News / National
July 30 election results key to Zimbabwe economic recovery
27 Jun 2018 at 01:59hrs | Views
"THE economy, stupid" is a popular phrase in American politics that came about in 1992 as the then United States presidential candidate Bill Clinton used this against sitting President George Herbert Walker Bush.
The idea behind the phrase was to bring to the attention of American voters that the most important thing going into that country's elections was economic stabilisation.
Not only did this strategy work and gave Clinton the presidency, but the phrase has gone on to become a cliché in American political discourse.
Similarly, Zimbabwe also faces elections slated for next month where only one thing matters most, the economy.
However, unlike what happened in 1992 where it was only Clinton who focused his campaign on the economy, the two main local political parties Zanu-PF and the MDC Alliance have focused their campaigns and theme on the economy.
But, the difference between the two parties is that Zanu-PF is already in power and in control of all levers of power, the judiciary, executive and legislature.
Yet, despite this, the economy has been in a depression for more than two decades.
For years, Zanu-PF has been boasting of future economic returns with next month's election being no different. But, the reality on the ground is that since the coming in of the new dispensation last November, the situation has only worsened.
"Even under the new government, constrained economic activity, foreign currency shortages, high parallel market rates, multiple-pricing systems, and poor livelihoods for households will likely persist during the outlook period," Fewsnet said in its Food Security Outlook for the February to September 2018 period.
"Price increases for basic and other commodities and services are likely to continue. Annual inflation which averaged 1% between January and December 2017 is likely to rise significantly. Macroeconomic conditions will also have an impact on the following livelihood activities and income sources."
All this is even with all the increased optimism that has been evidenced by the stock market performance whose market cap rose from a low of below $9 billion in November 2017 to $10,23 billion as of Monday.
Yes, the characteristics of a depressed economy as described by Investopedia are there for everyone to see.
Unemployment
In this area, out of the 13 572 560 population as at the end of 2017, only 5 611 809 were found to be economically active, according to the country's national statistics body, Zimstat.
Out of those economically active, only about 500 000 are formally employed from a peak of two million in 2000.
In March, Econometer Global Capital said while Zimbabwe boasts a younger population, "this young population is not translating into the required labour force by businesses. The residual effects from the economic collapse and hyperinflation during the mid-2000s hurt the education sector, particularly public schools and drove the mass emigration of skilled labour resulting in a significant brain drain".
To that effect, job growth has remained pathetically low.
Not helping matters is the fact that companies are shedding jobs more than they are hiring, on the back cost constraints.
Drop in available credit
Recently, speaking to our sister paper The Standard, Finance minister Patrick Chinamasa said "our biggest challenge at the moment is the debt problem, whereby because of that debt we are unable to access new capital".
As a result of this, Zimbabwe has very little credit until it extinguishes its huge debt, which according to the Parliamentary Budget Office, is over $11 billion.
This debt is as a result of years of borrowing and credit facilities both locally and internationally without being able to pay back due to government's high expenditure which constitutes about 90% of annual revenue.
With these constraints, government is unable to borrow as it is seen as having done nothing to address its excessive expenditure largely driven by its wage bill.
Diminishing output
The Confederation of Zimbabwe Industries' 2017 manufacturing sector survey report showed that capacity utilisation dropped to 45,1% from 47,4% in the previous year.
The reason behind that was due to lack of capital, decline in investment, antiquated machinery, and lack of foreign currency to import critical raw materials.
All this has contributed to low production which has caused an economic contribution of 13% to the economy from a peak of over 30%.
"The continued decline of the economy has led to several manufacturing companies closing operations. Very little foreign direct investment has come into the country as a result of the government's indigenisation policies, the high cost of capital and socio-political instability," United Kingdom-based realtor Knight Frank said.
Without the capital to improve production capacity and the foreign currency to buy the raw materials needed to produce goods timeously, the manufacturing sector will not improve.
Bankruptcies and sovereign debt defaults
Government's high expenditure has led to it neglecting to take care of its debts and thus has defaulted on many loans.
Since 2013, government has had a long penchant for over borrowing without being able to service those funds.
Chewing into its revenue has been the wage bill which if trimmed could save government billions.
Even though government presented its arrears clearance plan in Lima, Peru in 2015, it has only managed to clear arrears to the International Monetary Fund (IMF) and is still left with over a $1 billion to clear its World Bank debt.
"The IMF typically portrays itself as apolitical, but we nonetheless believe that Zimbabwe's considerable arrears to international financial institutions such as the World Bank mean that the Fund would be less likely to rush into any new arrangement following a fraudulent election. Without international support, we would not expect to see the kind of investment needed to kick-start the country's economic recovery," BMI Research said.
It was only in the 2018 National Budget that government finally proposed ways of reducing its huge wage bill that is still yet to yield results.
Reduced trade and commerce
While total trade has risen over the past few years, the consumptive nature of the economy has caused trade to be negative on the back of higher imports than exports.
This has caused widening deficits on a year-to-year basis since 2013 that have been averaging about $2 billion annually in the past three years alone.
Last month, central bank governor John Mangudya said the economy hit a $1 billion trade deficit in the first four months of 2018.
Economist Kipson Gundani said the increased consumptive nature in the economy was due to lower earnings of individuals over the years and an almost non-existent savings culture in the economy that has turned it consumptive in nature.
"It is never good to be highly consumptive because if you then analyse the quality of the trade even if aggregate trade has been increasing you would then discover the bulk of the trade in consumptive goods which are not value added, so it is a leakage in the economy," he said.
"If you are a highly consumptive country and those products are not local products, it means it becomes an absolute leakage where the economy is losing wealth," he said.
So, no matter if total trade has grown as long as the country remains highly consumptive trade will continue to remain negative something which the current government has yet to address, analysts say.
Sustained volatility in currency values
The country may not have a local currency but the growth in premiums in the parallel money market has caused a loss in value in real time gross settlement balances, EcoCash balances and even the pseudo-currency bond notes against the greenback.
With these distortions, inflation has been on the rise with the parallel market now effectively determining the pace of the economy.
Already, 25% of the forex used by industry comes from the parallel market.
Making matters worse is that the Reserve Bank of Zimbabwe only has $1,19 billion worth of liquidity facilities which is not enough to address the forex challenges helping the parallel market stay afloat.
Elections
For all these reasons the economy is front and centre going into next month's elections which BMI Research warns will be critical if the economy is to recover.
The idea behind the phrase was to bring to the attention of American voters that the most important thing going into that country's elections was economic stabilisation.
Not only did this strategy work and gave Clinton the presidency, but the phrase has gone on to become a cliché in American political discourse.
Similarly, Zimbabwe also faces elections slated for next month where only one thing matters most, the economy.
However, unlike what happened in 1992 where it was only Clinton who focused his campaign on the economy, the two main local political parties Zanu-PF and the MDC Alliance have focused their campaigns and theme on the economy.
But, the difference between the two parties is that Zanu-PF is already in power and in control of all levers of power, the judiciary, executive and legislature.
Yet, despite this, the economy has been in a depression for more than two decades.
For years, Zanu-PF has been boasting of future economic returns with next month's election being no different. But, the reality on the ground is that since the coming in of the new dispensation last November, the situation has only worsened.
"Even under the new government, constrained economic activity, foreign currency shortages, high parallel market rates, multiple-pricing systems, and poor livelihoods for households will likely persist during the outlook period," Fewsnet said in its Food Security Outlook for the February to September 2018 period.
"Price increases for basic and other commodities and services are likely to continue. Annual inflation which averaged 1% between January and December 2017 is likely to rise significantly. Macroeconomic conditions will also have an impact on the following livelihood activities and income sources."
All this is even with all the increased optimism that has been evidenced by the stock market performance whose market cap rose from a low of below $9 billion in November 2017 to $10,23 billion as of Monday.
Yes, the characteristics of a depressed economy as described by Investopedia are there for everyone to see.
Unemployment
In this area, out of the 13 572 560 population as at the end of 2017, only 5 611 809 were found to be economically active, according to the country's national statistics body, Zimstat.
Out of those economically active, only about 500 000 are formally employed from a peak of two million in 2000.
In March, Econometer Global Capital said while Zimbabwe boasts a younger population, "this young population is not translating into the required labour force by businesses. The residual effects from the economic collapse and hyperinflation during the mid-2000s hurt the education sector, particularly public schools and drove the mass emigration of skilled labour resulting in a significant brain drain".
To that effect, job growth has remained pathetically low.
Not helping matters is the fact that companies are shedding jobs more than they are hiring, on the back cost constraints.
Drop in available credit
Recently, speaking to our sister paper The Standard, Finance minister Patrick Chinamasa said "our biggest challenge at the moment is the debt problem, whereby because of that debt we are unable to access new capital".
As a result of this, Zimbabwe has very little credit until it extinguishes its huge debt, which according to the Parliamentary Budget Office, is over $11 billion.
This debt is as a result of years of borrowing and credit facilities both locally and internationally without being able to pay back due to government's high expenditure which constitutes about 90% of annual revenue.
With these constraints, government is unable to borrow as it is seen as having done nothing to address its excessive expenditure largely driven by its wage bill.
Diminishing output
The Confederation of Zimbabwe Industries' 2017 manufacturing sector survey report showed that capacity utilisation dropped to 45,1% from 47,4% in the previous year.
The reason behind that was due to lack of capital, decline in investment, antiquated machinery, and lack of foreign currency to import critical raw materials.
All this has contributed to low production which has caused an economic contribution of 13% to the economy from a peak of over 30%.
"The continued decline of the economy has led to several manufacturing companies closing operations. Very little foreign direct investment has come into the country as a result of the government's indigenisation policies, the high cost of capital and socio-political instability," United Kingdom-based realtor Knight Frank said.
Without the capital to improve production capacity and the foreign currency to buy the raw materials needed to produce goods timeously, the manufacturing sector will not improve.
Bankruptcies and sovereign debt defaults
Government's high expenditure has led to it neglecting to take care of its debts and thus has defaulted on many loans.
Since 2013, government has had a long penchant for over borrowing without being able to service those funds.
Chewing into its revenue has been the wage bill which if trimmed could save government billions.
Even though government presented its arrears clearance plan in Lima, Peru in 2015, it has only managed to clear arrears to the International Monetary Fund (IMF) and is still left with over a $1 billion to clear its World Bank debt.
"The IMF typically portrays itself as apolitical, but we nonetheless believe that Zimbabwe's considerable arrears to international financial institutions such as the World Bank mean that the Fund would be less likely to rush into any new arrangement following a fraudulent election. Without international support, we would not expect to see the kind of investment needed to kick-start the country's economic recovery," BMI Research said.
It was only in the 2018 National Budget that government finally proposed ways of reducing its huge wage bill that is still yet to yield results.
Reduced trade and commerce
While total trade has risen over the past few years, the consumptive nature of the economy has caused trade to be negative on the back of higher imports than exports.
This has caused widening deficits on a year-to-year basis since 2013 that have been averaging about $2 billion annually in the past three years alone.
Last month, central bank governor John Mangudya said the economy hit a $1 billion trade deficit in the first four months of 2018.
Economist Kipson Gundani said the increased consumptive nature in the economy was due to lower earnings of individuals over the years and an almost non-existent savings culture in the economy that has turned it consumptive in nature.
"It is never good to be highly consumptive because if you then analyse the quality of the trade even if aggregate trade has been increasing you would then discover the bulk of the trade in consumptive goods which are not value added, so it is a leakage in the economy," he said.
"If you are a highly consumptive country and those products are not local products, it means it becomes an absolute leakage where the economy is losing wealth," he said.
So, no matter if total trade has grown as long as the country remains highly consumptive trade will continue to remain negative something which the current government has yet to address, analysts say.
Sustained volatility in currency values
The country may not have a local currency but the growth in premiums in the parallel money market has caused a loss in value in real time gross settlement balances, EcoCash balances and even the pseudo-currency bond notes against the greenback.
With these distortions, inflation has been on the rise with the parallel market now effectively determining the pace of the economy.
Already, 25% of the forex used by industry comes from the parallel market.
Making matters worse is that the Reserve Bank of Zimbabwe only has $1,19 billion worth of liquidity facilities which is not enough to address the forex challenges helping the parallel market stay afloat.
Elections
For all these reasons the economy is front and centre going into next month's elections which BMI Research warns will be critical if the economy is to recover.
Source - newsday
