‘A rather optimistic GDP growth forecast’

By The Standard | Aug. 8, 2021

According to the World Bank, the pandemic led to a contraction of the country’s GDP of 8% in 2020.This had serious repercussions to livelihoods, adding 1,3 million Zimbabweans to the extreme poor.

BY FINCENT SECURITIES

THE period 2019/20 was marred with difficulties for Zimbabwe as 2019 was disquieted by a severe drought, Cyclone Idai as well as tough but necessary economic reforms.

Year 2020 was met with a global pandemic.

According to the World Bank, the pandemic led to a contraction of the country’s GDP of 8% in 2020.

This had serious repercussions to livelihoods, adding 1,3 million Zimbabweans to the extreme poor.

World Bank estimates suggest that the number of extremely poor people reached 7,9 million, almost 49% of the population.

The rise in food prices and decline disposable incomes led to the share of rural households reporting that they went without food for a whole day reaching 37% by July 2020.

Food insecurity was also worsened by inadequate coverage of relevant social protection programmes which saw less than a quarter of the extreme poor households receiving food aid in June 2020, according to Zimbabwe Statistics Agency.

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In the face all of this adversity for the past two years, the medium-term outlook points to a modest economic recovery in 2021 and even stronger growth outcomes in 2022.

The recovery is marred with uncertainties due to pandemic related downside risks both on a local and global level.

The GDP growth is expected to reach 3,9% in 2021 (World Bank data) hinged on the recovery in agriculture, improved electricity generation from replenished reservoirs and slower than expected inflation.

The veracity of the third and possible fourth wave of the pandemic and the uncertainties about the likely timing for a broad-based vaccine rollout in Zimbabwe and its key trading partners will suppress external demand.

Further, domestic demand is likely to remain subdued in 2021 as inflation remains high and the continued use of export retention policies constrains productivity and competitiveness.

On the backdrop of an upward economic growth trajectory, the economy is expected to accelerate in 2022 as the adverse impacts of the pandemic subside with increased deployment of vaccines globally as well as the fruits of the National Development Strategy policies.

The projected recovery is in large part dependent on prudent fiscal and monetary policies to harness macroeconomic stability.

The fiscal balance is projected to turn into a deficit in 2021 but will remain within sustainable limits.

The revenues are set to recover gradually — as a percentage of GDP — due to post pandemic relaxations.

The regional knock on effect of the pandemic on trade taxes as well as very low corporate and income taxes due to weak trade flows will continue in the medium term.

Effective management of public finances will depend on continued measures to ensure tight control of expenditures; particularly public wages, while at the same time provide adequate resources for basic service delivery.

Conservative monetary policies are expected to reduce inflation and stabilise prices in the medium-term.

Assuming appropriate policies, prices could stabilise by 2022 at a much lower inflation rate of around 22%.

The economy is set to recover during the current fiscal period with economic growth being driven by the good harvest in the agriculture sector and boom in commodity prices.

The ministry of Finance projects that the economy will recover by 7,8%, which is rather an optimistic forecasts compared to the World Bank’s forecast of 3,9%.

The economy is coming from two years of economic contraction with the economic environment being characterised by foreign currency shortages, hyperinflation and prolonged droughts.

The outbreak of the Covid-19 pandemic early in 2020, further exacerbated the challenges within the economy adversely affecting economic recovery in the country.

Fiscal and monetary stabilisation efforts implemented by the government have managed to slow down inflation giving hope that the economy may flourish.

Imposition of lockdowns to curb the spread of the coronavirus have resulted in supply chain disruptions and operating restrictions have adversely affected all sectors of the economy.

Whilst supply shocks subsidy with relaxation of the lockdown measures, demand side shocks continue to persist as the pandemic continues.

The country received above normal rainfall during the 2020/21 farming season giving hope of a better harvest.

The government played its part in the mobilisation of inputs through its various schemes in a bid to boost output.

The good rains received during the 2020/21 season heralds better economic prospects for the year and the country is expecting a harvest of 2,1 million tonnes, its biggest harvest since the land reform programme.

The better harvest will reduce pressure for grain imports thus saving about US$300 million that the country has been expending in grain imports yearly.

As the deliveries continue to trickle in at the Grain Marketing Board, bans have been implemented for the importation of grains as the country is better placed to meet its annual demand.

Side marketing of soya beans and maize have been made statutory offences with only authorised buyers allowed to buy the strategic grains.

Tobacco marketing which is applauded as one of the top foreign currency earner in the country is currently facing a challenge of being dominated by contractors which are funded offshore.

According to data from TIMB, by 30 June, US$487 million had been realised in the industry through the sale of tobacco.

Of the industry’s revenues, US$455 million accrued to contractors whilst tobacco auction floors only realised US$32 million.

This has sparked fears over the collapse of the tobacco auction floors in the country.

Consideration has also been made to fund tobacco farming locally however, the lack of collateral among many farmers remains an issue limiting their access to financing from other players.

The bumper harvest in the current year will enhance food security within the nation as in the past dependence on food aid had continued to grow in both rural and urban areas.

Whether performance of the sector would actually be key in driving economic growth remains a highly debatable issue as performance of the sector has limited spillover effects to other sectors of the economy.

The government has continued to provide subsidies and free inputs to the sectors thus increasing its expenditures.

The mining sector is one of the key anchors of the Zimbabwean economy.

However, it continues to face challenges that impede its contribution to the economic recovery.

Government has an ambitious plan to grow the sector to US$12 billion by 2023.

Whilst this is achievable, the sector has many hurdles to surpass before the dream can be realised.

Foreign investment has remained subdued in the country due to regulatory inconsistencies and overreach.

There is so much chopping and changing in policies which does not bode well for a sector which depend on large long term capital investment done over many years before production starts.

Whilst the country sits on vast mineral resources it remains under explored which limits production below potential. Mining companies continue to face challenges raising capital for their projects which is a limitation on their operations.

Smuggling remains a concern for gold mining given its high level of informalisation.

It is estimated that the country loses at least US$100 million per month due to smuggling of gold.

The central bank has introduced different measures to curb smuggling however, the problem continues to persist with some experts within the sector highlighting that the sector needs to be liberalised.

It has been reported that the apex bank is looking forward to the formalisation of artisanal miners within the gold mining sector as a measure to curb smuggling and protect the environment.

Artisanal miners associate formalisation with high compliance cost thus the authorities need to sweeten this offer to discourage smuggling.

Commodity prices have continued to firm on international markets as production keeps increasing with the relaxation of lockdown measures and a slow return to normalcy as major manufacturing countries register success in the inoculation programmes.

Gold prices have continued to surge over fears of inflation in countries like the USA and the uncertainty posed by the pandemic as new variants continue to be discovered.

The manufacturing sector is reported to have registered an improvement in capacity utilisation from 36,4% to 47% in 2020.

Capacity utilisation according to the Confederation of Zimbabwe Industries is expected to improve to 61% in the current year.

The sector has benefitted from improved access to foreign currency since the introduction of the auction system in June 2020, macroeconomic stability and a good harvest.

The manufacturing sector continues to suffer from stiff competition from cheap imported products.

The country remains at risk of a surge in the number of infections which will lead to stiffer lockdown restrictions.

This will adversely affect supply chain, reduce income streams thus affecting aggregate demand.

It is our opinion that capacity utilisation in the manufacturing sector is likely to remain subdued given the uncertainties that are posed by the current pandemic.

According to the World Bank, domestic demand is also projected to remain low as income remain subdued.

Limited flows of Foreign Direct Investment (FDI), influenced by export retention policies and other factors, are expected to keep productivity and competitiveness low in some sectors of the economy.

In the past two years, the country suffered hyperinflation and extreme depreciation of the local currency.

This prompted the government to unleash tight control on money supply and financial regulation which has resulted in the deceleration of inflation and stability in the exchange rate.

Inflationary pressures were witnessed during the first quarter of the year due to tariff adjustments by some government agencies.

However, inflation is expected to continue declining on the back of prudent fiscal and monetary management, stabilisation of the exchange rate, as well as better agriculture season that stabilises food prices.

In order to maintain the decline in inflation and maintain stability, the RBZ should continue to limit the growth of monetary supply, primarily by avoiding monetary financing and all quasi-fiscal activities.