ALPHA Media Holdings recently hosted a successful high-level conversation which featured bankers, industrialists and economists to digest economic prospects for 2021.
Notable participants at AMH’s The Big Debate series, were former Finance minister Tendai Biti, banker and Zimbabwe Economic Society president Nigel Chanakira, Institute of Chartered Accountants of Zimbabwe chief executive Gloria Zvaravanhu and Roundtable chief executive Kipson Gundani.
Others include Monetary Policy Committee (MPC) member and former legislator Eddie Cross.
Held under the theme, ‘Zimbabwe 2021 Economic Prospects’, the debate scrutinised Gross Domestic Product (GDP) growth prospects, inflation and the exchange rate performance under the interbank auction system.
GDP and inflation
Discussants noted that economic growth projections of 7,4% by Finance minister Mthuli Ncube in the 2021 national budget will be difficult to achieve due to Covid-19 lockdowns.
The experts said the pandemic will have far-reaching implications on consumption levels.
Ncube projected a 7,4% (GDP) growth up from a 4,1% contraction, with average year-on-year inflation targeted to fall to 135%, from 336% at the end of 2020.
In the last quarter of 2020, the National Development Strategy-1 was launched with prospects of a good agricultural season.
But in January, a second wave of Covid-19 turned the economy upside down, amid increases in infections and deaths.
Kicking off the debate, Gundani said despite positive prospects in mining and agriculture, a risk exists on the consumption side due to the effects of the pandemic.
Gundani said inflation targets were a mammoth task while controlled exchange rates could lead to an implosion.
Responding to Gundani, Zaravanhu argued that even a 3% growth was a toll order considering depressed demand, limited budgetary support, water and power shortages.
She said tax revenues will likely to be adversely affected by a growing cash economy which can fuel tax evasion.
To boost the economy, Zvaravanhu said, there was need to manage foreign debt, adhere to International Monetary Fund (IMF) guidelines and unlock fresh funding from multi-lateral financial institutions.
She warned that Covid-19 will have a huge impact on the economy, with corporates missing reporting deadlines due to restrictions on movement of people.
Chanakira chipped in the debate saying coming from a negative 4% growth performance in 2020, the economy was likely to grow by between 2% and 3%.
He also cited Covid-19 as a major problem stalling economic performance as January had no meaningful activity.
To contain inflation, Chanakira said, retailers must be supported by adequate foreign currency allocation to import and price competitively.
Market analyst Ranga Makwata projected a jump in inflation this year.
“Inflation, which had been hitherto controlled, is likely to start trending up again as a result of the exchange rate pass through effect,” he argued.
Cross, however, was optimistic on account of exchange rate stability and good inflation figures.
He said the economy had potential to meet Ncube’s growth projections.
Auction system and exchange rate
Lower bids on the Reserve Bank of Zimbabwe (RBZ)’s foreign currency auction system could bear the brunt of limited amount of hard currency as the money will be offered to bigger bids, according to Cross.
He said the foreign currency auction system was overwhelmed with bids outweighing availability of funds.
The exchange rate will weaken in the long term due to an acute shortage of foreign currency, Cross added.
“I see the exchange rate depreciating. I think the open market rate at the moment is about ZW$100 to ZW$110: US$1 and the auction rate at ZW$ 81-82: US$1 is holding steady,” he said.
“The real problem is securing enough hard currency to put on the auction to meet demand. Indications at this stage are that we may have to cut off the lower end of bids.”
Gundani argued that the auction system was manipulated.
He said the exchange rate was a mirror of the real economy and the huge gap of about 50% between the official rate at ZW$82: US$1 and the parallel market rate at ZW$120: US$1 indicated glaring disparities.
“I am a proponent of the idea that the exchange rate should be left to find its own level. This whole idea of manipulating the exchange rate will lead to explosion. Somebody is bearing the brunt and these are our exporters,” Gundani said.
“We have seen a lot of distortions including the launch of domestic and foreign nostro. It appears the domestic nostro is a fake account because you can’t do much with it. I think as Zimbabwe we have suffered a long period of exchange rate manipulation and experimentation. Prior to the period leading to 2009, there was a lot of exchange rate manipulation.”
Biti claimed that the foreign currency auction system was flawed.
Resultantly, this was a “rigged exchange rate, which presents problems for the economy where billions trade on the parallel market”.
Biti said corruption must be dealt with.
He urged the central bank to stop quasi-fiscal activities that can create budget deficit.
The ex-finance minister spoke of a need to build confidence in the local currency.
This could be herculean task considering claims by Cross that the RBZ is printing ZW$1 billion (US$12,2 million) weekly to buy gold. To worsen the situation, State firms and government departments are collecting a significant amount of funds allocated at foreign currency auction system weekly – crowding out the private sector.
The market is now waiting for new ZW$50 notes and other possible higher denominations.
Need for re-engagement
However, economic stability cannot be achieved without meaningful dialogue by political actors — domestic and internationally.
Chanakira said economic prospects would be dampened in the absence of political will.
“You cannot defy the cycle of markets. It’s a function of confidence regarding your currency. If you look at the conduct of monetary policy, an economy needs its own money.
“There is local production and to carry the currency of a foreign nation to institute domestic trade is not rational. We have a history of hyperinflation where we destroyed the confidence in the local currency. That depicts the extent to which you can actually rely on a domestic currency for trading purposes, investments and pensions.
“I know it’s not popular but the reengagement process is imperative.”
Chanakira bemoaned lack of policy implementation due to lethargic political will.
He said, for instance, Professor Ncube’s academic and professional background spoke to his ability to proffer solutions to economic crisis, but a lack of political remain a stumbling block.
“Like him or not, he had the suave to be able to communicate in those international circles. If you don’t have the political will to deal with domestic and international politics, the economy cannot change,” Chanakira said.
He concurred with Biti’s call for confidence building and transparency.
“For as long as there is no domestic and international dialogue then in my back pocket, I am going to keep the US dollars. That is just a rational economic expectation,” Chanakira said.
He said there was need to deal with local and foreign debts to build confidence and unlock new funding.
“Go back to the drawing board from a politics point of view and this goes for both parties. With due respect Mr Biti, its engagement on your part and the other side as well; it takes two to tango,” Chanakira said.