The Brett Chulu
THE year 2020 has just begun — we need to assess the prospects of the economy, given that government has told us the period of austerity is over. Let us interrogate the five key economic metrics that define the ultimate goals of fiscal and monetary policy.
We are in the final stretch of the Transitional Stabilisation Programme (TSP), the blueprint for economic reforms meant to stabilise the economy as a foundation for sustained growth.
The TSP started in October 2018 and is ending this year. The TSP was the first phase of the three economic development plans that underpin the implementation of Vision 2020. Finance minister Mthuli Ncube, in his 2020 budget statement, gave a forecast of 3% growth for 2020. Ncube premised this modest growth, which is a way off the 9,7% TSP for 2020, on a normal rainy season. The 9,7% growth rate target is what was determined as the minimum necessary to achieve the upper middle income status by 2020. This broader context is necessary as we assess the 2020 outlook.
Already, the 3% growth forecast means that we are off course, in terms of attaining the 2020 vision. This means that going forward we will need double-digit growth rates for the next 10 years to attain the 2020 upper middle income status. We will have to pull off a China — that is no child’s play — we are nowhere near the Chinese political economy meritocracy and economic organisation.
Sadly, even the modest growth forecast of 3% for this year, coming off a government-projected 6,5% decline for 2019, looks unrealistic, given that Ncube’s key assumption of a normal rainy season no longer holds. We expect continued negative growth this year for several reasons.
The biggest drivers of economic growth recovery for 2020, at between 4% and 5%, were seen as agriculture and mining. The poor rainy season in Zimbabwe this far means that there will be no agricultural recovery. The 2018/2019 drought, coupled with the inflation that ravaged the country in 2020 and unstable forex rates, has made farmers reduce production.
The retention of forex by our central bank for tobacco producers and forcing them to offload the unretained forex in the uncompetitive interbank market destroyed the capacity of farmers to reinvest as they faced input prices indexed to the parallel forex rates. Add to this misery a multitude of farming taxes. Then add drought — it is self-evident that tobacco output, key grains and oil seeds this year will be severely reduced.
Poor rains in the Zambezi catchment area will have a devastating effect on power generation at Kariba. Power is a key production constraint. Worsening power supply deficits will negatively impact on mining, another key driver of economic growth recovery identified in the 2020 budget.
With the reduced forex inflow from tobacco, we expect that power imports will be difficult to sustain. Elections in the United States may see the inward-looking stance of the Donald Trump administration ratcheting up, intensifying trade war sabre-rattling with China. Trade stability uncertainty may see the market prices for Zimbabwe’s key export minerals, nickel and platinum taking a nosedive. Gold may be our saving grace, as global investors are likely to pile into gold until the political direction of the US gets clear at the conclusion of the elections.
Manufacturing will suffer due to lack of domestic inputs from agriculture, power shortages and 2020 may see water being a new production constraint.
Overall, the good gold prospects are likely to be outweighed by overall reduced mining output. With agriculture and mining, the key growth drivers, recording a decline, the negative multiplier effect will be transmitted to other sectors of the economy.
The official view is that inflation will still be with us but will not be as severe as last year. The central bank governor, John Mangudya, in a Christmas eve interview, indicated that he is targeting month-on-month inflation of 5% by the end of 2020.
Ncube, in his budget statement, projected that month-on-month inflation will fall to a single digit. Mangudya seems to have supplied the hard target. Ncube, in his budget statement, supplied GDP growth figures that imply an average inflation of 215% for 2020.
Let us dissect this; month-on-month inflation is extremely high inflation. In South Africa, inflation-targeting by the South African Reserve Bank is 3-6%, year -on-year, not month-on-month. If our month-on-month inflation suddenly drops this month to 5% remains that way for the rest of 2020, the price for which one buys in January will cost 80% more. It is clear that month-on-month inflation will not drop to 5% anytime soon.
The GDP deflator implied in the GDP figures in the 2020 budget statement implies prices doubling on average this year. This is a scenario that took into account economic growth in 2020.
The official inflation expectations for 2020 are now not possible — inflation this year is likely to be much higher than the official forecasts and projections. Power constraints will push manufacturing capacity utilisation under, necessitating price increases. Food shortages due to low agricultural output will push prices up. Increased reliance on food and raw material imports will bid forex rates up, driving inflation higher.
Balance of payments
With inflation expected to remain elevated, and exports of tobacco and non-gold mineral exports expected to decline coupled with reduced agricultural output, our balance of payments position is expected to deteriorate.
Negative growth and inflation indicate that we will miss our key International Monetary Fund (IMF) Staff-Monitored Programme targets. This means that any hope for an external debt relief deal with the Bretton Woods institutions and the Paris Club this year must be deferred. Our country risk will thus remain elevated.
International credit will remain expensive. With no balance of payments (BOP) support coming through, the country will continue to fund the BOP deficit through debt defaults. A deteriorating BOP situation, coupled with quasi-market monetary policy (forex retentions) in a context of extractive politics and corruption will ratchet up speculative tendencies, resulting in the battering of the Zimbabwean dollar, further pushing up inflation.
In terms of income distribution, we are likely to see taxes being increased marginally to raise money for social safety nets and food imports. Government may be forced to accumulate a higher-than-planned budgeted deficit through an expansionary fiscal policy to innoculate itself against food-related political existential pressures. This expansionary policy will likely be inflationary, contributing to further erosion of income. Expansionary policy may see critical funding for developing irrigation infrastructure being diverted towards safety nets and food purchases, strengthening the vicious cycle of poor agricultural production.
In terms of formal employment, the logical result of another negative growth prospect means more layoffs, swelling the ranks of the informal sector. Political players will have to stop alpha-male zero-sum politicking if we are to mitigate the socio-economic storm that will be 2020.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — email@example.com.