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Political uncertainty critically rocks economy

ZIMBABWE’S political future remains uncertain, negatively affecting an already fragile economy, the latest African Economic Outlook (AEO) report says.

Taurai Mangudhla

According to the annual report-jointly prepared and published by the African Development Bank, the Organisation for Economic Co-operation and Development Centre and United Nations Development Programme covering all economies across Africa, the risk of policy reversals remains in Zimbabwe though minimal.

“For instance, although the government has stated that the multi-currency regime will remain in place until 2018, there are fears that the deteriorating liquidity situation may force the government to revert to the Zimbabwe dollar,” reads part of the report.

Fears over a possible quick return to local currency came after reports that top officials in President Robert Mugabe’s Zanu PF were debating the issue and after Former Finance minister Tendai Biti indicated Mugabe’s government was running out of options to finance its ballooning wage bill.

The general elections held on July 31 2013 were associated with increased uncertainty in the economy, resulting in huge capital outflow and a decline in total bank deposits from US$4,5 billion as of July 19 2013 to US$ 4,3 billion as of August 9 2013.

The AEO said the financial sector continues to experience structural vulnerabilities arising from the lack of confidence by depositors, liquidity constraints, rising non-performing and insider loans, high lending rates and low deposit rates, the absence of an active inter-bank market and the lack of an effective lender-of-last-resort.

The report says a directive by the government to cancel local authorities’ and the Zimbabwe Electricity Supply Authority’s debts left the banking sector heavily exposed.

“In this regard, it will be important for the government to revive the Tripartite Negotiating Forum (TNF) as a way of promoting dialogue and smart partnerships between key stakeholders in decision making and also as a basis for reaching consensus and promoting buy-in on key policies,” says the report.

The AEO also recommends that the Zimbabwean government should come up with inclusive institutions and policies that bring together and unite the nation.

The TNF is a social dialogue platform that brings together Government, business and labour to negotiate over key socio-economic matters.

It has been in existence since 1998 as a voluntary and unlegislated chamber in which socio-economic matters are discussed and negotiated over by the social partners.

The TNF was due to meet for the first time in two years yesterday and discuss a raft of issues including the contentious labour law reforms.

The indigenisation policy, which compels all foreign owned companies to relinquish majority stakes to local Zimbabweans, has also been a source of confusion and a deterrent to foreign capital inflows.

AEO says it has been observed that the indigenisation process is not focused on creating new wealth, but rather on distributing the little remaining foreign-owned wealth into a few hands.

The report notes that the conflict between the objectives of attracting FDI and indigenising the economy played out during the Government of National Unity in 2009, leading to uncertainty and policy inconsistencies.

“Following the elections, the government has toned down on its hard-line stance on indigenisation,” the report says.

Although the right to property is guaranteed and protected in the new constitution, it can be revoked when public interest is at stake, with defenses such as public safety, public order, public morality, public health or town planning listed as factors that may override the right to property.

The AEO report further notes that Zimbabwe’s economy remains in a fragile state, with an unsustainably high external debt and massive deindustrialisation and informalisation of the economy.

It said the average GDP growth rate of 7,5% during the economic rebound of 2009-2012 was moderating due to liquidity challenges such as the lack of and high cost of capital and revenue underperformance, outdated technologies, structural bottlenecks that include power shortages and infrastructure deficits, corruption and a volatile and fragile global financial environment.

The AEO says constrained fiscal space has forced the government of Zimbabwe to adopt a contractionary fiscal policy stance, while the use of the multi-currency regime limits the use of monetary policy instruments.

It also points out performance of domestic revenue inflows and the rise in recurrent expenditures would continue to constrain fiscal space, while the continued use of the multi-currency regime will result in monetary policy largely remaining unchanged.

“Zimbabwe is experiencing a structural regression, with the acceleration of deindustrialization and informalisation of the economy,” the report says.

AEO says the country’s external sector position remains precarious, with both the trade and current account balances being projected to remain largely negative in the short to medium term due to rising imports against a backdrop of low export receipts.
“Import growth continues to be mainly dominated by fuel, chemicals, machinery and manufactured goods,” the report says.

“As the manufacturing sector continues to struggle, domestic demand for consumption goods are being met by increased imports (and) Zimbabwe’s current account will remain under pressure unless there is a full recovery of the local manufacturing sector, helping the economy wean off its dependence on imports.”

Zimbabwe is among the worst investment destinations in terms of doing business with research showing starting a business in Zimbabwe remains a cumbersome, costly and time-consuming exercise.

In the World Bank report, Doing Business 2014, Zimbabwe was ranked 170 out of 189 economies in terms of overall ease of doing business. In 2013, the country was ranked 172 out of 185 countries.

The World Bank report noted that starting a business required nine procedures and took 90 days as of 2013. Zimbabwe is ranked 131 out of 148 countries in the World Economic Forum’s Global Competitiveness Report 2013/14 rankings, slightly up from 132 out of 144 countries in 2012/13.

In the 2013 Ibrahim Index of African Governance, Zimbabwe is ranked 47 out of 52 countries, putting it in the same category as politically unstable countries like Somalia, Equatorial Guinea and Chad.

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