Zim in the throes of new recession

Be afraid; very afraid! This is what economic players and analysts are saying as Zimbabwe’s economy is now in the throes of an economic recession. Falling aggregate demand, plunging production, diminishing purchasing power, eroding incomes and rising inflation are buffeting the economy which the International Monetary Fund (IMF) says will contract by 5,2%.

By Chris Muronzi

This comes as runaway inflation is wreaking havoc in the economy.

Zimbabwe’s annual rate of inflation for the month of April 2019 rose to 75,86%, up from 66,8% in the previous month.
Month-on-month inflation also climbed to 5,52%, gaining 1,14% on the March rate of 4,38%, the Zimbabwe National Statistics Agency said on Wednesday.

Finance minister Mthuli Ncube tried this week in parliament to downplay the meltdown by emphasising fiscal surpluses — achieved through the 2% tax and other aggressive revenue collection measures — without addressing the implosion issue.

A recession refers to a significant decline in general economic activity that goes on for months. It is visible in industrial production, employment, real income and wholesale-retail trade

The decision to separate foreign currency accounts from Real-Time Gross Settlement accounts and the floatation of Zimbabwe’s new currency has come back to haunt the troubled country’s economy.

A look at Delta earnings this week, executive and analysts’ comments demonstrated that the economy is now in a recession.

The IMF sees the economy contracting by as much as 5,2% this year.

“The formal devaluation of the RTGS wiped off 60% purchasing power in a day when the rate was floated. Demand became very constrained particularly in the last quarter of the financial year,” Delta CE Pearson Gowero said, while presenting his group’s full-year earnings to March 2019.

The beverage company achieved 75% of its revenue in the first nine months of the year.

“We are in a process of rebuilding: the reforms are underway. Zimbabwe is slowly finding its feet. The journey is long, and it will not be smooth, but we are heading firmly in the right direction,” Finance minister Mthuli Ncube said last week.

Workers earnings, pensions and savings are losing value fast in the face of rising inflation and the weakening local currency .

This has had the effect of lowering disposable incomes and aggregate demand, hence production.
Economists also see a gloomy outlook.

“Well, government has also indicated that they may also have to revise theirs (gross domestic product growth) as well. It is very simple and straight forward, it (IMF’s revision) is related to the El Nino-induced drought and the aftermath of Cyclone Idai.

“Also, as you know there is the role of the primary factors that have had an adverse effect on the economy and the shortages of foreign currency. As you can see, a lot of companies are closing as a result of the acute shortages of foreign currency,” Labour and Economic Development Research Institute of Zimbabwe director Godfrey Kanyenze said.
“So, it is the El Nino-induced drought that has had a very adverse impact, the issue of Cyclone Idai which has worsened the situation and the absolute shortage of foreign currency. These are just forecasts, predictions in terms of the weather, the foreign currency situation and reforms.”

But Zimbabwe’s fortunes will change depending on its commitment to instituting reforms, he says.

“If you go to the IMF Article 4 report of 2017, it has got scenarios. One based on business as usual where there are no reforms, you can call that the baseline scenario and another one based on a reform trajectory. If you undertake successful reforms, ease of doing business, public and private sector reforms as have been mooted by the government, then your scenario in terms of what will happen next year and the year after changes completely,” Kanyenze said.

So far, President Emmerson Mnangagwa’s government is yet to institute credible reforms to improve the investment climate and the ease of doing business despite coming up with a series of reform measures.

Economist John Robertson says Zimbabwe has scarcity of investors and bureaucratic permit requirements that make doing business in the country unattractive.

“I have spoken to people within the past few weeks. They said they wanted to build factories, but that they were going to build them in Botswana because if you are going to come to build factories, create jobs and exports we will give all kinds of benefits and attractive advantages which will make you very pleased you came to Botswana,” he said.

“In Zimbabwe, if you want to invest, you have got to pay for the privilege of being allowed to invest in Zimbabwe and you will pay for that with many permits and licences … but the fact is that it is a very more hostile environment and I think that is what the IMF has picked up.”

Eddie Cross, an economist advising Ncube and former opposition MP, expressed optimism that the country would register subdued growth, ruling out a slide into recession.

“I think that they (IMF) are being too pessimistic. Ncube believes that we are going to get growth of 3% and I think he is right. I do not think the fund (IMF) understands the Zimbabwean economy. What I agree with them is that I think we have got to recognise that what the government has done in the last year has been to shift the economy from consumer led growth path to export-led growth and the changes in monetary policy have emphasised that,” Cross said.

He added: “So, the exporters are in a situation where they are in receipt of very substantial premiums on export proceeds and this is going to lead to growth, export-led growth. But, clearly, if you boosted consumer demand by boosting incomes or reducing PAYE (Pay As You Earn) or whatever it would have an immediate impact on growth.

“With export led growth there is a time lag because what happens is that you introduce the incentives and then it takes time before they kick in and result in exports.”