Zimbabwe’s economy is largely expected to register modest growth in 2021 buoyed by a bumper harvest in agriculture, partial dollarisation and declining inflation, growth in export earnings and increase in industrial capacity utilisation. The improved crop harvest is driving consumer spending and reducing the import bill for agriculture related raw materials and commodities.
Critically, food inflation has significantly declined to less than 1,7% as of April 2021 due to significant drop in demand from household consumers. Maize production is estimated at 2,7 million metric tonnes (175% growth from 980 000 metric tonnes (mt) produced in the 2020 season), while wheat production is expected to maintain at 150 000mt, sorghum to grow to 244 000mt (from 104 000mt in 2020) and soya bean production to increase by 51% from 47 000mt in 2020.
Anchors for economic stability
Real growth rate for the economy is anchored on partial dollarisation and a slow growth in money supply which has resulted in decline in inflation. Annual inflation has significantly dropped from the 2020 average of 622% to 107% in June 2021.
Foreign currency deposits with local banks have surged to over US$1,6 billion while reserve money is estimated to be ZW$24,5 billion (US$286 million) as of June 2021. Zimbabwe’s export earnings increased by 5% to US$1,085 billion in the first quarter of 2021.
Exports are expected to reach US$4,5 billion in 2021 due to a surge in commodity prices on the global market where the increase in prices for gold, nickel, platinum and chrome has rallied the country’s export prospects. Industrial capacity utilisation ended the first quarter of 2021 at 47% and the forecast is that it will close the year at about 61%.
Resurgence in consumer demand
Producers and retailers in the local market have witnessed a recovery in consumer demand as a result of declining inflation and some measure of economic stability in the country. Even though the local currency continues to depreciate on the foreign exchange market against major currencies, the decline has been modest due to slow growth in money supply.
Despite the negative impact of Covid-19 on movement, trading hours and access to market, major retailers in the country realised an increase in sales volumes in the first quarter of 2021 while the banking sector led on growth in inflation-adjusted revenues as non-interest income (bank charges and transaction fees) headline sector earnings.
Food and beverage manufacturers experienced increases in revenue and volumes in the first quarter of 2021 even though the lockdown is posing logistical challenges and restricting access to the market.
Other sectors witnessing improvements in consumer demand as a result of partial dollarisation include real estate and construction which picked up after the end of the rainy season.
However, business remains subdued in the telecommunications sector due to outdated voice tariffs which are not in sync with inflation movements.
Supply side stability
Improvements in power supplies have enabled stable production and improved producer confidence in the market.
Despite having the highest pump prices per litre in the Sadc region (more than US$1,33/litre), fuel supply has been very stable due to the ability to retail in foreign currency for traders in the petroleum sector. Above normal rainfall has allowed electricity generation to stabilise with Kariba Power Station producing 985MW out of the total output of 1 443MW.
Dam levels have also improved due to above normal rainfall, which helps in guaranteeing water availability for producers in the economy.
Despite the growth in consumer demand and economic stability being witnessed in the country, the economy remains very fragile and there are imminent risks to sustained growth.
Auction market inefficiencies
Zimbabwe instituted the foreign exchange auction market in June 2020 and the platform has been pivotal in availing foreign currency to formal businesses, thus providing a modicum of pricing stability. In the full-year to June 2021, the auction market has allotted over US$1,4 billion million in foreign currency to local businesses and individuals (versus demand exceeding US$5 billion).
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, not just for foreign currency but for various commodities with prices controlled by the government such as fuel, grain, cotton, gold and others.
Similarly, the spread between the soft pegged auction market rate and parallel market rate is now wide with the former at US$1:ZW$85,64 while the latter is trading at US$1:ZW$140. The spread creates a fertile ground for market instability in the short tomedium-term as it creates pricing distortions in the market.
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.
Zimbabwe had been spared the worst in terms of Covid-19 fatalities and spread with 89 000 cases recorded so far and 2 750 deaths countrywide since the emergence of the pandemic.
However, cases under the new Delta variant are rising and the persistence of the pandemic globally will continue to suppress the local tourism sector as most of the source markets are experiencing increases in mortality and 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 strict lockdowns and restrictions on business operating hours which will dent economic recovery.
Policy changes and informalisation
The complex tax environment, low levels of confidence in the country’s banking sector and frequent changes in monetary policies 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 with an estimated US$1,5 billion circulating in the informal sector. The shadow economy will inevitably weigh heavily on economic recovery efforts as real tax revenues dwindle and the Treasury is forced to institute more taxes.
To manage this, the government would need to simplify its taxation model, provide tax compliance incentives and create robust enterprise systems that monitor business transactions in real time and enforce tax compliance.
State entities burden and corruption
The evident failure by the government to privatise various loss-making state entities means that the economy will continue to be burdened by SEPs that contribute less than 2% to economic output. Most of these commercial enterprises are piling huge debts on the taxpayer while lining the pockets of the politically connected.
Parastatal debts have significantly increased Zimbabwe’s debt exposure in the past 20 years. Equally damaging to the local economy is the increase in graft and high level corruption cases which have not been prosecuted or acted upon by the courts.
For the past seven years, the Auditor-General (AG)’s Office has unearthed gross violations of basic tenets of corporate governance and abuse of public funds in state entities and government departments. The 2018 and 2019 Audit Report highlighted that Zimbabwe could have been prejudiced of more than US$100 million per year in fictitious loan repayments and overstated supply contracts for goods paid for, but never supplied.
Curbing corruption and improving corporate governance in state entities is a matter of political will by the executive to implement the AG recommendations and take a firm stance.
The bumper harvest has significantly improved household food supplies and reduced food inflation in Zimbabwe. However, consumer prices keep increasing due to the impact of foreign currency shortages and depreciation of the Zimbabwean dollar on the foreign exchange market.
The impact of delays in the settlement of winning bids on the auction system will continue to give a lifeline to the powerful parallel market. The impact of the new Delta variant on the economy will be huge with anticipated lockdowns, loss of income for small businesses and the informal sector.
Despite the risks and fragility, the Zimbabwean economy should register real GDP growth of between 3-5% in 2021.
Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — email@example.com or Twitter: @VictorBhoroma1.