The year 2016 will go into history books as a challenging year as well as a year that witnessed landmark developments across the breadth and width of the Zimbabwean economy and the globe. Two top global developments are the triumph of Donald Trump, against odds and the infamous Brexit. Back home, the bond note will top the list, at least in my view, as the most popular economic development of 2016 in Zimbabwe.
By Kipson Gundani
Whilst there have been many upward and downward developments, one certain thing is that the rate of economic growth continues to slow down, with gross domestic product (GDP) projected to grow by 1,2% in 2016, down from the initial projection of 3,1% at the beginning of the year.
We have seen a decline in both business and consumer confidence over the past few months.
Among other things, we are seeing delays in foreign payments, cash shortages even after the introduction of bond notes, a significant imbalance between the RTGS account and the underlying dollars backing the account and people trying to withdraw every last dollar they have from the banks.
In the midst of all these challenges, there is great opportunity for all stakeholders in the Zimbabwean economy to come together and be part of a historic journey to rejuvenate our economy anchored by the great need to re-industrialise.
A closer look into major variables will reveal that;
There is growing protectionism across the globe which is a major threat to global and regional economic integration.
There is deepening financial/banking crises in China, Italy and the EU and fears of a contagious impact into the developing world.
There is growing recognition across the world that monetary policy and quantitative easing has failed to revive the world economy
Regionally, growth in sub-Saharan Africa this year of 1,4% has slowed to a 20-year low while the projected acceleration to 2,9% in 2017 would be the second-slowest growth rate (after 2016) since 1999. Even if Zimbabwe grows at 5% annually (probably optimistic), it will take another 20 years (or so) to regain 1998 levels of per capita income, suggesting that we are likely not to catch up with the rest of the world anytime soon.
The major lesson learnt in 2016 is that it is much harder to grow economies now that the export-led industrialisation model, expounded in China, is broken. Economies across the globe have begun to look at models that will spur internal economic growth generation by increased market protection. Zimbabwe has also made a statement of intent in this regard through promulgation of Statutory Instrument 64 of 2016.
As confirmed by the African Development Bank, the country remains in debt distress, exacerbated by the lack of a diversified export base and declining terms of trade that make it difficult for the country to adjust to changing world demand for tradable goods. These structural weaknesses have constrained the country’s ability to generate high and sustainable growth that is necessary to mitigate the debt distress. Moreover, the external position is projected to remain under severe pressure in the medium term on account of poor export and import performance on the back of an appreciating US dollar.
The fiscal space remains constrained due to underperformance of domestic revenues, increase in public expenditures, depressed exports, limited foreign direct investment (FDI) and other capital inflows into the country. This has undermined development expenditure and social services provision in both urban and rural areas, exacerbating the incidence of poverty.
In the midst of this quagmire, the overvalued exchange rate is at the heart of most of the country’s economic problems. The US dollar is at least 40% overvalued in Zimbabwe — and becoming more so. The overvalued exchange rate is a key factor driving de-industrialisation and structural regression and also lies at the heart of the immediate banking, liquidity and cash crises. The country is facing a deflationary environment where consumer prices are down 4% since 2013 and this trend is likely to continue into 2017 on the back of the depreciation of the South African rand against the US dollar resulting in a continued decline in prices of imports from South Africa. This trend, along with weak domestic demand, tight liquidity conditions and declines in crude oil and global food prices, resulted in negative inflation in 2016 and there are no signs of a different trend in 2017. A closer look into the people will attest to mounting unemployment and worsening poverty. The trade gap averaging US$3,5 billion a year since 2011 and deepening fiscal crisis are real thorns in the flesh.
De-industrialisation and company closure and a resultant burgeoning informal sector has primarily led to stagnation in fiscal revenues leaving little room for capital expenditure hence significantly curtailing future growth prospects.
There has been increased export concentration leading to near-total reliance on a handful of primary exports – minerals and tobacco
Returning to growth in 2017 is therefore an extremely fragile forecast contingent on containing the cash, currency and budget crises, which looks increasingly unlikely. The window of opportunity after two years of economic decline will be a modest rebound due to better rains and firmer commodity prices. This will however be negated by rising political and policy uncertainty as we move closer to 2018, a deepening fiscal crisis and increasingly tight monetary conditions.
The economy is bogged down in negative territory and has almost plateaued. Unlocking new momentum in the economy would require decisive solutions to the big five challenges for the Zimbabwean economy which are as follows;
The overvalued exchange rate and balance of payments crisis.
External debt and a deteriorating domestic debt burden
The consumption-savings imbalance
The infrastructure deficit
The government budget which is consumptive
I would therefore want to conclude my article, which will be the last one from me in 2016, by wishing every reader a Merry Christmas and a Happy New Year despite all the present and potential adversities.
More importantly, may God take care of everyone, till we meet again.
Kipson Gundani is the Chief Economist of Buy Zimbabwe. The views expressed in this article solely belong to the writer. New perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Email firstname.lastname@example.org Cell +263 772 382 852.