HomeBusiness DigestGloomy economic forecast for 2020

Gloomy economic forecast for 2020

Kudzai Kuwaza

THE country’s economy is set to further decline this year on the back of inflationary pressures and drought among other challenges.The economy contracted by at least 6% last year, according to the International Monetary Fund.

In 2019, the economic crisis deepened, characterised by debilitating power outages of up to 18 hours a day, an acute foreign currency shortage, fuel shortage, reduced production and runaway inflation which is now inching towards 500%, year-on-year.

This has been compounded by a drought that has devastated the country, leaving nearly eight million people facing starvation, as well as the political deadlock between President Emmerson Mnangagwa and main opposition MDC leader Nelson Chamisa.

Government’s decision to ban the multi-currency regime, making the local unit the sole legal tender through Statutory Instrument 142 of 2019 in June last year, has resulted in the local unit rapidly losing value.

The local currency has been introduced despite the conditions necessary for its introduction not being met.These include low inflation, import cover of six months and a sustainable GDP growth rate of at least 7%. Mnangagwa has insisted that despite the local currency losing value, government will keep it in place.

The devaluation of the local unit has resulted in the erosion of wages. As a consequence, medical doctors and Harare City Council nurses went on strike, putting the lives of scores of patients at risk.

From a labour unrest perspective, the New Year has resumed where 2019 ended, with civil servants threatening not to report for work due to low salaries which have been eroded by inflation.

They are demanding salaries indexed to the United States dollar. Most teachers’ unions have already declared that their members will not report for duty when the school term starts next week.

The Staff-Monitored Programme (SMP) which began last year remains in the balance in the new year after government failed to meet targets set in the SMP despite a meeting between the two parties last month.

Government’s failure to meet the agreed targets due to unrestrained fiscal expenditure and massive growth in money supply has been a source of dissatisfaction for the Washington-based multilateral organisation.

The SMP is an informal arrangement between the government and the IMF to monitor the implementation of key economic programmes in the country and is designed to support the government’s reform agenda.

Furthermore, the Economist Intelligence Unit has forecast that Zimbabwe will be among the five worst performers, only behind Venezuela, in terms of GDP growth in 2020.

The think-tank projects that the country’s economy will contract by 12,9%.Zimbabwe, according to the forecast, will only perform better than Venezuela which will contract by 20,5%.

The other countries among the projected five worst performing economies are Iran, Argentina and Macau. This is in stark contrast to Treasury’s projection of 3% growth this year.

Confederation of Zimbabwe Industries chief economist Tafadzwa Bandama points out that inflationary pressures will continue into the New Year.

“Going forward in 2020, the economy will experience multi-pronged inflation pressures,” Bandama reveals in her inflation report for November last year.

“Although the 2020 National Budget announced a Budget Deficit of ZW$5 billion, which is 1,5% of GPD, the fragility of the economy causes any increases in money supply to have a disproportionate impact on the exchange rate, which subsequently feeds into prices. Growth in money supply is looming as the government may resort to Bank borrowing and monetisation of budget deficit.”

She points out that the borrowings will be used to finance, among other purposes, maturity of United States dollar Treasury Bills, servicing of legacy debt, increased employment costs for government workers and a high subsidy bill for basic commodities as a result of the drought.

“The need to subsidise basic commodities will widen the budget deficit. Authorities may resort to accommodation by the central bank to finance the expenditures,”Bandama said.

“In the absence of non-inflationary financing options, money creation will lead to inflation in the short-to-medium term. School fees hikes and fuel price adjustments will exert pressure on inflation numbers going forward.”

Production looks to remain subdued in 2020 as there is no solution to the power cuts and foreign currency shortages that have crippled most companies and exporters.

The introduction of the foreign currency interbank market has been woefully inadequate as it has failed to equip companies and exporters with adequate foreign currency.

Despite an admission by Finance minister Mthuli Ncube that the interbank market needed to be improved, challenges in accessing adequate foreign currency persist.

The current drought will result in the economy remaining depressed in 2020, according to business consultant Simon Kayereka.

“The economic outlook for Zimbabwe will be determined by the drought. Our economy is agro based, so if agriculture does not do well, it has a domino effect on every other industry,” Kayereka said.

“The country will be forced to import grain once again, putting pressure on the fiscus. Government may be forced to print more money for other social services and this will continue to push inflation and consequently prices of basic commodities up. So unless we get assistance, the year 2020 may be more difficult than the previous one.”

Kayereka said breaking the political deadlock between Mnangagwa and Chamisa may ease the turbulence brought about by an economy facing major headwinds in 2020.

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