THE Zimbabwean economy has experienced a period of relative stability since October 2020, even though multiple reforms have to be implemented to attain sustained economic growth.
To a larger extent the stability emanates from market re-dollarisation, which has allowed price discovery, business planning and improved the supply of goods and services in the economy.
The launch of the foreign currency auction system has also assisted formal producers to index prices through a stable (but soft pegged) exchange rate.
Nonetheless, the auction market falls short on meeting market demands as it can only allocate about 30% of the country’s foreign currency needs and cater for the formal business sector only.
Going forward, Treasury has to put steps to implement a more sustainable managed float exchange rate and ensure that the central bank moves away from the role of allocating foreign currency to supervising financial institutions that should play the role.
Inflationary pressures remain low despite the recent increase in prices for various goods and services, which emanated from hikes in charges for utilities, fuel and selected tax heads. Annual inflation has significantly dropped from the 838% recorded in July 2020 to 241% recorded this month (March 2021).
The government has set a target of reducing inflation to less than 10% by December 2021 and limit money supply growth to less than 22,5% per quarter.
Notable progress has also been achieved in implementing the commodity exchange market which will be key in the pricing of agricultural commodities in future. Capacity utilisation in the industry has barked the Covid-19 business slowdown and firmed to above 47%.
Zimbabwe’s trade statistics also show economic resilience with exports growing marginally by 5,8% to US$4,9 billion in 2020. The consistency in the availability of power and fuel has allowed the industry to maximise on production and meet orders.
Capacity utilisation is expected to rise to 61% in 2021 provided there is consistency in government policy on currency and manageable growth in money supply. Despite the progress, a number of unresolved issues are preventing the economy from settling into a growth mode. These include:
Foreign exchange control regulations
The country’s foreign exchange regulations remain a pain to investors who have been resilient in the past 20 years when a sizeable number of businesses either disinvested or adopted a wait and see approach to governance issues in the country.
Multinational corporations (MNCs) operating in the country, securities exchange investors and other foreign businesses have found it very difficult to remit dividends to their shareholders through formal channels and to settle their foreign obligations due to the country’s stringent exchange control regulations.
This remains a dent to any hopes of attracting foreign investment in the country.
According to the Reserve Bank of Zimbabwe (RBZ), the country received a paltry US$40 million in actual foreign investments in 2021.
To ensure serious investment in the country, investors need a guarantee that they will be able to repatriate their earnings formally and exit the market (if necessary) without exchange control or regulatory bottlenecks.
It is imperative to point that countries compete for the same investment and investors look at markets where they can be able to repatriate their capital without overregulation or policy discord from the host government. Policy consistency by the government on foreign exchange regulations remains the missing link to confidence building.
Civil service remuneration
The past two years have seen a serious wage compression for the civil service with entry level (B1) civil servants now earning ZW$16 752 (after a 25% increment). This figure translates to US$207 if the formal auction rate is used and US$130 if the open market rate is used.
However, prices on the local market are largely indexed to the open market rate. This means that most civil servants cannot afford the consumer food basket of six which required ZW$25 935 (US$308) in February 2021. As a result, most civil servants and their families are living in abject poverty. The government should seriously address civil service remuneration concerns and conditions of service, so that service delivery is restored in key sectors such as education and health care that have been affected by industrial action.
Without fully addressing civil service remuneration issues, Zimbabwe will continue to lose its highly trained personnel in all government departments and the private sector as well. Similarly, domestic demand will remain subdued in the economy as over 2,5 million people are dependent on the civil service salaries.
The Mines and Minerals Amendment Bill of 2015 has been stuck in government for over five years now. The Bill was introduced to amend and reinforce the archaic Mines and Minerals Act of 1963, which is currently being used locally.
The current mining law lacks on provisions that plug mineral revenue leakages and tax evasion, and consolidate tax payments by miners.
The government recently awarded 25 Exclusive Prospecting Orders (EPOs) which will help in ascertaining mineral resource value and unlock investment. However, the current mining law promotes opaqueness in licensing, corruption by state institutions that oversee mining and secretive side marketing of precious minerals.
The mining bill should also decriminalise and formalise small-scale and artisanal mining to ensure proper reporting, private sector financing, taxation, minimum safety standards, inspections and environmental management. The amendments to the current mining legislation should be expedited as they are key in ramping up production and increasing transparency in the industry.
Managing gold smuggling
The government has admitted that less than 33% of gold produced in the country is delivered to the central bank and over US$100 million is smuggled out illegally.
The bulk of the gold is shipped to South Africa and United Arab Emirates (UAE) among other countries, through smuggling cartels that have influence in state institutions and in the entire value chain.
Illegal gold buyers also pay cash to small-scale miners, taking advantage of the central bank delays in paying for delivered gold. gold deliveries to the central bank fell from 27,66 tonnes achieved in 2019 to 19,05 realised in 2020 largely because of well-oiled smuggling rings and systematic corruption in the marketing of the yellow metal.
Small-scale and artisanal miners sold only 9,35 tonnes last year compared with 17,48 tonnes in 2019. Some large scale producers have also been under-declaring their output, while selling their gold via small scale producers to get 100% foreign currency and minimise exchange rate driven losses.
This means that the country loses millions of dollars in tax revenues on export earnings and foreign currency that should be accessed via the formal banking system is lost to illicit financial flows (IFFs).
To curb smuggling, the foreign exchange market has to be reformed to a managed float which preserves value for all exporters on their surrendered export earnings portion.
State entities reforms
State entities governance reforms are pivotal in independent business regulation, private sector investment, employment, debt management and managing systematic corruption in the allocation of state resources. Zimbabwe has a total of 107 SEPs, which currently contribute less than 2% of the country’s gross domestic product (GDP).
In the mid-1990s, SEPs accounted for more than 40% of the country’s GDP and employed thousands of employees. Strategic SEPs such as National Railways of Zimbabwe, Air Zimbabwe, Zupco and Zimbabwe Electricity Supply Authority (Zesa) need partial privatisation to be managed efficiently.
It is now overdue for the government to seriously address (move from rhetoric to implementation) investor concerns that impede privatisation of all loss-making entities.
Corporate governance reforms and recommendations from the Auditor-General’s annual reports have to be implemented comprehensively if corruption in state entities is to be managed.
Most SEPs have lost track of their core mandate and continue to be feeding troughs for the politically connected, while piling more debt on the struggling taxpayers and economy. The country’s social safety nets also need reforms to address the risks of extreme poverty, social exclusion for the vulnerable, inequality and food insecurity.
Land tenure issues are still hampering serious investment in agriculture, with 99 year leases flatly rejected by financial institutions. Similarly the alarming road infrastructure decay needs a policy change on the management of road levies and political will to capacitate local governments in road maintenance. Overall, positive steps have been made or signalled, but a lot still needs to be done to revamp the economy in 2021.
Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe Feedback: Email firstname.lastname@example.org or Twitter @VictorBhoroma1.