TO fully appreciate the performance of the economy in 2014, one has to put it in the broader context of the seismic structural changes that have taken place in the economy over the years, even decades.
Since the mid-1990s, the Zimbabwean economy has undergone wrenching structural changes that made the economy of the period up to the 1990s barely recognisable today.
A key structural change is the emergence of the mining sector as the engine of growth and recovery, with its huge implications for employment creation and poverty eradication given its capital intensity and enclave nature whereby it is more integrated into the external economy than the internal one.
Export recovery since the advent of multi-currencies in 2009 is driven by primary commodities such that of the export receipts of US$14,1 billion generated during the period 2009 to September 2013, US$9,2 billion or 65,2% emanated from the mining sector, with agriculture, horticulture and hunting weighing in with US$4 billion or 28,3% and the manufacturing sector contributing the balance of US$0,9 billion (6,4%).
In this regard, primary commodities, mining and agriculture, accounted for 93,5% of export earnings during the period 2009-13.
The challenge with such an economic structure is that Zimbabwe has become a typical Sub-Saharan African economy whose fortunes are dependent on the vagaries of external primary commodity markets and weather conditions.
This structural weakness influenced the performance of the economy in 2014, and in the short to medium term. As highlighted in the International Monetary Fund (IMF)’s ‘Regional Economic Outlook: Sub-Saharan Africa Staying the Course’ of October 2014, oil prices are projected to decline marginally between 2014 and 2016 from their 2013 levels.
Likewise, non-fuel commodities are expected to decline on average by 6% in the same period compared to 2013, while prices of copper, gold and platinum are forecast to decrease by between 5 and10%, with those for coal and iron ore projected to fall substantially by 15% and close to 35%, respectively, over that period, posing risks with regard to export earnings.
Against the background of weak domestic demand, tight liquidity conditions and the appreciation of the US dollar against the South African rand, inflation in Zimbabwe is projected to remain subdued at levels below 1% in 2014 and to remain low in 2015, well within the Sadc macro-economic convergence target of between 3% and 7%.
This is consistent with the findings of the 2014 Confederation of Zimbabwe Industries (CZI) State of the Manufacturing Sector Survey, where 81% of respondents believed that the country was likely to continue in a disinflation mode in 2015 reflecting lack of capital inflows; the liquidity crunch; low domestic demand and no change in economic policy.
Thus, low inflation reflects a lack of demand in the economy. In addition, as pointed out in the 2015 budget statement, this near negative inflationary development also partly reflects self-correction of the price structure where domestic prices of goods and services were generally higher than those in South Africa and other neigbouring countries. Following the adoption of multi-currencies in 2009, wage and price setting continued to be influenced by the ‘…mindset of the hyper-inflationary environment.’ Hence, as CZI (2014) rightly observed, lack of competitiveness is associated with the pricing mechanism. In the CZI Manufacturing Sector Survey (2014), 71% of the respondents stated that they use cost plus mark- up pricing strategy, while 18% base their prices on import prices, with only 6% using quality to decide prices.
Under globalisation, efficiency pricing is the norm, with firms always looking out to lower their costs of production through innovation in order to remain competitive.
Critically, the economic rebound experienced since the advent of multi-currencies and the end of hyperinflation in 2009 has been exhausted. Having averaged 9,8% during the period 2009-2012, economic growth declined to an estimated 4,5% in 2013 due to uncertainties associated with an election-year, weakening demand for key exports and tighter liquidity conditions, lack of competitiveness, and adverse weather.
Economic growth in 2014 is estimated at 3,1%, reflecting the liquidity shortages in the economy, low domestic savings, investment inflows and power supply shortages, among other factors.
Thus, unlike the trends exhibited by all the other regions in the world, growth in 2014 decelerated from an estimated 4,5% in 2013, and is projected to remain almost at a standstill at 3,2% in 2015, against ZimAsset targets of 6,1% in 2014 and 6,4% in 2015. The global economy is projected to grow from 3% in 2013 to 3, 3% in 2014 and 3,8% in 2015, while Sub-Saharan Africa’s growth is projected to accelerate from 4, 9% to 5, 4% and 5, 8%, and Sadc from 3,3% to 4% and 4,4% during the respective periods.
Thus, as highlighted in recent African Development Bank Economic Outlook reports, weakening commodity prices are compensated by macroeconomic reforms elsewhere in Sub-Saharan Africa, and hence the improved growth projections, even against weakening commodity prices.
The projected rate of growth of GDP in 2015 for Zimbabwe is predicated on a stable macro-economic environment, planned investments in agriculture, mining, communication and other infrastructural projects, including in power generation and housing, ease and cost of doing business reforms, among others, which given the sluggish pace of reforms and lethargic implementation of agreed positions, makes the projections rather optimistic.
Economic recession in 2015
This is reinforced by the findings of the 2014 CZI State of the Manufacturing Sector Survey, where 47% of the respondents indicated that the economy will be in recession in 2015, 30% expected slight growth, and 19% expected moderate growth, while only 4% expected strong growth of the economy, suggesting a lower growth rate in 2015 compared to 2014. Be that as it may, as pointed out in the 2015 Budget Statement, “…such levels of growth remain inadequate for us to begin making a dent at the prevailing levels of capacity utilisation in the economy and high unemployment;” (paragraph 76, page 22). As the 2015 and previous budget statements emphasise, to attain ZimAsset targets of in excess of 6% growth rates would require addressing all key constraints to rapid economic growth, including improving ease and cost of doing business, guaranteeing uninterrupted supply of adequate power, beneficiation of minerals, among other reforms, including public enterprise reforms. Hence, ‘business as usual’ is a recipe for further deterioration and anaemic growth.
While previous budgets have raised the urgency of reviewing various processes, procedures and other requirements for establishing businesses in Zimbabwe in order to reduce the cost of doing business, progress is very slow.
As highlighted in the 2015 budget statement, the main areas in need of reforms include: (i) licencing processes; (ii) multiplicity of levies; (iii) multiplicity of authorities; and (iv) delays in utility connections. Whereas the establishment of the One Stop Shop (OSS) Investment Centre at Zimbabwe Investment Authority (ZIA) in December 2010 was meant to minimise the bureaucratic requirements, the budget statement observes that it has not been fully operationalised due to the following challenges: (i) non-integration of the OSS to the ZIA structure, hence, it operates like an island; (ii) delays in formalising secondment of officials to ZIA; (iii) lack of clarity in terms of reference, mandate, and conditions of service for seconded staff; (iv) most secondment to the OSS was done informally without involvement of the Civil Service Commission.
Lack of political will
Hence, achieving sustainable high and inclusive growth requires determined implementation of comprehensive doing business reforms.
Hitherto, Zimbabwe has lacked the political will and courage to implement such reforms, even though they have been on the agenda for decades, prompting the 2012/13 Global Competitiveness Report of the World Economic Forum to observe that: “Surprises, however, arise not from the rankings, but rather from the policy disconnect; specifically the unwillingness of policymakers to tackle the challenges identified, opting rather to focus on soft factors which do not necessarily add value in lifting competitiveness rankings.”
According to the 2014 Doing Business Report, nine African countries are among the top 20 most improved in terms of business regulations since 2009 (Benin, Burundi, Cote d’Ivoire, Ghana, Guinea-Bissau, Liberia, Rwanda, Sierra Leone, and Togo), from which Zimbabwe could learn.
The pattern of growth is such that agriculture is projected to grow by 3,4%, mining by 3,1%, and manufacturing by 1,7% in 2015.
An indictment of past growth is that it has not been job-rich, with 4,610 companies closing down between 2011 and 2014, with 55,443 employees losing their jobs as reported in the 2015 Budget Statement. However, serious challenges continue to undermine the manufacturing sector, with capacity utilisation declining from 39,6% in 2013 to 36,3% in 2014. According to CZI, “industries in Zimbabwe are under serious threat. Deindustrialisation has reached catastrophic levels, with dire consequences to the state of the economy,” (CZI, 2014 6).
Capacity utilisation is undermined by (i) low local demand (28,8%); (ii) working capital constraints (26,5%); (iii) competition from imports (14, 2%); (iv) antiquated machinery and machine breakdowns (7,3%); (v) drawbacks from current economic environment (7,0%); (vi) high cost of doing business (6,2%); (vii) shortage of raw materials (6,2%); and viii) power and water shortages (3,8%) (CZI, 2014:14).
In this regard, it is most unfortunate therefore that the share of the manufacturing sector in GDP peaked at 26,9 % in 1992 before collapsing to 7,2% by 2002 and 10,8 % by 2003, 15,5 % by 2009, 15,9 % (2011) and 15, 6 % by 2012.
It is most tragic that rather than the anticipated movement of resources, including labour, from low productivity sectors (communal agriculture and informal) into high productivity ones (manufacturing and services), Zimbabwe is experiencing a persistent de-industrialisation and heightened informalisation of the economy, implying a structural regression. Yet growth in labour productivity arises either from changes in labour productivity within sectors – for instance through the implementation of new machines and innovative technologies that allow more output with the same amount of labour input – or from the reallocation of jobs across sectors (“structural change”) when workers move from low- to high-productivity sectors (e.g. from agriculture to industry or services). More importantly, structural change is not only central, but is necessary in order to increase living standards by allowing more people to benefit from higher productivity levels in the more advanced parts of the economy. Hence structural change is the most effective driver of growth to bring down rates of vulnerable employment in developing economies. As highlighted in the 2013 Global Employment Trends Report of the ILO, it is the across-sector labour productivity aspect of growth that results in a faster reduction in vulnerable employment in developing countries.
Yet Zimbabwe is experiencing a structural regression characterised by increasing dependence on natural resources, de-industrialisation and informalisation. According to the 2011 Labour Force Survey, 84% of employment in the country is informalised, up from the 80% recorded in the 2004 Labour Force Survey.
While the Medium Term Plan (MTP) (2011-15) notes that the Micro, Small and Medium-Enterprises (MSME) sector accounts for an estimated 60% of GDP and approximately 50% of employment, the FinScope MSME Survey of 2012 found that of the 3, 4 million MSME businesses in the sector with an estimated turnover of at least US$7,4 billion in 2012, 63, 5% of nominal GDP, as much as 85% of them were not registered / licensed. Hence, a significant proportion of the economy is operating underground, does not contribute to government revenues and other levies, and is outside the domain of formal arrangements, including credit.
Subdued export performance
The external sector position remains constrained and under considerable pressure from subdued export performance associated with weakening commodity prices, the depreciating South African Rand (implying appreciating real exchange rate making exports more expensive and imports cheaper), and hence a high level of import-dependence, contributing to continued de-industrialisation.
Consequently, export earnings realised over the period January to October of 2014 amounted to US$2, 4 billion, while imports for the same period stood at US$5, 3 billion. Due to the large trade deficits, low transfers and incomes, the current account balance is projected to worsen from a deficit of US$3,351 billion in 2014 to a deficit of US$3, 431 billion in 2015.
Resultantly, international reserves remain low at less than one month import cover, against Sadc recommendations of 3 months.
At about 23,9% of GDP, the current account deficit is way above the Sadc macro-economic convergence target of below 9% of GDP. This is not helped by the depressed state of foreign direct and portfolio investment inflows and lack of balance of payment support.
In view of short and long term capital inflows, foreign portfolio investment and grants; the capital account is projected to remain in surplus in 2015 at US$3, 065 billion, an 11% increase from US$2, 761 billion in 2014.
However, the capital account surplus is driven by debt creating short term and long term capital flows and not by foreign direct investment flows, which remain depressed.
At an estimated US$8,396 billion as at December 2014, 60% of GDP, the country’s public and publicly guaranteed debt burden is unsustainable. This debt is made up of an external debt of US$7,225 billion and a domestic debt of US$1,171 billion. Of the US$7,225 billion external debt, 81% are accumulated arrears. Hence, with such large external payment arrears, the country is in debt distress, against a context of limited fiscal space and rising domestic debt.
As a consequence, the country’s credit rating has been significantly downgraded, undermining access to international capital markets and in particular concessional financing. While the 2014 National Budget advocated for the accelerated re-engagement of the international community as part of the strategy of resolving the external debt overhang, arrears clearance and debt resolution will take time to resolve even under best scenarios.
The Mid-Term 2014 Fiscal Policy Statement acknowledges that inflows of capital are sensitive to specific country risks, especially relating to political stability, and credibility of domestic macroeconomic policies. It laments the fragmented regulatory framework covering foreign investment characterised by a number of pieces of legislation governing different aspects of foreign investment.
These include (i) Exchange Control Act, [Chapter 22:05]; (ii) Zimbabwe Investment Authority Act, [Chapter 14:30]; (iii) Indigenisation and Economic Empowerment Act [Chapter 14:33]; (iv) Securities and Exchange Act [Chapter 24:25]; (v) Local Authority by- Laws; (vi) Immigration Act; and (vii) Environment Management Act.
Worse still, these also may contradict each other. For instance, as stated in the Mid-Term Fiscal Policy Review Statement, whilst the Exchange Control and the ZSE set foreign investor participation in local entities at between 40 and 100%, ZIA and Indigenisation Acts provide a threshold of 49%.
Such fragmented pieces of legislation create administrative challenges, and send conflicting information to potential investors, and hence the need to synchronise them and establish an investor-friendly environment. As a result of these contradictions, during the first ten months of 2014, FDI inflows to Zimbabwe amounted to US$146,6 million compared to US$311,3 million for the same period in 2013.
This is in line with the findings of the CZI 2014 State of the Manufacturing Industry Survey, where, 87% of the respondents indicated that the environment deters foreign direct investment, with the percentage of firms who made capital investment using foreign direct investment remaining unchanged at only 5%. FDI is projected to increase by 69% from US$349 million in 2014 to US$591 million in 2015, riding on the implementation of ease and cost of doing business reforms and the re-engagement process.
Be that as it may, these levels are still way below potential, especially when compared to inflows to neighbouring countries like Mozambique which is attracting FDIs at over US$8 billion. While the 2014 National Budget tried to clarify on the indigenisation and economic empowerment regulations, highlighting sector specific approaches under resource based investments and other investments, this did not resolve the challenges to potential investors, continuing to deter FDIs.
The 2015 National Budget proposed further clarifications and simplifications.
While confirming that the 51/49% ownership structure enshrined in the Indigenisation and Economic Empowerment Act applies to all sectors of the economy, the clarification in the 2015 Budget Statement is with respect to the time-lines for achieving this, which is left to negotiation between the would-be investor and the respective/ relevant line Ministry responsible for the particular sector/sub-sector. This therefore still leaves the matter open to discretionary power and hence does not put the issue to rest.
Lack of synchronisation
A key aspect of the performance of the economy is the lack of synchronisation of the development plan (ZimAsset) and the national budget. Budget implementation is characterised by pressures on the expenditure side against low revenue collections, with the set revenue targets only achieved in May and June during the 2014 fiscal year.
For the whole of 2014, revenues are projected at US$3,93 billion as opposed to the original projections of US$4,120 billion, with US$3,7 billion (94,2%) in tax revenue and US$227 million (5, 8%) in non-tax revenue.
At 28% of GDP, the revenues-to-GDP ratio is already high by world standards, yet it is the reprioritization of expenditures that lags behind.
While the 2014 national budget projected expenditures of US$4,120 billion, cumulative government expenditures to 31 October 2014, inclusive of loan repayments, stood at US$3,423 billion, against targeted expenditures of US$3,270 billion, giving a variance of US$153,1 million. It is estimated that expenditures to December 2014 will amount to US$3,92 billion, implying a gap of about US$200 million relative to the original 2014 Budget.
Recurrent expenditures to October 2014 were US$2,87 billion (92% of total), while capital expenditure was US$261,7 million (8% of total expenditures). During the first ten month period to October 2014, employment costs at US$2,51 billion, accounted for 80% of total expenditures (excluding loan repayments), against a target of US$2,35 billion, an expenditure overrun of US$154 million catered for by the supplementary budget.
The target in 2014 was to reduce the wage bill from 75% of the total budget in 2013, to between 55 to 65% in 2014 and 30% by 2018. This expenditure-mix remains unsustainable and hardly a building plank for implementing the four clusters of ZimAsset, namely; (i) food security and nutrition; (ii) social services and poverty eradication; (iii) infrastructure and utilities; and (iv) value addition and beneficiation.
There was significant under-provision on health, with development partners weighing in with US$186, 1 million. While the education sector had been allocated a non-wage recurrent budget of US$48, 6 million in 2014 for the procurement of teaching and learning materials, support students at tertiary institutions, and schools’ supervision, by October 2014, only US$10,4 million had been disbursed, against a target of US$40,5 million; a variance of US$30,1 million.
Out of the US$25,5 million for social protection programmes, including the Basic Education Assistance Module, Harmonised Cash Transfers, and Support to People Living with Disabilities, among others, only US$5,6 million had been disbursed by end of October 2014, against a target of US$18,7 million.
Payment of US$89, 1 million towards clearing outstanding obligations to service providers reduced the arrears to US$78,7 million from a high of US$205 million in October 2012. Cumulative capital disbursements to October 2014 at 67%, amounted to US$268,7 million, against planned expenditures of US$401,3 million for the same period.
Instructively therefore, going forward, the business as usual scenario that has dominated economic management will not address the challenges the economy is facing and effectively implement the four clusters of ZimAsset.
Inclusive, pro-poor growth
What is required is the consistent and determined implementation of reforms to leverage decent work-rich, inclusive and pro-poor growth.
This can only be done by adopting an inclusive stakeholder approach under a Social Contract where stakeholders subordinate sectarian interests to the national interest.
Furthermore, the importance of social cohesion and unity of purpose in Government and beyond cannot be overemphasised.
Godfrey Kanyenze is a prominent economist and is the director of the Labour and Economic Development Research Institute of Zimbabwe (Ledriz) a research think-tank of the Zimbabwe Congress of Trade Unions.