Are we still on a real growth path?

We were so pleased with the turnaround of the economy that we began to believe that it was due solely to our economic management prowess, with government officials at the forefront of those telling all who cared to listen about how they had done all the right things to achieve economic growth. Some even began to attribute success to the animal that is the Government of National Unity (GNU) and consider whether it could be a viable long-term solution to our political problems.

Economic growth was negative during the ‘lost decade’ mainly due to hyperinflation which rendered our currency progressively useless and eroded all our savings. At the peak of hyperinflation prices were changing so fast that normal trade was not practicable. Hence the adoption of the multi currency system, and in a flash it fixed our number one hindrance — the absence of a widely accepted medium of exchange. Immediately, a lot of capabilities were restored in the economy, the ability to plan, to save and to transact with the outside world.

 

As it coincided with the formation of the GNU, a lot of the positive effects of dollarization have been wrongly attributed to the agreement of a political compromise. Whilst the GNU created an enabling environment, currency stability allowed commerce to take place in an orderly fashion. Having come from 10 years of negative growth, most economic indicators were coming off a low base and, inevitably, initial growth rates were very high.

As good fortune would have it, firm commodity prices on international markets and higher agricultural output helped spur economic growth.  Gold, for example, enjoyed annual price increases of 23,4% in 2009, 27,1% in 2010 and 10,1% in 2011. This was the general case with other commodity prices and with 90% of Zimbabwe’s exports reportedly being commodities – we naturally rode this wave of firm prices that bolsted economic growth.

The growth enjoyed in the economy so far since dollarization has cultivated a sense of sustained optimism even amongst some of those who were sceptical at the outset. The official GDP growth forecast, for example 9,4% for 2012. If achieved, this would be the highest since dollarization and almost certainly be  above the regional average. Metal prices have remained relatively firm so far — gold and platinum prices for example, have appreciated by 5% and 18% so far this year. They however remain below their peak but seem to be on a recovery path.

 

This may be taken as an indicator that the growth we have enjoyed so far will persist. Some red flags, however, suggest that growth this year may slow down drastically, with the economy even possibly stagnating.

First is the uncertainty of metal prices themselves. The gold price is driven by ‘safe haven’ investing where investors put their money in the metal during times of high uncertainty as a store of value. Uncertainty is currently high in developed world economies, particularly in the Eurozone. 

This has given rise to demand for gold as a safe haven, hence the firm price. Should sentiment on the prospects of these economies improve, gold might experience a sharp reversal which would affect our export revenues directly. Already the general sentiment is that the US economy is on a recovery path and hence the dollar is strengthening.

Platinum, on the other hand, would be adversely affected if the economic woes in the West are not resolved soon. Demand for platinum is usually driven by industrial users who in turn depend on economic growth for increased demand for their products. Chinese output of vehicles looks likely to slow. Now add to that the challenges currently being faced by the local mining sector and the expected growth does not seem realistic at all.

Miners have to contend with higher royalties and exploration fees as well as unfavorable indigenization laws. Already, as at monthly gold production of 928kg February, fell below both the 1,100kg official target and the January figure of 1,053kg. The 9,4% GDP growth forecast is partly based on an assumption of 15 000kg annual gold production or an average 1 250kg monthly production. 

Agriculture is the other sector on which our growth prospects are pinned. Both volumes and prices look firm at the tobacco auction floors and that is a good sign. Different cotton industry players have expressed conflicting views on what to expect. Some are bracing for a slightly higher crop yield whilst others say there may be a sharp decline.

Maize, however, is clearly a problem child.  Reports are that about 33% of the crop will be written off due to a long mid-season dry spell. Compounded with the fact that this season’s planted hectarage was already 19% lower than the season before, the harvest could be lower by as much as 38%.  Maize being the staple food of the country, the effects of a much lower harvest could be far reaching. Food inflation, for example, could be pushed higher and this would have a negative effect on economic growth as well as the balance of payments. 

Another factor to consider is that corporate earnings reports released by listed companies so far seem to confirm that our high growth days are numbered. After dollarization corporate earnings generally headed northwards. Yet results coming in now are showing a rather different picture. We have already seen Truworths releasing results with lower turnover, whilst ZPI had lower operating profits. Most of the other results either showed a reduction in the rate of growth or poorer earnings.

The prudent amongst us will be bracing for a serious slowdown in economic growth and in fact this expectation would not be out of place basing on experience from other countries that had currency reforms followed by high growth. After a couple of years the economy loses steam and either slows down significantly or suffers a sharp reversal of fortunes. It is time we bit the bullet and implemented the necessary fundamental changes that will carry us on a more sustainable growth path, instead of just continuing to assume that things will automatically go on improving.

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