key inputs and raw materials both on the market, as well as at affordable prices and the lack of serviced stands from the local authorities.
The minister acknowledges that hyperinflation, at 7 983% in September 2007, remains “a major constraint to sustainable economic growth and export competitiveness”, adding that shortages of commodities on the formal market has made it impossible to compute the October 2007 figures. The minister believes that the restoration of national confidence, through unspecified measures, should bring down inflation to 1 978% in 2008. However, such an inflation rate requires month-on-month changes in prices of much less than 40%.
In the absence of tangible measures to reduce monthly inflation rates from above 50%, the minister’s target remains largely optimistic.
Meanwhile, export earnings increased by 6,4% from US$1.30 billion during the first 10 months of 2006 to US$1,39 billion during the corresponding period of 2007, while imports are estimated to have risen by 6,1% from US$1,97 billion to US$2,09 billion during the same period. The increase in export earnings was driven by mineral exports, while the high import bill emanated from high fuel and food imports.
The Budget projects that the capital account will register inflows amounting to US$193,6 million in 2007, about 36% of which will be in the form of humanitarian aid. By forecasting investment inflows from friendly countries of only US$73,2 million in 2007, the minister indirectly acknowledges that Foreign Direct Investment and Balance of Payments support remains depressed. However, the minister was completely silent on measures to be taken to improve these inflows, which are key in turning around the economy.
The minister also revealed that external payment arrears, which totalled US$2,2 billion at the end of October 2006, increased to US$2.9 billion as at end of October 2007, pushing the total external debt stock to US$4.1 billion. These external arrears figures largely reflect the country’s curtailed foreign currency generation capacity.
The minister projects a nominal GDP figure of $16 quadrillion for 2008, which would entail total revenue of $6,08 quadrillion or 38% of GDP, against total expenditure of $7,84 quadrillion (49% of GDP). This implies a budget deficit of $1,76 quadrillion, or 11% of GDP in 2008, down from an estimated 17% of GDP for 2007.
Given that external credit is unlikely to materialise in the short term, the bulk of the budget deficit is expected to be financed from domestic financial savings.
Thus, in view of the government’s intention to restructure its debt from short to long term, this would imply that the government will continue to issue longdated treasury bills and other long-dated paper as its main financing instruments.
However, for this strategy to work effectively, the government would need to make the long-dated paper attractive and acceptable to investors by pricing it competitively to cushion investors from loss in value arising from the hyperinflationary environment.
Although the government commendably seeks to increase the proportion of capital expenditure from 26% in 2007 to 32% in 2008, the actual outturn in previous budgets has not been satisfactory as a result of rising cost of capital goods as well as shortages of critical inputs, occasioned by low foreign currency inflows. However, an increase in capital expenditure, especially with the recapitalisation of the Infrastructure Development Bank, is certainly desirable as it facilitates positive supply side response through enhanced infrastructure development and rehabilitation of roads, bridges, buildings, plant and equipment.
However, experience shows no will power on the part of the government to implement these projects between successive budgets.
* Doroh is ZB Financial Holdings chief economist.