Opinion / Columnist
Short term risks for Zim economy
03 Jun 2021 at 20:26hrs | Views
The Zimbabwean economy is expected to register modest growth this year after 2 years of successive decline when currency changes, high inflation, extreme weather conditions and COVID-19 downturn wrecked the local business environment. The government expects the economy to grow by 7.4% (up from the 4.1% decline of 2020) buoyed by the good yields in the agriculture sector, stable energy supply and resilience from mineral and tobacco exports. The current economic stability and partial dollarization environment has been key in re-establishing the local credit market with banks increasingly lending in foreign currency and realizing better revenues even in inflation adjusted terms. Consumer demand has improved for the retailing sector, just as much as it has for the manufacturing sector. The real estate sector has witnessed significant levels of investment in the last 6 months due to its ability to get stable recurring income in foreign currency. Despite the current stability anchored on partial dollarization and money supply discipline, the *economy remains very fragile* due to lack of sustainable economic reforms and pertinent governance concerns from investors and the business community. The following are some of the imminent risks that may derail economic stability in the short term.
Auction Market Inefficiencies
Zimbabwe instituted the foreign exchange auction market in June 2020 and the platform has been pivotal in availing foreign currency to formal businesses and providing a small measure of pricing stability. In the first quarter of 2021, the auction market has allotted over US$420 million in foreign currency to local producers with most of the funds going towards the importation of raw materials, machinery and equipment, chemicals, and other industrial consumables. However, there have been delays in the settlement of winning bids with backlogs running as far as 2 months in some instances. These backlogs provide a lifeline to the parallel market. Similarly, the spread between the soft pegged auction market rate and parallel market rate is now wide with the former at US$1: ZW$84.65 while the latter is trading at US$1: ZW$130.
The spread is creating a fertile ground for market instability in the short to medium term as it creates unhealthy arbitrage opportunities on the pricing of entirely all imported major commodities such as fuel, electricity, wheat, and soya. This has seen the emergence of fuel queues on service stations which sell the liquid gold in local currency. The power utility (ZESA) was recently forced to review electricity prices by 30% to factor in the changes in exchange rate. Pricing of agriculture commodities and formal delivery of Gold have become compromised as well. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics. To manage this, the government needs to allow the auction rate to be market determined while a sustainable plan needs to be instituted to ensure the country moves to a managed floating exchange rate as is the case with several African countries with comparable economies and balance of trade positions.
Heightened Mineral Smuggling
Gold has lost its top spot of being Zimbabwe's most valuable export to Nickel mattes which accounted for US$985 million in export earnings in 2020, with Gold coming in second at US$982 million. However, Gold exports remain very key to the country's foreign currency earnings and economic stability. The official export figure remains a pale shadow of the over US$1.5 billion which illegally exported by known syndicates to South Africa and United Arab Emirates (UAE) among other destination markets. Gold deliveries to the central bank fell from 27.66 tonnes achieved in 2019 to 19.05 realized in 2020 largely because of well-oiled smuggling rings and systematic corruption in the production value chain. Small Scale and Artisanal Miners sold only 9.35 tonnes last year compared with 17.48 tonnes in 2019. The major reasons for the fall in deliveries were to do with delays in payments by the central bank and differences in prices offered for spot gold by parallel market buyers and by the government. The risk is that if the payment delays and exchange rate issues are not resolved, smuggling will spiral out of control and will take years to uproot due its connection with politics and other state apparatus. The effects of increased smuggling will be felt on the foreign exchange market where foreign currency shortages will persist and lead to heightened depreciation of the local currency. Its now a broken song to recommend timely payments of delivered Gold to the central bank.
COVID-19 Variants
Zimbabwe has largely been sparred of the worst in terms of COVID-19 fatalities and spread with 38,706 cases recorded so far and 1,587 deaths countrywide since the emergence of the pandemic. Nonetheless, the persistence of the pandemic globally will continue to suppress the local tourism sector as most of the source markets are experiencing the newer variants of the disease or imposing strict travel bans to limit the contraction of fatal variants of the disease. As such, business in the tourism and hospitality sector will remain subdued for a longer period than anticipated. Even though local business has recovered, the impact of the pandemic can be extended to disruption of trade and restrictions on business operating hours.
Upcoming 2023 elections
Even though general elections are 2 years away, the election mood is gradually building. This has an effect of shifting government attention from sustainable economic policies to policies which bring quick wins in the elections and funding for various subsidies to entice the electorate. This will lead to the re-emergence of debt trapping agriculture and consumption subsidies which are not provided for by the national budget. This will result in money printing, knee-jack policy changes and re-emergence of triple digit inflation. Similarly, any election related unrest or dispute will be detrimental to economic stability and image to the international community.
Policy changes and Informalization
The complex tax environment, low levels of confidence in the country's banking sector and frequent changes in monetary policies are leading to high levels of informalization. Majority of the country's Small to Medium Enterprises (SMEs) are not tax compliant while formal organizations are finding ways to evade taxes. A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia's 62.3%. This means that the shadow economy in Zimbabwe transacts more in terms of monetary value than the formal economy. The shadow economy will inevitably weigh heavily on economic recovery efforts as tax revenues dwindle and the treasury is forced to institute more taxes. To manage this, the government would need to simplify its taxation model and create robust enterprise systems that monitor business transactions in real time and enforce tax compliance.
Mono currency inertia
The persistent push by various players for a return to monocurrency show lack of appreciation on Zimbabwe's tainted monetary policy history, the fundamentals that support currency value and the importance of structural reforms to sustainable economic stability. The rushed and ill-timed introduction of the Zimbabwean Dollar in 2019 cost the local economy billions while pensioners, corporates and labour were left nursing savings losses. The current stability is borne out of partial dollarization and any effort to implement a monocurrency without addressing structural issues will be futile. Further regulations to implement a mono currency will push the demand for hard currency, while undoing the gains of the partial economic stability realized so far.
The failure by the government to privatize various loss-making state entities means that the economy will continue to be burdened by SEPs that contribute less than 2% to economic output. Most of these commercial enterprises are piling huge debts on the taxpayer while lining pockets of the politically connected. Parastatal debts have significantly increased Zimbabwe's debt exposure in the past 20 years. Despite the current price stability and free trade in foreign currency, Zimbabwe's economy remains very fragile and highly susceptible to reactionary policy changes by the government and other persistent risks that the government has shown no political will to resolve sustainably.
Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.
Auction Market Inefficiencies
Zimbabwe instituted the foreign exchange auction market in June 2020 and the platform has been pivotal in availing foreign currency to formal businesses and providing a small measure of pricing stability. In the first quarter of 2021, the auction market has allotted over US$420 million in foreign currency to local producers with most of the funds going towards the importation of raw materials, machinery and equipment, chemicals, and other industrial consumables. However, there have been delays in the settlement of winning bids with backlogs running as far as 2 months in some instances. These backlogs provide a lifeline to the parallel market. Similarly, the spread between the soft pegged auction market rate and parallel market rate is now wide with the former at US$1: ZW$84.65 while the latter is trading at US$1: ZW$130.
The spread is creating a fertile ground for market instability in the short to medium term as it creates unhealthy arbitrage opportunities on the pricing of entirely all imported major commodities such as fuel, electricity, wheat, and soya. This has seen the emergence of fuel queues on service stations which sell the liquid gold in local currency. The power utility (ZESA) was recently forced to review electricity prices by 30% to factor in the changes in exchange rate. Pricing of agriculture commodities and formal delivery of Gold have become compromised as well. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics. To manage this, the government needs to allow the auction rate to be market determined while a sustainable plan needs to be instituted to ensure the country moves to a managed floating exchange rate as is the case with several African countries with comparable economies and balance of trade positions.
Heightened Mineral Smuggling
Gold has lost its top spot of being Zimbabwe's most valuable export to Nickel mattes which accounted for US$985 million in export earnings in 2020, with Gold coming in second at US$982 million. However, Gold exports remain very key to the country's foreign currency earnings and economic stability. The official export figure remains a pale shadow of the over US$1.5 billion which illegally exported by known syndicates to South Africa and United Arab Emirates (UAE) among other destination markets. Gold deliveries to the central bank fell from 27.66 tonnes achieved in 2019 to 19.05 realized in 2020 largely because of well-oiled smuggling rings and systematic corruption in the production value chain. Small Scale and Artisanal Miners sold only 9.35 tonnes last year compared with 17.48 tonnes in 2019. The major reasons for the fall in deliveries were to do with delays in payments by the central bank and differences in prices offered for spot gold by parallel market buyers and by the government. The risk is that if the payment delays and exchange rate issues are not resolved, smuggling will spiral out of control and will take years to uproot due its connection with politics and other state apparatus. The effects of increased smuggling will be felt on the foreign exchange market where foreign currency shortages will persist and lead to heightened depreciation of the local currency. Its now a broken song to recommend timely payments of delivered Gold to the central bank.
COVID-19 Variants
Zimbabwe has largely been sparred of the worst in terms of COVID-19 fatalities and spread with 38,706 cases recorded so far and 1,587 deaths countrywide since the emergence of the pandemic. Nonetheless, the persistence of the pandemic globally will continue to suppress the local tourism sector as most of the source markets are experiencing the newer variants of the disease or imposing strict travel bans to limit the contraction of fatal variants of the disease. As such, business in the tourism and hospitality sector will remain subdued for a longer period than anticipated. Even though local business has recovered, the impact of the pandemic can be extended to disruption of trade and restrictions on business operating hours.
Upcoming 2023 elections
Even though general elections are 2 years away, the election mood is gradually building. This has an effect of shifting government attention from sustainable economic policies to policies which bring quick wins in the elections and funding for various subsidies to entice the electorate. This will lead to the re-emergence of debt trapping agriculture and consumption subsidies which are not provided for by the national budget. This will result in money printing, knee-jack policy changes and re-emergence of triple digit inflation. Similarly, any election related unrest or dispute will be detrimental to economic stability and image to the international community.
Policy changes and Informalization
The complex tax environment, low levels of confidence in the country's banking sector and frequent changes in monetary policies are leading to high levels of informalization. Majority of the country's Small to Medium Enterprises (SMEs) are not tax compliant while formal organizations are finding ways to evade taxes. A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia's 62.3%. This means that the shadow economy in Zimbabwe transacts more in terms of monetary value than the formal economy. The shadow economy will inevitably weigh heavily on economic recovery efforts as tax revenues dwindle and the treasury is forced to institute more taxes. To manage this, the government would need to simplify its taxation model and create robust enterprise systems that monitor business transactions in real time and enforce tax compliance.
Mono currency inertia
The persistent push by various players for a return to monocurrency show lack of appreciation on Zimbabwe's tainted monetary policy history, the fundamentals that support currency value and the importance of structural reforms to sustainable economic stability. The rushed and ill-timed introduction of the Zimbabwean Dollar in 2019 cost the local economy billions while pensioners, corporates and labour were left nursing savings losses. The current stability is borne out of partial dollarization and any effort to implement a monocurrency without addressing structural issues will be futile. Further regulations to implement a mono currency will push the demand for hard currency, while undoing the gains of the partial economic stability realized so far.
The failure by the government to privatize various loss-making state entities means that the economy will continue to be burdened by SEPs that contribute less than 2% to economic output. Most of these commercial enterprises are piling huge debts on the taxpayer while lining pockets of the politically connected. Parastatal debts have significantly increased Zimbabwe's debt exposure in the past 20 years. Despite the current price stability and free trade in foreign currency, Zimbabwe's economy remains very fragile and highly susceptible to reactionary policy changes by the government and other persistent risks that the government has shown no political will to resolve sustainably.
Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.
Source - Victor Bhoroma
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