HomeOpinionInsistent power cuts now de-stabilising economy

Insistent power cuts now de-stabilising economy

By Respect Gwenzi

Zimbabwe is currently battling with extended load shedding schedules now averaging over eight hours in some parts of the country.

This is attributable to low domestic generation on the major thermal plant, Hwange Thermal Power Station, which, of late, has been averaging 300MW per day out of its total installed capacity of 920MW.

A technical fault at Hwange resulted in a significant deficit of power supply to the national grid, leaving Kariba South Hydro power plant as the main source for the entire country. This has become the longest period of power interruptions since the beginning of the year.

As we know, electricity is a key production enabler.

Its shortage severely disrupts business activity and increases cost of production as businesses look for alternative yet expensive energy means like diesel to power generators.

Further, frequent electricity shortages also hurt households, who have to look for expensive alternative sources like liquified petroleum (LP) gas.

In 2019, when the country was facing such prolonged load shedding schedules, business activity severely plummeted leading to a GDP decline in double digits.

A few weeks ago, I illustrated the potential Zimbabwe has in terms of energy sources from solar to biomass to wind as well as thermal.

Zimbabwe is sitting on enough coal resources to generate electricity for the next 100 years and also receives enough solar rays to generate electricity throughout the year.

Over-reliance on the current thermal stations which have outlived their lifespan is leading to frequent breakdowns, making domestic production costs relatively high when compared to other regional counterparts.

It is past time now for the government to completely overhaul these thermal plants as well diversifying the energy mix. Many countries across the globe are going green.

To remain competitive in the future, government should also tap other green energy solutions to reduce dependence on Kariba Hydro, which in recent years has been affected by climate change.

In 2019, the Kariba Dam water levels reached their lowest point in decades. Then, a plant with total installed capacity of about 1,050MW was averaging between 250-300MW per day.

But, be that as it may, the current expansion of Hwange Thermal through construction of new thermal Unit 7&8 with a combined installed capacity of 600MW is a step in the right direction, and will go a long way in resolving Zimbabwe energy challenges.

Also, despite being done at a slower pace, probably due to financing challenges, the current investments in solar plants across the country will also improve energy situation.

For Zimbabwe to meet its ambition of becoming an Upper Middle Income country by 2030, it should prioritise energy projects. An Upper Middle Income nation is characterized by heavy industries and these require uninterrupted electricity supply.

The Government should address exchange rate disparity.

There is no consensus between the Government and independent analysts’ view on the stability of Zimbabwean dollar (ZW$). The former touts the ZW$ performance against the US dollar on the forex auction market, whilst the latter are pointing to the divergence between the official and exchange rates offered in alternative markets.

In my view, I think the issue of exchange rate stability should not be viewed in isolation.

Both markets should be considered for us to ascertain whether the local currency is stable or not.

Going by this line of reasoning, it is now vividly clear that the Zimdollar has chartered unstable territory as the variance (premium) between these two rates has become the North Pole and South Pole.

On the auction market, US$1 is trading for under ZW$86 while the average parallel rate is now at ZW$150.

This gives a premium of over 70% when the global best standards dictate that the black market premium should be at most 20%.

It is the Reserve Bank of Zimbabwe’s (RBZ) position as announced by the Governor, John Mangudya last week that the forex backlog on the auction is not driving the parallel rate.

The Bank blames the parallel exchange rate overrun to speculative activities by some businesses and wealthy individuals.

However, it is my submission that the continued divergence between these two rates is being fuelled by the actions of both the Bank and the National Treasury.

Forex demand is significantly spiking in line with expectations of economic recovery while forex supply has become overwhelmed as evidenced by a three-week supply backlog.

If the auction market is surely operating under market forces of demand and supply, this development will lead to significant decline in Zimdollar against the US dollar as bidders offer more to access the limited forex.

However, since the beginning of the year, the auction rate has barely moved, with the Zimdollar being down against the greenback by only 5%.

The weekly depreciation rate has become very predictable and because of that, one cannot rule out some insider trading.

With lagged supply, businesses are being forced to source forex on the black market while waiting for bid settlement from RBZ. Also, this auction market is not saving the entire market; the informal sector is out of the equation.

As such, these informal traders as well as the general public are forced to utilise the alternative markets.

More so, it is my view that spending from the Treasury has become excessive and this is playing a huge role in the severe deterioration of the Zimdollar witnessed in recent weeks.

The Treasury, through Grain Marketing Board (GMB), is purchasing grains from farmers.

The bumper harvest of this year’s magnitude was not anticipated, as it has become the largest harvest since the land reform programme of early 2000s.

The initial 2021 budget as read in November 2020 had only ZW$8 billion (US$93,4 million) for Strategic Grain Reserve yet the Treasury is now set to splash at least ZW$60 billion (US$700,9 million).

While these fiscal funds are being used in purchase of real output, I believe that the type of payment is driving exchange rate overrun. These farmers are being paid significant amounts in local currency (RTGS$), a currency which is still facing huge public confidence deficiency.

Besides confidence issues, the economy is gradually dollarising as most key goods and services like fuel, rentals and medication are being traded in forex.

So, to store value and be able to access critical goods and services, most Zimdollar earnings are converted into a stable US dollar.

Further, civil servants’ salaries were adjusted by unexpected margins and more funds are being spent in the procurement of vaccines.

All these transactions are causing excessive demand for forex in the parallel market.

In my view, to clamp burgeoning premiums, the bank should liberalise the auction so that it reflects true market fundamentals.

Also, the government should always spend within its means.

Unbudgeted expenditures constrain the Treasury purse and may lead to contingency plans, such as money printing.

Sustainable spending ensures money supply grows at a rate that is in tandem with the rate of growth activity in the real sector. For the past two months, Zimbabwe is in Level 4 Covid-19 induced lockdown with high restrictions. So, having high liquidity (ZW$) growth when activity is being subdued by these restrictions lead to excessive depreciation and inflation.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net.

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