Chronicle of Zimbabwe’s 2012 economic difficulties

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At the end of 2011, the prospects of a vibrant Zimbabwean economy were quite high after the country had achieved an economic growth rate of 9,3% on the back of a sharp rebound soon after hyperinflation.

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A year later, a poor harvest, a much lower than expected revenue outturn, an imploding and a dire liquidity situation have all contributed to the slowdown in economic growth, resulting in the downward revision of the rate to 4% from an initial projection of 9,4%.

Banks
The year started with the liquidity crunch following a Real Time Gross Settlement System gridlock in the banking sector due to the absence of lender of last resort. Some say the banking system has never recovered.

Interfin, Genesis and Royal Bank fell by the wayside and Treasury has been working hard to introduce banking reforms through amendments to the Banking Act.

The Reserve Bank of Zimbabwe announced staggered minimum capital requirements whose first phase has to be fulfilled by December 31, 2012. Deposits have grown to just around US$4 billion. Loans and advances to the private sector are now around US$3,5 billion.

Treasury noted some banks were exceeding liquidity threshold ratios of 30%. Lending institutions, which have nearly doubled their loan to deposit ratio over the last two years, are now paying the price through an increasing fraction of non-performing loans, indicating the underwriting process has not adequately priced credit risk.

Economic growth rate
The economy was forecast to grow 9,4% this year but a compression of exports, vulnerabilities in the banking sector, downside risk in the agriculture sector, the destabilising effects of indigenisation as well as external vulnerability saw growth slowing. Growth will be below 5% in 2012, the actual figure has varied between 4%, 4,3% and 4,5%, weighed down by drought in agriculture, contraction of credit, slowdown in recovery of fiscal revenue, and slow pace of economic reforms needed to support supply in the mining and agriculture sectors.

Diamond revenues
Zimbabwe’s diamond production for 2012 is expected to exceed the Medium Term Plan (MTP) target of 12,1 million carats after the Kimberly Process Certification gave the green light to sell diamonds from Marange.

Mines minister Obert Mpofu said that upward trend is on course to meet the MTP targets.

However the revenues would not meet the US$600 million mark set by Treasury as the major mining companies were under sanctions. The Mines ministry initially set a monthly target of US$54 million. Finance minister Tendai Biti has often complained about uncertainties and transparency issues shrouding diamond revenue.

Despite diamond exports of US$563 million by October, only US$43 million had been remitted to treasury. The government was slow in finalising the Diamond Legal Framework, already identified as one of the priority areas on the agenda of the current session of Parliament.

Such a legal framework will strengthen measures currently being implemented by government on enhancing transparency and accountability over extraction and marketing of diamond resources, minimising risks related to managing deposits/reserves, encouraging investment in exploration and managing the environment. The World Bank notes an investment of US$150 million could increase production to 15,2 million carats per year by 2018.

Financing recovery, lack of credit lines
What emerged as one of the most difficult challenge in 2012 was how to finance economic recovery. Investment levels remain precariously low and recapitalisation efforts have been minimal and did not contribute meaningfully at macro-economic levels.

According to the World Bank, investment has not been broad-based. It was only limited to infrastructure rehabilitation and new mining projects. The major highlight in terms of infrastructure development is the dualisation of the Plumtree-Mutare highway. Tenders have been put out for the project.

Biti turned to the region for credit lines and grants in order to ease the funding challenges faced by government. He still has not received the US$100 million grant from South Africa and is yet to make good the 2009 SA promise of R500 million. Biti intends to push for the resuscitation of the (Harare) Salisbury-Pretoria agreement for a R1,75 billion credit facility. He also turned to Angola for a US$50 million grant and would negotiate with IMF and the World Bank for the reduction of arrears on its US$10 billion debt. Locally there was the Zimbabwe Economic and Trade Revival Fund and Distressed and Marginalised Industries Fund.

Inflation and tight liquidity
Zimbabwe now has the lowest inflation rate in Sadc at 2,99%. This is generally a commendable development but not always a good thing because a constant drop in inflation signals a slow economy and points to lack of demand for goods and services.

Indigenisation
Indigenisation progressed at an accelerated pace in the entire mining sector except for two firms, Metallon Gold and Duration Gold.

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