Recession, Zim Dollar return and Economic Outlook

As the country enters the last half of the year and warms up to the re-introduction of the Zimbabwean Dollar, it is now evident that the economy is swiftly sliding into a recession. In 2018, the economy grew by an estimated 4%, driven by growth in agriculture, mining and record exports of commodities. The current year started on a grim note with January inflation hitting 56.9% before expanding to 97.9% in May 2019. The June inflation figure will eclipse 100% to confirm the re-admission of the local economy into the recession mode for the first time since 2008. The International Monitory Fund (IMF) predicted that Zimbabwe's economy will contract by 5.2% before revising the figure to 2.1% in line with the deliverables in the Staff Monitoring Programme (SMP). The World Bank points that the Zimbabwean economy is now in recession and will shrink by 3.1% in 2019. The major constraints for the economy emanate from structural challenges in governance being met in implementing economic reforms, hyperinflation, foreign currency liquidity shortages, power outages, political instability and the prevailing drought among others.

A recession is a significant decline in economic activity spread across the entire economy, lasting more than a few months and normally visible with a drop in Gross Domestic Product (GDP), real income, consumer demand, employment, industrial production and company closures.

The symptoms of a recession in Zimbabwe have mainly been visible on loss of value for the local currency which affects real incomes for labour and businesses. The Zimbabwean Dollar (Formerly RTGS Dollar) has lost more than 150% of its value since the interbank market was launched in February 2019. The average civil service salaries have gone below US $80.00 (using prevailing interbank rates) and below US $35.00 if the black market rates are used. The same applies for wages in the private sector and business earnings for local producers. Company closures have also started to creep in with massive industrial layoffs, though the major push factor there has been foreign currency shortages and power cuts. Industrial capacity utilization has declined to less than 40% and may end the year at about 35% if those two production factors are not addressed.

Zimbabwe's last recession cycle was from the year 2000 to 2008 where the local economy contracted at an average of 7.41% in each year. The period saw massive de-industrialization, company closures, foreign investor flight, job losses, decline in agricultural productivity and rise in poverty levels. The economy bounced back to growth in 2009 after the introduction of the US Dollar which stabilized inflation, boosted private sector investment and cut the central bank print run which was responsible for fueling inflation. However the local industry had lost competitiveness due to de-industrialization, decline in agricultural production, obsolete equipment and lack of capital to retool. The local industry has not been competitive in the region largely because of those key constraints. However the key take outs from the 2009-2013 record growth cycle is that confidence, political stability and prudent public funds management are key to the growth of the local economy. Zimbabwe's economy grew by an average of 10% between 2009 and 2013.

On the 24 of June 2019, the Zimbabwean government gazetted a new regulation that outlaws the charging of multiple currencies for local goods and services while re-introducing the Zimbabwean Dollar, parked since 2008. The return of the Zimbabwean Dollar through the gazetting of Statutory Instrument 142 of 2019 might be a positive aspect for the local industry provided the foreign currency to import raw materials is available on the interbank market or local banks access foreign currency to oil their Nostro accounts. Now that the country has an official local currency, banks can now trade currencies on the international platform with limited central bank control.

However failure to secure foreign currency for local producers might lead to empty shelves and production stoppages. The informal market will therefore remain very relevant as goods in short supply in the shops can be found on the black market for any currency the traders deem fit. Even though the Zimbabwean Dollar is the legal tender, SI 142 does not state any penalties for trading in multiple currencies or criminalize those found in possession of foreign currencies. Strict enforcement of the local currency through price controls will lead to market shortages for all imported commodities especially medicine, basic foodstuff and industrial equipment. The government is likely not going to temper with price controls.

Black market activities and runaway inflation are not likely to be cooled by the return of the Zimbabwean Dollar in the long term as fears of rampant money printing by RBZ are high. The USD and South African Rand will remain very vital for informal trade, savings and property disposals as sellers will likely adopt a wait and see attitude in the coming weeks. Foreign currency will now be traded illegally in dark corners at high premiums.

The much hyped FCA account will remain relevant for industrial importers mainly. Non-Governmental Organizations (NGOs), foreign embassies and corporates that transacted using FCA transfers will no longer be able to do so. Foreign currency deposits with local banks will definitely take a knock going into end of year. Similarly all labour costs will be settled in a local currency unless if the central bank specifies otherwise. Foreign currency remittances are most likely going to be treated as free funds to ensure the remittances corridor is left open and International Money Transfer (IMT) agencies can import US Dollars into Zimbabwe.

In terms of the value for the Zimbabwean Dollar, the government has no absolute control on that front. The value of the local currency will depend on securing reserves to back the fiat currency, liquidity levels on the interbank market, confidence levels in the economy and government itself, export and import parity (current account position), inflation levels and general economic performance. Currently all these fundamental necessities are not positive, therefore the value of the Zimbabwean Dollar is likely to plummet against major world currencies. After assessing the government's currency reforms, it is clear that the introduction of the Zimbabwean Dollar was necessitated by the government's need to have control on money printing in the local economy. The slide into dollarization took this key function away from the central bank. The central bank also wants flexibility in paying local debt and responding to government expenditure demands for economic intervention.

Major constraints remain the economy with key gaps in supplies of fuel, maize, soya and wheat; foreign currency shortages on the interbank market; power cuts; confidence deficit and production bottlenecks. Inflation still remains the country's number one enemy and managing it remains the key performance indicator for treasury and central bank authorities. Exports will be slightly below the $4.23 billion mark achieved in 2018 due to foreign currency retention outcries from key producers such as tobacco farmers and miners. The IMF monitored Staff Monitoring Programme (SMP) remains key in cutting government expenditure, curtailing borrowing locally or offshore and restructuring of State Enterprises and Parastatals (SEPs). Though the agreements in the program are now under threat from civil service salary hikes. Civil servants are likely going to get 50 to 100% increments in the next month though their satisfaction will largely be determined by the inflation rate.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.