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EIU predicts tough times ahead for Zimbabwe

by Staff reporter
04 Aug 2020 at 08:19hrs | Views
LONDON-BASED Economic Intelligence Unit (EIU) has predicted a gloomy economic outlook for Zimbabwe in the next four years owing to failure by government to manage the tumultuous political and economic environment.

In its report released over the weekend, the EIU said pointers on the ground showed the government would most likely spend more national resources in mitigating the economic crisis that continues to blight the economy.

"Spending as a percentage of GDP will increase in 2020 as the government attempts to mitigate the economic crisis. Public-sector wages will continue to rise, and healthcare spending will also be boosted, but capital expenditure will remain low, with projects stifled by corruption and bureaucracy as other spending is prioritised," read the EIU's third quarter report on Zimbabwe.

It also stated that while revenue inflows into the government coffers could increase owing to possible increases in taxes between the years 2022-24, there was a likelihood that government expenditure would also increase.

As revenue increases over 2022-24, expenditure will also rise steadily as a percentage of GDP (albeit at a lower rate than revenue, as financial resources will remain limited).

"We expect a modest rise in capital expenditure as the government seeks to repair infrastructure and develop power generation capacity following years of under-investment.

"Subsidies and the public wage bill will remain substantial. We expect the fiscal deficit to widen in 2020, to 9% of GDP, before narrowing gradually over 2021-24, to 8,2% of GDP in 2024, as revenue growth outpaces spending increases," the report adds.

With Zimbabwe fast becoming a big borrower on the market to finance expenditure internally, the EIU said government would be forced to go onto the market again to seek financing to sustain operations.

The deficit will continue to be financed chiefly through domestic borrowing, as Zimbabwe remains largely cut off from international capital markets (although credit remains available from countries such as Russia and China).

"With few other financing options, the government is reliant on issuing short-term Treasury Bills while the Reserve Bank of Zimbabwe (RBZ, the central bank) engages in quasi-financing activity (printing money). Broad money supply rose sharply throughout 2019 and 2020. The IMF warned against this policy in its review following the latest SMP, but in the face of tight financing conditions, the government is running against the Fund's advice," added the EIU report.

The unit also noted that government could turn to its usual habit of printing more money and introducing it to the market to aid currency availability.

"We expect the money printing scheme to continue this year, as few other avenues are open to the government. This will place further upward pressure on inflation through massive increases in the money supply," said the EIU.

Turning to inflation, the EIU predicted an increase in inflation levels beginning this year.

"With soaring money supply, inflation has skyrocketed. We expect inflation to average 498,3% over the year. From 2021, we expect the RBZ to cease its quasi-financing activities (as a show of good faith as the authorities look to re-engage with the IMF), tempering growth in the money supply base.

"Interest rates will rise that year as the RBZ attempts to moderate inflation, which will stabilise from 2022 as money supply grows more slowly, giving the RBZ room to cut rates gradually. We forecast that real GDP will contract by 15,5% in 2020 (following an estimated decline of 8,1% in 2019) as foreign-currency shortage, limited investment, company shutdowns, extended power cuts, soaring inflation and lockdown measures to stem the domestic coronavirus outbreak weigh on economic activity," the EIU stated in the report.

Political challenges and corruption within government circles, the report noted, would need to be stemmed as a measure to boost international and investor confidence-a move that could see more investors coming to do business with Zimbabwe.

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Source - newsday

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