THE Zimbabwean economy was under stress throughout 2016 on account of a tight liquidity crunch coupled with a myriad of macro-economic challenges, which culminated in low domestic production across various sectors of the economy, including agriculture, mining, manufacturing, tourism, construction and the service industry.
As a result, government was forced to revise downwards its economic growth projections from initial targets of 2,7% to a mere 0,6%.
Bad policies, lack of consistency, as well as corruption and poor corporate governance saw Zimbabwe being ranked among the worst countries in the world in terms of the ease of doing business.
The only positive news in the Zimbabwean economy, which is dogged by corruption and massive revenue leakages that are crippling state institutions, was government’s settling of a US$107,9 million International Monetary Fund debt.
The government used funds availed through the special drawing rights (SDR) facility to meet its obligation.
However, economists say settling the IMF debt alone or even all its internal and external arrears, which topped US$11 billion will not turn around the economy in the absence of structural reforms.
Liquidity and the bond notes
Zimbabwe has struggled to attract fresh capital or lines of credit since dollarisation in 2009. The country dollarised after a decade of stagnation and hyperinflation that effectively wiped the economy dry.
Due to a hostile policy environment and bad corporate governance, investors have remained wary of losing their capital especially after the fast-track land reform of 2000 and the raiding of corporate accounts by the Reserve Bank of Zimbabwe during the hyper-inflation era.
Leakages in the economy and failure to attract fresh capital resulted in serious liquidity and cash problems.
To solve cash shortages that have seen daily withdrawal limits at banks fall sharply from a high of US$3 000 last year to about US$20, Reserve Bank of Zimbabwe governor John Mangudya in May announced plans to introduce US$200 million worth of a surrogate currency (bond notes), which are backed by an Afreximbank facility. The notes were introduced last month.
While the bond notes were meant to improve liquidity after close to US$2 billion was externalised as of January 2016, depositors wiped their accounts clean. Long queues at banks are still the order of the day even after the bond notes were introduced.
President Robert Mugabe in April sought to clarify the Indigenisation Act, which was meant to end an escalating feud between Finance minister Patrick Chinamasa and Indigenisation minister Patrick Zhuwao over the compliance procedures for banks. Mugabe said banks remained under Chinamasa, while companies in reserved sectors could remain operational. Mugabe effectively caused more confusion by attempting to clarify a law that is clearly dreaded and has resulted in capital flight in the market with investors fearing to lose their investments given that the law insists on majority local ownership of all businesses.
As a result of the policy discord in government as well as its decision to maintain controversial laws, such as the Indigenisation Act, investors stay away. Capital inflows are expected to reach US$692,4 million in 2016, against US$1,2 billion recorded in 2015.
Despite having received two Nigerian tycoons, namely Aliko Dangote who is the richest man in Africa and Tony Elumelu, as well as hosting Chinese president Xi Jinping, Zimbabwe has nothing to show for it except promissory statements that are yet to reach fruition largely due to Harare’s toxic investment climate.
Although Zimbabwe’s manufacturing sector’s capacity utilisation increased by 18% to 47, 4% this year, experts say this figure only looks good on paper as it was largely due to distortions stemming from the closure of hundreds of companies that are no longer considered in a nationwide survey.
As of August, at least 236 companies had shut down since the beginning of the year, according to market data. At least 81 companies folded in the first quarter with an additional 148 companies ceasing operations in the second quarter of the year largely due to a poor investment climate, a debilitating liquidity crunch as evidenced by the acute cash shortage, low capacity utilisation and a lack of cheap financing. In the manufacturing sector, over-dependence on imports against the background of a strong US dollar and a weakening South African rand, had undermined companies’ competitiveness over both the domestic as well as export markets.
Current account deficit
Given the growing number of industries being shut down at a time the few producers are struggling to retool, Zimbabwe is depending mostly on imports across all product lines. This has resulted in a huge current account deficit that is basically bleeding the economy.
According to government statistics, a downturn in overall export performance is estimated for 2016, with exports falling by 6,9% to US$3,365 billion, from US$3,614 billion last year.
“The economy’s relatively high import bill remains unsustainable at US$5,35 billion in 2016, against exports of US$3,365 billion,” the Ministry of Finance said.
Deflationary conditions persisted throughout 2016, with inflation registering -2% for the year to October 2016, according to ZimStats. The decline in domestic prices during 2016 was driven by a combination of continued weakening in domestic demand, depreciation of the South African rand against the US dollar, and subdued international oil prices.
The Zimbabwean economy recorded the world’s deepest deflation rate in the month of September, which analysts saw as an escalating threat to the country’s long-term growth potential as it eats into the productive sector.
Deflation is also a result of reduced disposable incomes as citizens fall victim to job cuts and company closures while others have been forced to take salary cuts, thereby reducing consumption.
Final consumption, according to government, succumbed to low disposable incomes with private non-capital spending declining by 4%. As a result, overall consumption is expected to decline by 2% in 2016 against a drop of 1% in 2015.
Another budget deficit
According to Chinamasa’s 2017 budget, slower-than-anticipated economic growth undermined overall performance of the public finances, with cumulative revenues from January to October 2016 performing 1,5% below previous year levels, but 9,8% lower than budgeted estimates.
“The 9,8% under-performance in revenue for the period January–October 2016 left collections at US$2,876 billion, against a target of US$3,158 billion. Resultantly, a budget revenue shortfall of US$282, 5 million was experienced,” Chinamasa said.
Growth forecast review
In September, Chinamasa revised Zimbabwe’s 2016 growth forecast from 2,7 to 1,2 % on account of the El Niño-induced drought, depressed mineral prices, low foreign direct investment, declining domestic demand and a biting liquidity crisis. In the national budget which he delivered last week, Chinamasa revised downwards again the 2016 growth projections to a mere 0,6% on account of the same reasons.
Underperformance of key sectors
Zimbabwe is a resource-driven economy with most of its exports based on agriculture. Currently, tobacco, gold and platinum are among the major exports.
A severe drought, for the second consecutive year, had a heavy toll on agricultural production, with the country producing a mere 511 000 tonnes, against the average national requirement of 1,8 million tonnes, resulting in a huge import bill for the country.
Consequently, agriculture recorded a growth decline of -3,7% in 2016.
In mining, with the exception of gold, mineral prices remained depressed during the period to the end of October 2016.
Basically, 2016 was a year of missing all ambitious growth targets while pointing to an even worse 2017.