Short-term risks for Zim economy

BY VICTOR BHOROMA

The Zimbabwean economy is expected to register growth this year after two years of successive decline when currency changes, high inflation, extreme weather conditions and Covid-19 downturn wrecked the local business environment. The government expects the economy to grow by 7,4% (up from the 4,1% decline of 2020) buoyed by the good yields in the agriculture sector, stable energy supply and resilience from mineral and tobacco exports.

The current economic stability and partial dollarisation environment has been key in re-establishing the local credit market with banks increasingly lending in foreign currency and realising better revenues even in inflation adjusted terms.

Consumer demand has improved for the retailing sector, just as much as it has for the manufacturing sector. The real estate sector has witnessed significant levels of investment in the last six months due to its ability to get stable recurring income in foreign currency.

Despite the current stability anchored on partial dollarisation and money supply discipline, the economy remains fragile due to lack of sustainable reforms and pertinent governance concerns from investors and the business community. The following are some of the short-term risks that may derail economic stability.

Exchange market inefficiencies

Zimbabwe instituted the foreign exchange auction market in June 2020 and the platform has been pivotal in supplying foreign currency to formal businesses and providing a small measure of pricing stability. In the first quarter of 2021, the auction market has allotted over US$420 million in foreign currency to local producers with most of the funds going towards the importation of raw materials, machinery and equipment, chemicals, and other industrial consumables.

However, there have been delays in the settlement of winning bids with backlogs running as far as two months in some instances. These backlogs provide a lifeline to the parallel market. Similarly, the spread between the soft pegged auction market rate and parallel market rate is now wide with the former at US$1: ZW$84,65 while the latter is trading at US$1: ZW$130.

The spread is creating a fertile ground for market instability in the short-to-medium term as it creates unhealthy arbitrage opportunities on the pricing of entirely imported major commodities such as fuel, electricity, wheat and soya. This has seen the emergence of fuel queues on service stations which sell the liquid gold in local currency.

The power utility (Zesa) will soon be forced to review electricity prices to factor in the changes in exchange rate. Pricing of agriculture commodities and formal delivery of gold have become compromised as well. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics.

To manage this, the government needs to allow the auction rate to be market determined while a sustainable plan needs to be instituted to ensure the country moves to a managed floating exchange rate as is the case with several African countries with comparable economies and balance of trade positions.

Heightened mineral smuggling

Gold has lost its top spot of being Zimbabwe’s most valuable export to nickel mattes which accounted for US$985 million in export earnings in 2020, with gold coming in second at US$982 million. However, gold exports remain very key to the country’s foreign currency earnings and economic stability.

The official export figure remains a pale shadow of the over US$1,5 billion which was illegally exported by known syndicates to South Africa and United Arab Emirates (UAE) among other destination markets. 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 production value chain.

Small-Scale and Artisanal Miners sold only 9,35 tonnes last year compared with 17,48 tonnes in 2019. The major reasons for the fall in deliveries were to do with delays in payments by the central bank and differences in prices offered for spot gold by parallel market buyers and by the government.

The risk is that if the payment delays and exchange rate issues are not resolved, smuggling will spiral out of control and will take years to uproot due its connection with politics and other state apparatus.

The effects of increased smuggling will be felt on the foreign exchange market where foreign currency shortages will persist and lead to heightened depreciation of the local currency. It’s now a broken song to recommend timely payments of delivered gold to the central bank.

Covid-19 variants

Zimbabwe has largely been spared the worst in terms of Covid-19 fatalities and spread with 38 706 cases recorded so far and 1 587 deaths countrywide since the emergence of the pandemic.

Nonetheless, the persistence of the pandemic globally will continue to suppress the local tourism sector as most of the source markets are experiencing newer variants of the disease or imposing strict travel bans to limit the contraction of fatal variants of the disease.

As such, business in the tourism and hospitality sector will remain subdued for a longer period than anticipated. Even though local business has recovered, the impact of the pandemic can be extended to disruption of trade and restrictions on business operating hours.

Upcoming 2023 elections

Even though general elections are two years away, the election mood is gradually building. This has an effect of shifting government attention from sustainable economic policies to policies which bring quick wins in the elections and funding for various subsidies to entice the electorate. This will lead to the re-emergence of debt trapping agriculture and consumption subsidies which are not provided for by the national budget. This will result in money printing, policy changes and re-emergence of triple digit inflation. Similarly, any election related unrest or dispute will be detrimental to economic stability and image to the international community.

Informalisation

The complex tax environment, low levels of confidence in the country’s banking sector and monetary policy environment are leading to high levels of informalisation. Majority of the country’s Small-to-Medium Enterprises (SMEs) are not tax compliant while formal organisations are finding ways to evade taxes.

A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia’s 62,3%. This means that the shadow economy in Zimbabwe transacts more in terms of monetary value than the formal economy. The shadow economy will inevitably weigh heavily on economic recovery efforts as tax revenues dwindle and the treasury is forced to institute more taxes. To manage this, the government would need to simplify its taxation model and create robust enterprise systems that monitor business transactions in real time and enforce tax compliance.

Mono-currency inertia

The persistent push by various players for a return to mono-currency show lack of appreciation of Zimbabwe’s tainted monetary policy history, the fundamentals that support currency value and the importance of structural reforms to sustainable economic stability. The rushed and ill-timed introduction of the Zimbabwean dollar in 2019 cost the local economy billions while pensioners, corporates and labour were left nursing savings losses. The current stability is borne out of partial dollarisation and any effort to implement a mono-currency without addressing structural issues will be futile.

The failure by the government to privatise various loss-making State Entities and Parastatals (SEPs) means that the economy will continue to be burdened by SEPs that contribute less than 2% to output. Most of these enterprises are piling huge debts on the taxpayer while lining pockets of the politically connected. Parastatal debts have significantly increased Zimbabwe’s debt exposure in the past 20 years.

Despite the current price stability and free trade in foreign currency, Zimbabwe’s economy remains very fragile and highly susceptible to reactionary policy changes by the government and other persistent risks that the government has shown no political will to resolve sustainably.

Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.