Over the week the Minister of Finance Tendai Biti presented the 2013 Mid-term fiscal policy review.
By Kumbirai Makwembere
The policy was in actual fact a review of how the economy performed in the first half of 2013 as no revenue enhancement measures were introduced or reviewed. Well, this did not come as a surprise as parliament itself expired a month ago and there is no guarantee that the incumbent will retain his position post the election period.
The main highlight from the policy statement was another downgrade of the economy’s growth prospects. It appears the years of plenty are running out for the economy as this time last year economic growth was downgraded from the initial 9,4% to 5,6%. By year-end the revised target of 5,6% was not met as the economy is believed to have registered a 4,4% growth.
Economic growth was officially trimmed down to 3,4% from the initial estimate of 5% set by the Ministry of Finance on presenting the 2013 mid-term fiscal policy statement. Growth in all the key sectors of the economy was slashed, with the mining sector now expected to expand by just 5,3% compared to the initial projection of 17,1%. The downward revision is largely a result of the slump in commodity prices on the international front coupled by rising production costs locally.
Agriculture is also now expected to expand by 5,4% down from the earlier estimate of 6,4% owing to the poor 2012/13 rainy season and softening agricultural commodity prices. Maize output is now estimated at 968 000 tons from the initial projection of 1 100 000 tons.
Cotton production is expected to remain flat at 283 000 tons. However cotton earnings for the year are going to be lower than those enjoyed in 2012 owing to soft commodity prices. Downward revisions were also done in Finance & Insurance; an improvement of 3,2% is now anticipated from the earlier 5,4% while real estate together with electricity and water are now expected to grow by 3,2% and 0,3% respectively.
These revisions did not come as a surprise as activity in the broader economy has slowed down significantly since the second quarter of 2012. The more pessimistic market watchers are even pointing to a contraction in economic growth in the current year. What is evident is that there are a lot of structural bottlenecks in the economy and if these are not urgently addressed growth will continue to slacken. Benefits of the growth rates of 5,4%, 9,6%, 10,6% and 4,4% enjoyed from 2009 to 2012 will likely reverse.
The only surprise to be pulled out of the fiscal policy statement pertains to the upward review in government revenues at such a time when the economy is ailing. This was a paradox as one would expect low revenues when key sectors in the economy are technically contracting. More so higher tax revenues imply that the cost of doing business will be more taxing to companies. Such an option is highly destructive when efforts are being made to pull back the economy.
Chief among the reasons for the slow growth is the tight liquidity in the business environment. Five years into dollarisation, companies are still looking for capital for their operations to return to optimal levels. The majority are now highly geared as they are making use of short –term borrowings that are very expensive.
This has seen most of the profits generated from operations going towards servicing debt whilst others are failing to repay their loans. According to the Reserve Bank of Zimbabwe (RBZ), the ratio of non-performing loans increased from 1,8% in December 2009 to 13,8% in March 2013, an indication that companies are struggling to service their debts.
The Ministry of Finance also revised downwards growth of broad money supply to US$4,42 billion compared to the initial forecast of US$4,47billion. Such a depressing scenario does not bode well in availing of credit to the domestic market. Ideally capitalising operations requires use of cheaper long term finance, preferably equity capital, which is not available on the local market.
Another reason behind the tight liquidity in the economy is the slow inflow of Foreign Direct Investments into the economy. Statistics from the RBZ indicate that in 2012, grants to the country totaled US$230 million while direct investments amounted to US$354 million. Portfolio investments and long-term loans on the other hand amounted to US$99 million and US$31 million respectively.
This is a far cry from inflows received by other countries in Southern Africa such as South Africa and Mozambique. These two countries enjoyed inflows of US$4,6 billion and US$5,2 billion in the past year respectively. Foreign capital is shunning the country due to some unfavourable economic policies such as the indigenisation and economic empowerment regulations.
Furthermore, implementation of the policy is not consistent across the board and this induces uncertainty over other companies that are yet to implement the policy. Some potential foreign financiers as a result have shelved their plans until there is some clarity on how the process will be concluded.
The state of the country’s infrastructure is also impacting negatively on economic growth. Supply of water and electricity remains erratic and this results in the cost of doing business going up as firms have to switch to alternative supplies that are expensive. Resources again need to be channeled towards rehabilitating the country’s rail and road network.
When government launched Sterp 2 in 2010 it estimated that a total of US$3,7 billion is required to improve electricity generation and US$615 million on upgrading transport and communication networks. Government does not have the financial muscle to fund these projects. This scenario is further compounded by the fact that most of the collected revenues are going towards recurrent expenditure thereby crowding out funding for capital projects. In the first six months of 2013 only US$143,8 million was channeled towards capital projects against a target of US$235,4 million.
Zimbabwe as a country has also taken long to resolve its political issues. The country has been in an election mode for a long time now and all this has placed a cloud of uncertainty over the economy. Politics have a large bearing on business as it determines the economic policies that a country will pursue.
Resolving our politics as a nation will go a long way in opening up the country to the world and this in turn will usher the inflow of capital that the country greatly requires.