'Zimbabwe hurtling towards stagflation'

LAST week the CEO Africa Roundtable (CEOART) gathered some of Zimbabwe's best economists and industrialists to digest economic developments during the first quarter of 2021. What came out of the summit was a mixed bag. But it is clear that a great deal of work must be done to boost economic recovery.

Taurai Mangudhla (TM) had a discussion with CEOART boss Kipson Gundani (KG) to find out what is in store for Zimbabwe as 2021 progresses. Below are the excerpts from the interview.

TM: What is your assessment of the first quarter of 2021?
KG: The economy is on the watershed, delicately poised - either for full-scale recovery and thereafter sustained growth towards the upper middle income status, in line with Vision 2030, or an irretrievable slide beyond the precipice, the major factor being the Covid-19 impact and the residual macroeconomic distortions still inherent in our economy.

TM: What has been the impact of Covid-19 in Q1?
KG: The world is under siege from the Covid-19 pandemic. Zimbabwe has not been spared from this pandemic with over 36 000 infections and 1 520 deaths. This latest wave is a twin threat to lives and livelihoods. As uncertainty continues over the economic impact of Covid-19, Zimbabwe herself is in a more delicate position to balance policies needed to restore macroeconomic stability with those needed to restore
urgent social needs.

TM: Tell us about the 2021 outlook.
KG: Economic growth is likely to be depressed. In the absence of a significant fiscal stimulus and given the fragility of the economy, growth will be highly depressed. Widening currency fluctuations and possible rising debt in the wake of increased demand for goods and services for the effective response to the pandemic could dampen growth further and discourage the much-needed investments, thus leading to an increase in poverty. The decline in tourism will lead to more job losses and dampen growth. Remittances are likely to decline, affecting access to basic social services and increasing vulnerability, as most countries housing the Zimbabwean Diaspora are affected due to the slowdown in economic activity. Company closures and downsizing due to cost push factors will also see an explosion of the informal economy as more people join the bandwagon due to company closures and downsizing.

TM: The ministry of Finance predicts a 7,4% GDP growth. Is this attainable and why?
KG: According to the Treasury, Zimbabwe's economy is forecast to rebound in 2021 as the country shrugs off the effects of the coronavirus pandemic and as the government takes further measures to stabilise the currency. Treasury expects the economy to expand 7,4% this year from a projected 4,5% Covid19-induced decline in 2020 on the back of an expected good agricultural season and recovery of the global economy. The World Bank has projected a 2,9% growth. Key drivers of next year's growth will include an improvement in exports and commodity prices, as the world economy kicks into gear again. Tobacco would be a determinant too. The Covid-19-induced lockdowns will weigh down domestically-driven consumption causing a knock on these growth estimates. Local demand will remain subdued due to lockdowns and most firms which rely on internally-driven consumption will face challenges. More so, companies already struggling will find it difficult to recover even after the pandemic recedes as savings dry up. Zimbabwe's economy is largely driven by household and government consumption expenditures collectively accounting for 80% of growth. Decline in GDP largely reflects declines in consumption. Future growth will largely depend on ability to accumulate capital stock, increase in labour inputs and technological advancement. In our case, low productivity and lower employment of labour inputs points to a downward movement on the production possibility curve. My opinion is we are going towards stagflation and growth in 2021 will not exceed 2%. Mining and agriculture alone will not drive growth of 7,4%.

TM: Has the government done enough to create an enabling environment for business to thrive?
KG: Agreeably there has been a great improvement in economic sanity. The historical distortions emanated from an unbalanced budget financed through money printing, exchange rate controls and a centralised allocative system which was very inefficient. Great improvement has been done on the fiscal side, though the 2021 national budget is a bag of optimism over fiscal prudence. From 7,4% growth estimates, a sharp fall in inflation, a jump in revenue, the ministry of Finance paints a picture of economic boom. However, economic stability is built on the sobriety of policies and not on populist stances. In my view, in the absence of external financing, we are likely to see overshooting of expenditure making fiscal consolidation a murky exercise. On the monetary side and regrettably the Dutch auction system remains a huge distortion in the market as not full price discovery is being allowed.

TM: Tell us more about the auction system.
KG: The RBZ foreign exchange auction is a case of fragile stability. The Dutch auction system has resulted in some exchange rate stability, but fragile. The auction remains a buyers' market with the government being a key player on the supply side of the foreign exchange. The rate is technically controlled, hence there is now almost a 50% drift from the parallel market rate, thus adding little competitiveness of foreign exchange allocation. Economic players shouldering the impact of this distortion are exporters through surrender requirements at a suboptimal exchange rate. Most progressive economies leave the exchange rate to find its own level – benign neglect. It is thus likely to lead to an implosion and likely collapse of the auction system if the gap between the parallel market rate and official rate continues to widen, as exporters seek for a fair return in the alternative market. More so, a country's exchange rate is a symptom that reflects what is happening in the real economy nationally and globally. The weakening exchange rate as shown on the parallel market is a reflection of weakening fundamentals. Today, far from de-dollarisation, Zimbabwe is in the throes of creeping redollarisation. The stroll through currency experimentation has taken us through multi-currencies, 40% devaluation, sinking pegs, controls, ban on United States dollar transactions, new Zimbabwean dollar and a lifting of the ban on US dollar transactions. All this is leading to a creeping re-dollarisation contrary to the government's official plan to de-dollarise.

TM: To what extent will a good harvest drive recovery?
KG: Improved planning and access to inputs coupled with a normal to above normal rainfall season will likely lead to a bumper harvest in 2021. The pfumvunza programme will ensure food security at household level. Overall the agriculture sector is expected to
grow by 11,3%, making it an impact sector on GDP growth. The agriculture sector has potential to grow the economy and significantly contribute to foreign currency generation presenting tremendous opportunities for companies.

TM: What should be done to improve investor confidence on Zimbabwe?
KG: The confidence question remains a lingering issue and this is historical. Restoring confidence is a case of a prolonged journey of good political-economic management.

TM: What is the best currency for use in Zimbabwe?
KG: I don't think the choice and colour of the currency matters. What is critical is to allow markets to determine their own course and avoid the temptation to put many controls which then result in distortions and arbitrage opportunities. However, the dual currency which we currently have is a richer haven for re-dollarisation than de-dollarisation. The US dollar is likely to remain the currency of preference.