BY TAFADZWA BANDAMA
THE 2021 National Budget announced that the economy is projected to grow by 7,4% in 2021. The growth is expected to be driven by strong recovery in agriculture, mining, electricity, construction, transport and communication sectors. The finance and insurance sector is also expected to buoy economic growth initiatives.
The economy is also projected to create 150 000 formal jobs that were lost due to Covid-19. Other assumptions to the positive economic growth outlook include reduced severity of the Covid-19 pandemic and effective policy implementation.
The anticipated good rainfall requires early and timely preparations for the duration of the season especially fertilisers and other related chemicals. On the anticipated growth for 2021, the seemingly excess rainfall requires more than normal amounts of fertilisers so that the rains are not detrimental to crop yields, which would lower output. Secondly, reversal of the assumption on easing of covid-19 effects has a negative influence on GDP growth as resources are needed to fund health services.
Thirdly, the lockdown of the informal sector, and its direct or indirect impact on supply and value chain linkages with the formal sector impedes economic growth. GDP is a crucial assumption to any budget because revenues and other aggregates depend on it. Overstating potential output is the single most threat to any budget.
One other risk factor that has the potential to negate the developmental efforts of the country is the currency question. The role of confidence of economic agents in the local currency as a medium of exchange, unit of account and store of value, cannot be overemphasised. As economic agents are drawn more towards United States dollar transactions, the economy faces the risk of the RTGS dollar being increasingly marginalised – thus redollarising the larger proportion of domestic transactions.
The sustainability of the currency auction system to stabilise the currency and prices given the near-direct transmission of exchange rate depreciation to inflation is another risk factor that needs to be mitigated. The widening disparity between the official exchange rate at US$1:83 RTGS dollar and parallel market exchange rate at up to US$1:120 RTGS dollar, has the potential to stoke inflation flames which was 362,63% in January 2021.
In the 2021 Budget, it was announced that public entities should review fees, levies and charges in line with economic developments. True to this announcement, government agencies are adjusting prices by huge mark ups and this could see inflation creeping upwards. This creates a difficult doing business environment as business has to grapple with a myriad of taxes and fees increases by local and central government agencies. It is worrying to note that the business regulatory environment is taxing to generate revenue as opposed to efficient service delivery, enabling and facilitating investment in the economy.
Notwithstanding this dispensation given to utility parastatals, Government still has to grapple with subsidies arising from the pricing of agricultural commodities e.g. maize and soya beans. These subsidies are not budgeted for in the 2021 budget envelope, which poses a significant risk to developmental efforts.
Lack of adequate levels of aggregate demand in the economy due to exchange rate depreciation and inflation eroding incomes is a major undoing to developmental prospects. The productive sector needs markets for their products and services and the reduction in aggregate demand does not bode well for profitable enterprise which promotes investment and enhanced economic activity. Levels of aggregate demand will be affected by low incomes, covid-19 and its containment measures.
Income levels in both the private and public sectors have become a structural issue in the economy, and it takes both Government and the private sector to address this challenge. The graph below illustrates high insecurity levels where households spend over 50% of their incomes on food items leaving little for other basic expenditures.
The local economy, which has the largest informal sector in Africa, at approximately 60%, according to the International Monetary Fund (2018), has resulted in low local demand for formal sector products and services due to the implementation of the lockdown. The low domestic demand affects working capital availability, smooth cash flow and the ability of firms to service domestic and international obligations. This implies that accumulation of domestic debt and foreign debt by firms will mitigate against economic development as we aspire to be a middle-income economy by year 2030.
The challenge in the financial sector is on the real value of the capital, and its adequacy to underwrite substantial lending in foreign currency equivalent. The financial sector is not in a position to fund investment as transferrable deposits as a percentage of M3 (money supply) are 94% which means there are no meaningful savings to support investment. Banks are not able to lend this money to the productive sector on long term because such deposits can be withdrawn without notice.
The high inflation environment has made it difficult for financial institutions to play their critical role of financial intermediation to facilitate investment. There is need for the RBZ to work with banking institutions to promote long term financial instruments in the economy, though much depends on the choices of individuals and companies, on the tenor of deposits they prefer to hold in banks.
Developments on international markets have contagion effects on our economic growth aspirations as we attempt to become a middle-income economy by year 2030. Surging commodity prices, for instance, of crude oil and crude vegetable oil, result in imported inflation on the respective value-added products. On the other hand, frequently fluctuating commodity prices on the international markets affects our revenue generating capacities and this has been worsened by the Covid-19 pandemic, which has necessitated reduced economic activities in destination markets due to implementation of public health response measures.
High unemployment as a result of low investment, low incomes, shortage of foreign currency and inflation will mitigate against investment. Lack of investment across all sectors especially in the social infrastructure and productive sector is likely to dampen local developmental prospects. Investment in social infrastructure is vital for human capital development, which is a key factor of production. Investment is crucial for improving productivity and enhancing product sophistication through technology diffusion.
Investment also increases competitiveness of local firms on international markets. Policymakers should draft policies that promote more PPPs and joint ventures, given that government has little resources left to invest in infrastructure, as a result of high recurrent expenditures.
The uncertainty surrounding Covid-19 and the pandemic’s carry-over effects are likely to deal a heavy blow to our economy as experts from the Economists Intelligence Unit are projecting that developing countries with little or no capacity to procure Covid-19 vaccines will only return to pre-pandemic normalcy in 2024.
The Covid-19 pandemic could witness reduced remittances in the medium to long term if the pandemic worsens, or if there are unfriendly changes to the remittance regulations both on-shore and offshore. Protracted Covid-19 pandemic could also cause lack of raw materials sources and destination markets for produce due to international lockdowns, reduced FDI and capital flows which are necessary to drive economic growth.
The lack of adherence to robust public financial management systems which enables accountability, the efficient management of natural resources and their utilisation, pose a big risk to national development. There is need to stem gold leakages and other precious minerals so that revenue generated from mineral extraction and other resources is used to fund economic development projects. Due to smuggling and performance constraints, gold deliveries have declined from 27,7 tonnes in 2019 to 19 tonnes in 2020, according to Fidelity Printers and Refiners.
Corruption is another big risk militating against national development. Corruption affects economic efficiency, equitable distribution of resources in the country including widening income inequalities in the economy. Corruption has a negative score on the doing business environment and it scares away investors who, before setting up shop, have to skip corruption hurdles. Transparency International (2014), highlighted the long-term corrosive effects of corruption on economic growth through its adverse effects on investment, taxation, public expenditures and human development.
Corruption undermines the regulatory framework and the efficiency of state institutions as rent seeking behaviour distorts incentives and the decision-making process.
Political stability is a key ingredient in the national development pot. Lack of political cohesion and unity of purpose affects the doing business environment by reducing investment and the speed of economic development. Political discord affects economic development as it shortens policy-makers term of office leading to suboptimal formulation and implementation of economic policies. Political instability may also lead to frequent policy shifts as office bearers change thus creating volatility in the policy environment. The discord in the local political arena needs to be addressed to foster economic development.
Going into the future, climate change effects will take a toll on economic development. This happens in form of droughts and in the case of Zimbabwe this does not augur well for agriculture development. Additional risks emanating from unanticipated episodes of climate change arise from cyclones which retard the pace of economic development, for instance the occurrence of Cyclone Idai in 2019.
Moreover, research has shown that there is a positive relationship between climate change and the incidence of pandemics. This calls for investment in social infrastructure so that when pandemics hit us, we are prepared to deal with eventualities of disease outbreaks and infrastructure damage.
Other risks may emanate from policy inconsistency, lack of implementation of announced policies and programmes, partly due to lack of financial resources and Covid-19 lockdown conditions. The manufacturing sector acts as an engine of economic growth through value addition yet the figure below shows that the sector is existing in a low output medium.
Going forward Zimbabwe needs to emerge out of its low output equilibrium by ensuring that the doing business environment enables savings mobilisation (30% of GDP), infrastructure rehabilitation, investing in new technology in order to improve total factor productivity and enhance product sophistication. This enables local companies to compete on the international market and boost exports given the implementation of the AfCFTA.
The economy should stop exporting raw products but heighten value addition and beneficiation. Import substitution is also key to achieve some degree of self-sufficiency and self-reliance a hard lesson the country was taught by Covid-19.
Bandama is an economist by profession and training. She possesses an in-depth knowledge and understanding of macro-economics and real sector economics, which skills she obtained while working for public and private entities. Her portfolio brief includes economic research, data analytics, policy formulation, analysis and advocacy. She is currently the chief economist of the Confederation of Zimbabwe Industries and writes in her own capacity.