THERE appears to be turmoil in the global economy! From the debt crisis in the Eurozone, to economic deceleration in China and US, no doubt the global economy is slowing down. This is because all the world’s economic powerhouses are experiencing a deceleration.
Rightfully so, the IMF revised downwards its 2012 projections for global economic growth from 4,1% to 3,9%. Closer to home, South African Finance minister Pravin Gordhan mentioned recently that the 2,7% growth that the country is projecting for 2012 is highly in doubt. The slowdown in the rest of the world has had a material impact on exports. Metal prices are also hitting a crunch internationally, to the detriment of countries that rely heavily on mining for economic growth.
In all this global mess, Zimbabwe is no exception. While presenting his 2012 mid-term Fiscal Policy review, the Minister of finance revised downwards the projected growth of 9,4% for 2012 to 5,6%. This did not come as a surprise to many as independent economists and international financial bodies like IMF had long been giving figures below 9,4%. In addition, halfway into the year, there have not been any fundamentals supporting 9,4% growth in GDP. In fact, businesses were experiencing a deceleration, an indication that all was not well in the economy. Agriculture is the main drag to economic growth as it is expected to shrink by 5,8%, a major revision of the initially projected 11,6% growth.
The main reasons given for the poor agricultural output are poor rains, less hectarage planted by farmers due to lack of funding, and lower yields due to shortages of inputs such as fertiliser. The maize crop is estimated at 968 000 tonnes, against more than 1,9 million tonnes in domestic demand. The tobacco crop was revised downwards by 13% to 130 million kg. Other sectors that were revised downwards include electricity and water, from 4,9% to 4,5%, and tourism down to 10,4% from 13,7% initially projected.
The mining sector, on the other hand, was revised upwards from 15,9% to 16,7%. Gold output is expected to increase by 15,8%, platinum output is projected to grow by 10,8%, while diamond output is projected to be up by 37,6%. Despite the volume increases, the targeted growth may be too optimistic since prices are falling. Year to date, gold is up a modest 0,70% compared to a 12,6% gain the same period in 2011. The platinum price is down 0,21% as compared to a 3,29% increase the same period in 2011. Furthermore, the targeting for indigenisation of the mining sector this year is expected to disrupt production. Government however, feels the sector is on the right growth trajectory.
What is important to note, however, is that mining is a capital-intensive business, which requires huge funding if any value is to be derived from it. Will the new shareholders emerging after indigenisation have that financial capacity to continue injecting funds for new explorations. If not, then the expected growth levels from mining would not be achieved by the end of 2012.
For a country that is coming out of a recession, a slowdown in growth at such an early stage is a huge cause for concern. From dollarisation, the country has not yet reached a level of full capacity in almost all sectors. The manufacturing sector is operating at an average capacity of 57%. Most companies have struggled to secure funds for recapitalisation and are still struggling, three years after dollarisation. In agriculture, output has not even reached close to its peak. The situation has actually worsened as Zimbabwe, once the bread basket of the region, is now a net importer of food.
Another major highlight of the mid-term Fiscal Policy statement was the revision of the budget downwards from US$4 billion to US$3,64 billion. The revision was mainly due to the under performance of the anticipated revenue from diamond sales. Almost six months ago, eyebrows were raised when the minister entrusted the funding of US$600million of the government’s expenditure to diamond sale proceeds. A lot of issues surround diamond revenues, among them transparency and a number of selling restrictions due to sanctions. There appears to be a general lack of accountability. If such issues are not addressed, then the country might never fully benefit from the sale of its own resources.
Despite lower revenues than targeted, pressure for recurrent expenditure keeps mounting. For the half year, 73% of total expenditure was chewed up by wages. This left very little for capital projects, which are essential for the facilitation of economic growth. Areas such as electricity and water development got very minimal funding and yet these are critical for industrial production. Already, the media say the civil service is striking over low wages. Considering how significant the civil service is to the economy, government will most likely give in to their demands, a move that will further crowd out capital projects.
As things stand, the country has a tough road ahead. The cash budget, though commendable, will only limit the level of expenditure that government can carry out. However, for a debt-ridden country like ours, it is not advisable to consume more even if we can. In a bid to increase revenue, government increased excise duty on diesel and petrol from 16 US cents and 20 US cents to 20 US cents and 25 US cents per litre, respectively. Government expects to rake in US$20million extra revenue from the move. According to Biti, because oil prices are depressed on the international market, the increased duty is not expected to result in an increase in prices locally.
What the country needs are significant inflows of foreign direct investment spread across all sectors. This will unlock value in idle capacity such as mining and manufacturing.