AT the beginning of 2019, I laid out my possible economic outcomes for the year and most forecasts were largely in line with year-end outturn although some notable misses were recorded.
On the outset, projection of economic performance at national produce level is paramount and typically guides the direction of other key aggregates. My January forecast in terms of gross domestic product (GDP) outturn for the year 2019 was -5% and was supported by the contractionary fiscal and monetary policies which were introduced late in 2018 into 2019.
These policies significantly cut government’s expenditure, which, in tur, would impact aggregate demand and as a consequence reduce national output. Government maintained a positive GDP projection of 6% over the first nine months of the year only to climb down late in October. By year-end, due to a combination of factors, chief being austerity, GDP was seen closing the year between 5% and 8% below the prior year.
I had also projected that year-on-year inflation will sharply rise to breach the 300% mark, a projection that was widely shared and agreed on by three analysts at Equity Axis, who had helped simulate the numbers for our first quarter 2019 Economic Review and Outlook paper.
While we did not see government fully de-dollarising, our assumptions were that government would gradually move towards liberalisation of the exchange rate given the October 2018 initial move to separate the FCA accounts. We, however, saw this as a step towards elimination of the Zimbabwe dollar other than the United States dollar. The near term impact of the liberalisation of the exchange rate would therefore be exchange rate weakness and skyrocketing inflation.
Other projections included that of foreign balance of payment (BOP) balance and deficit levels and revenue performance.
As we begin 2020, I submit some of my well-researched thoughts and predictions on the economic outlook for 2020 details which are contained in our Equity Axis 2019 Economic Review and Outlook Paper. The year 2020 will be another difficult year for Zimbabwe, which is already experiencing severe carryover stagflation.
My submission is that GDP will fall by a further 7% in 2020, which is slightly below the 2019 outturn. At this rate Zimbabwe will become one of the fastest declining economies in the world. This view is a complete opposite of government’s own projection of a GDP rebound in 2020. World Bank, IMF and African Development Bank all project positive economic growth for 2020. Why could I be so different in terms of my GDP forecast?
Firstly, in as much as government has pronounced the end of austerity, the 2020 national budget does not have enough spending power to reignite aggregate demand nor to stabilise it. For a simplistic approach, a surge in inflation by 400% would mean prices quadrupled within a period of 12 months and to maintain or restore equilibrium, wages would have to adjust by an equivalent measure in constant currency.
Government has allocated only 35% of its national budget towards recurrent expenditure and this equates to about $21 billion. Further deduction shows any raise that could soon be announce will not go beyond 150% of the former wages. This therefore means demand will remain low and, not only that, but come off 2019 levels given that key services such as education and health are set to see a hike in price from December 19 to January 20.
These had not fully been factored in 2019. While this is an interesting dynamic, it would therefore mean companies cannot produce more as less people have more or static spending power.
Further to this, a breakdown of the sectoral performances shows that anchor sectors of agriculture and mining will continue to face headwinds. It is likely that Zimbabwe will experience a more severe drought than what we have seen in the past, completing three straight seasons of similar outturns.
l To be continued next week
Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org