eBusiness Weekly
Misheck Ugaro
Historically the country grappled with an unstable economic environment over the five years leading up to the onset of austerity measures implemented under the Transitional Stabilisation Programme (TSP) in 2018.
And while a measure of stability was achieved before the abandonment of the programme in November 2019, where the Government deficit as well as the current account deficits were largely brought under control, continued success is tied to the achievement of a stable political environment.
The foreign exchange market has largely remained stable in the last quarter of the year with both the interbank and parallel market rates hovering around the $15,8: US$1 and $20:US$1 respectively.
Month-on-month inflation outlook to the end of the year has been on a downward trend and as a result an aggressive $63 billion budget for 2020 was announced targeting a GDP growth of 3 percent.
However, the same cannot be said of the political sphere and these two aspects are intertwined where a politically unstable environment may easily erode the gains achieved so far on the economic front. Added to this, there is no doubt now about the onset of a severe drought for the 2020 season, being a second consecutive year.
Zimbabwe, with an agricultural and mining backbone for economic growth, faces the real risk of unwinding the positives that had so far been achieved. These include liberalisation of the foreign exchange market, the bringing under control of the now famous twin deficits being the budget and the current account deficits, the installation of a Monetary Policy Committee whose impact was already beginning to take root as evidenced by the relative stability in the last quarter of the year, the re-engineering of subsidies cutting out inefficiencies and arbitrage opportunities and the liberalisation of the fuel sector.
While the full impact of these positive achievements above are yet to filter through and be felt by the men on the street, the country faces the risk of reversal on some of these gains as we move into the year ahead due to developing environmental scenarios.
The most significant of these factors is the drought that has seen below normal rainfall being received throughout all regions of the country to date.
In addition, a recent event in the Middle East is likely to cause some disturbances on the geo-political sphere in addition to Zimbabwe’s own unstable political environment.
An analysis of the factors seems to show the following likely scenarios
- The drought risk
The poor rains received so far are inadequate to bolster the country’s economic performance. It has been shown historically that drought incidence in Zimbabwe results in GDP contraction.
The historical pattern, as alluded to by the Ministry of Finance and Economic Development in the Budget presentation of November 14, 2019 showed negative GDP growth 2002-2003 (-5,9 percent), 2008 (-14,3 percent) and 2019 (6,5 percent ) as major contractions during drought years.
Agricultural output is expected to decline as a result of the current drought that is extending into 2020. It has been estimated at a 16 percent decline. Where there are low water levels to sustain irrigation, the challenge is compounded by an inadequate power supply, itself expected to decline by 19 percent.
Erratic power supply is a double edged sword as it also negatively impacts industrial capacity utilisation as well as the other key sectors like mining and tourism. Manufacturing output is expected to decline by 4,3 percent, from an already shrinking base.
- Political risk
The challenges faced by the country are not limited to economic factors. The socio political environment, typified by the current political logjam that has polarised the country poses a significant risk. The unfortunate continued incidence of drought may result in further social instability and hampering production.
To further complicate this, developments in the Middle East may negatively impact on the Zimbabwean economy through oil prices as petroleum is being projected to jump to US$150 a barrel from the current US$60 a barrel levels. This will have a severe strain on an import dependent country such as Zimbabwe.
However, on the other side, commodity prices are rising as a result and in particular gold price has risen to its highest level since 2013.
This may provide a boon for the country’s mining exports and calls for a more comprehensive management of gold exports and do away with the current state of affairs, especially in the small scale mining sector typified by chaotic and violent machete carrying gangs.
- GDP contraction
Going into the first quarter of year, we expect the economy to experience the effect of the expansionary monetary policy of 2019, which saw money supply growth peaking at 80 percent as this has a lagged effect.
While the foreign exchange market has relatively been stable in the second half of 2019 from about August due to various measures implemented by the authorities, including drastic liquidity management and distribution on the market, the installation of the monetary Policy Committee, the foreseen import bill for supplementary food imports is likely to exert further pressure on further Money Supply growth and its attendant effects on exchange rate and inflation.
Price escalations are expected to start filtering through from end of the first quarter into the year and drive inflation up.
As a result, money supply growth is expected to cause a depreciation in the local currency exchange rate to 25: US$1 (unofficial market) while inflation, which tends to track the exchange rate, is likely to go up. We expect the commencement of the publication of annual inflation figures from February 2020 as the full year cycle will have been attained and at present therefore there are no comparative figures.
The projected 3 percent GDP growth for the year is unlikely to be achieved when all the factors above are taken into account. The expected decline in all the economic sectors is being projected to result in a GDP contraction of 5 percent.
Many economists have called for the authorities to propose a supplementary budget already in the face of an adverse environment.
This should come as early as by end of the first quarter as the announced $63 billion will be much lower than the supplementary budget given total bids were $136 billion.
In conclusion, the incidence of continued drought, which is now running for two consecutive years, an unstable political environment and a developing geo political situation may combine to adversely affect the originally projected GDP growth.
Authorities may need to revise the proposed budget to take into account all the negative developments that faces the country going into 2020.
[email protected] (263) 0777 052 004/0712 808 140 — Misheck Ugaro is an economist, a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is a member and past Vice President of the Zimbabwe Economics Society.
