Zimbabwe’s pace of economic recovery has slowed down significantly in the past 20 months.
By Victor Makanda
It all began when the Ministry of Finance (MoF) downgraded the initial 9.4% GDP growth forecast for 2012 to 5.6%. By the end of 2012 GDP growth came in at 4.4%, lower than the revised figure.
In the current year, the MoF further revised downwards the 5% initial growth forecast to 3.3% on presenting the mid-term fiscal policy review.
Reasons advanced for the review concur with a recent report that was published by the World Bank during the week under review.
The report, dubbed “Zimbabwe Economic Briefing – September 2013”, forecasts real GDP to grow by 3% in 2013, the lowest GDP growth rate for the economy since the adoption of the multi-currency system in 2009. The slow growth has been a result of the continued slowdown of key sectors of the economy amidst easing of international commodity prices.
Low investment, tight credit conditions and policy uncertainty soon after the July 31 elections are some of the reasons for the forecast low growth rate.
Concerns over the new government economic policies, including the anticipated extensive implementation of the indigenisation legislation, are bound to extend the wait and see attitude of both domestic and Foreign investors that characterised the run-up to elections.
The World Bank further forecast GDP growth rate for the ailing economy to be 3% in 2014, the same level as 2013. This, they note, it was a baseline projection. Levels of investment are expected to remain below potential in 2014 as economic agents adjust to the uncertain times. Risk will remain tilted towards the downside.
The multilateral institution cited expected volatility from both the global economy and domestic economy as the major reasons for the low growth rate.
On the global side, soft commodity prices are expected to persist, leading to declining levels of export proceeds. On the domestic side, there is risk of exacerbation of vulnerabilities in the banking sector due to tight liquidity, expected fiscal spillages and the potential negative effects of the indigenisation programme and a precarious external position.
In addition, capital outflows due to the expected unwinding of the US Federal Reserve’s expansionary policy are expected to worsen the external position.
In light of the above factors, the World Bank’s growth forecast of 3% appears to be a true reflection of how the economy will perform at the end of the year. This concurs with the revised 3.4% target by the MoF.
All sectors of the economy are ailing. Growth in agriculture is expected to contract by 0.3% as performance of the 2013 season has been below initial projection.
Whilst the tobacco sector has been strong, maize production is expected to decline by 17.5% in 2013 to 798 600 tonnes. There will be need for food imports for an already overstretched treasury.
The manufacturing sector will remain stunted by low investments, declining competitiveness, amidst tight credit conditions.
Ideally, the key sectors in the economy should be the major contributors to GDP growth. This will increase aggregate output as measured by GDP.
However, in our case the services sector is expected to be the major contributor to GDP at 40.6%, according to the World Bank report. Agriculture and mining are expected to contribute 16% and 9,4% respectively.
The situation is unlikely to reverse in the short term due to lack of affordable capital. Attracting capital from across national boundaries remains tough due to the absence of investor-friendly policies. In addition, tight credit conditions are further depressing aggregate domestic demand in the economy. The liquidity condition has worsened as evidenced by the contraction in broad money supply after the deposit run that was witnessed in the banking sector post-election results. Broad money supply declined by 3% in the first half of the year to US$3.84 billion. This reflected the adjustments in the financial sector and the slowdown of the economy in the run-up to elections. Close to US$700 million is estimated to have been withdrawn from the system before the central bank reassured the nation that the multi-currency system would remain in use for the foreseeable future.
Up until key issues in the economy are resolved growth rates which were witnessed between the periods 2009 to 2011 to the north of 5% may remain a thing of the past. Inability to capacitate the manufacturing and mining sectors may also see reduced aggregate output in the economy. As highlighted by the World Bank, stemming fiscal slippages, especially through meaningful contribution to revenues from diamonds, will also reduce the fiscal stress currently bedevilling the economy.
Government expenditure may also need to focus on increasing the level of capital formation within the economy as this will lead to increased employment creation and increased activity translating to more consumption.
The announcement of the new cabinet is now past us. Whilst there were no major surprises, the nation awaits policy direction from the new team which will help allay fears and uncertainty. As it stands right now, the direction of the economy is as clear as mud.