3 December 2012

Zimbabwe: 'The Choices We Make' - Biti Grapples With a Slowing Economy

analysis

Zimbabwe's economy, which had grown faster than regional peers since 2009, has lost momentum and is now slowing down, with a current account deficit likely to worsen the liquidity crunch and hurt economic recovery. But, as Dumisani Ndlela reports, the challenges facing the economy go beyond liquidity problems, and have unsettled Finance Minister Tendai Biti, who presented his last budget under the so-called inclusive government on November 15, 2012.

One of the greatest biblical philosophers, King Solomon, once noted that there is a time for everything.

But for Zimbabwe, the time for prosperity appears to be stuttering after a spell of economic growth, which some analysts contend was rather, economic recovery. So much an issue of expression, but indeed after plumbing unprecedented depths during the crisis decade to 2008, Zimbabwe's economy could only move upwards.

But conditions for this northward trajectory had to be put in place: In 2009, the country's political foes buried the hatchet and formed an inclusive government, putting an end to an unprecedented political crisis that had dogged the economy. The country then ditched its defenceless currency, which had come under heavy attack from hyperinflationary pressure, triggering hourly erosion of value that created a nightmare for both individuals and corporate institutions.

Things therefore began to look up: A combative former student leader, also the first Zimbabwe lawyer to take a political case that successfully challenged the electoral system and exposed a rigging machinery, Tendai Biti, was thrust into the hot job as Finance Minister on a former opposition MDC-T ticket.

Hesitatingly, or rather reluctantly, he obliged, but noted, as if to plead for grace in the event of failure, that he had the most unenviable job in the world.

Many economic commentators and political observers thought this was Biti's political graveyard.

Their fears were justified: After ditching the domestic currency, Zimbabwe needed huge foreign cash to bankroll its hard currency economy. International donors chose to stay away, uncomfortable principally because the inclusive government had President Robert Mugabe in it.

President Mugabe, once a hero of the West, turned villain after expropriating vast tracts of land from white owners for redistribution to blacks.

But most of the vast tracts of land acquired under the programme now lie idle, 13 years since Zimbabwe embarked on its land reform programme that courted international criticism and sanctions against President Mugabe's government.

The reforms had noble intentions: to transfer vast tracts of fertile land from a tiny minority of white commercial farmers, who produced most of the country's food and agricultural exports, to black farmers, most of whom were either landless or were forced to survive on poor quality soil.

But the programme had unintended consequences. The situation triggered food shortages, with the country, once a regional break basket, now a virtual basket case heavily dependent on donors and imports. Agriculture, apparently, still defines Zimbabwe's economy.

But once the economy began to stabilise, the once-jittery Biti steadied into a steely captain: In 2009, his first year since becoming Finance Minister, the economy posted its first growth after a decade-long crisis under which gross domestic product (GDP) had shrunk by a combined 50 percent.

GDP growth in 2009, of 5,8 percent, had been followed by growth of 8,1 percent and 9,3 percent in 2010 and 2011 respectively, and the economy had looked like it was on an unstoppable trajectory to record growth levels.

Giving his 2012 economic outlook at the close of 2011, Biti gave robust projections, indicating that the economy in 2012 would grow by 9,4 percent, discounting sad projections from the International Monetary Fund and local economists who pointed out Zimbabwe's economic train was now travelling on a rugged path. He fell short of describing critics of his growth projections as traitors.

It was not long before Biti came back with a sombre admission: In July, he announced that Zimbabwe's economy was, "in an unacceptable state of underperformance", leaving it in "a winter of despair, characterised by low business and investor confidence, some disequilibrium in the economy, little growth in employment, declining social indicators and generally a lackadaisical business-as-usual mentality".

"All these factors threaten to reverse the nascent shoots of progress made during the last three years," Biti said, revising growth projections from the initial 9,4 percent to 5,6 percent in 2012, and slashing the national budget from US$4 billion to US$3,64 billion.

Biti later announced a further downward revision of growth projections for the year, reiterating during his 2013 national budget presentation this month: "Regrettably, clear output indications on the ground necessitate a further downward revision to 4,4 percent."

He told Parliament: "The 2013 outlook also looks bleak - blighted by a miscellany of factors that include a deeper global outturn, the continued capital deficit, financial sector instability, and a poor business climate, amid other challenges."

"Overall growth is projected to moderate to five percent in 2013, underpinned by anticipated output improvements in mining and agriculture."

He noted that, "Given the ground we need to recover, estimates of GDP growth rates of 4,4 percent in 2012, and five percent in 2013 represent stagnation and return to depression economics".

"The projected outlook falls short of average economic growth targets of 7,1 percent defined in our Medium Term Plan 2011-2015," said Biti.

He admitted that "the fact of the matter is that we have not entered into a sustainable path to recovery and, most regrettably, is the overwhelming evidence of stagnation".

"The sub-optimal equilibrium fuelled by low aggregate demand and low productivity, underpinned by the five binding constraints on our economy, namely electricity supply, finance, fragile balance of payments, politics and poverty need to be addressed," said Biti.

Apparently, he acknowledged that the real sector of the economy had been "poignantly retrogressive" in 2012 due to "an unsavoury cocktail of endogenous and exogenous factors that include a poor rain season, lack of capital, revenue underperformance, corruption and a volatile and fragile global financial environment".

Indeed earlier this year, Reserve Bank of Zimbabwe governor, Gideon Gono, had warned that the country's economic recovery would slow down on the back of the Eurozone debt crisis and the continuing economic turmoil in the United States of America.

Gono said the recession in some of the world's leading economies could affect the domestic economy whose performance had been driven by firming international commodity prices and a recovery of tobacco output.

Biti said structural bottlenecks, including power challenges and deteriorating infrastructure, had all contributed to the economic deceleration.

Agriculture performance, which was initially projected to decline by 5,8 percent in 2012, has been revised upwards to a growth of 4,6 percent, reflecting revised tobacco and cotton output. Actual tobacco production amounted to 144,5 million kgs, against an earlier projection of 130 million kgs, while cotton output was 350 000 tons, against initial projection of 255 000 tonnes.

In 2013, agriculture is projected to grow by 6,4 percent. This would be supported by credit financing facilities to farmers and continued contract farming arrangements for major crops such as tobacco, cotton, barley and soya beans.

Due to funding constraints on the domestic market, President Mugabe unveiled a US$20 million input facility for farmers. The scheme has courted the ire of former opposition members in the inclusive government, who have demanded that President Mugabe should reveal the source of the US$20 million fund. President Mugabe's lieutenants, principally former government spokesperson, Jonathan Moyo, have said the question should not be about the source of funds, but who would benefit from the funding.

Clearly, the issue has taken a political dimension, but so did Biti's national budget thrust, which appeared to borrow largely from his MDC-T party's "Beyond the enclave" programme.

Biti, who has been accused of sabotaging the agricultural sector to undermine President Mugabe's agrarian reforms through insufficient budgetary allocation to the sector, noted:

"Honourable members may want to take note that the agricultural sector has received funding of around US$2 billion over the period 2009-2012."

Interestingly, presidential support has consistently featured without hullaballoo since 2009, with funding from President Mugabe having amounted to US$15 million last year.

Mining, dominated by alleged pillaging of income by ZANU-F politicians in the Marange diamond fields, remains the most dynamic sector of the economy, leading economic recovery since 2009, with an average annualised growth of more than 30 percent.

Mineral exports rose by about 230 percent over the 2009-2011 period, making mining the leading export sector.

Biti said the country had been unable to fully exploit the benefits of high international prices to boost exports as a result of low investment into the sector.

This, clearly, was an indirect jab on ZANU-PF and its leadership.

The prevailing uncertainty created by the country's controversial economic empowerment laws , as well as infighting in the power-sharing, have triggered investor fatigue and capital flight, resulting in a dearth of foreign direct investment, which the country desperately requires to recover.

President Mugabe's ZANU-PF has aggressively rolled out the empowerment programme as part of its election campaign.

Prime Minister Morgan Tsvangirai has opposed ZANU-PF's empowerment model, arguing his party believes in a comprehensive economic strategy aimed at poverty eradication. The MDC-T said its strategy, named Jobs, Upliftment, Capital Investment and Ecology, recognised "the imperative of putting people first".

Biti said Zimbabwe's manufacturing sector is still battling to recover on its potential, as the economy has grown more reliant on imported inputs that used to be sourced mostly locally.

"Hence, the current firm stress levels remain extremely high," said Biti.

Recovery of the manufacturing sector, said Biti, was suffering more from supply-side than demand-side constraints to capacity utilisation.

"Low capacity utilisation levels largely stem from firms operating obsolete machinery, power outages, higher input costs due to lack of domestic linkages, limited availability and high cost of finance, stiff competition over domestic and export markets, due in part to unreliability of supply-chains, and overall business uncertainty," said Biti

According to the Confederation of Zimbabwe Industries' Manufacturing Sector Survey for 2012, capacity utilisation in the manufacturing sector declined from 57,2 percent to 44,2 percent.

Biti hopes that in 2013, the manufacturing sector will grow by three percent, underpinned by the implementation of the Industrial Develop-ment Policy, anticipated lines of credit, fiscal incentives as well as a favourable agriculture season.

But the biggest hurdle to recovery of both industry and the economy has been the poor supply of electricity which, admittedly, has had negative effects on production and productivity across all sectors of the economy.

The 2011 Enterprise Survey indicates that 47 percent of firms listed erratic electricity supply as a severe constraint to business.

The tourism sector, which had been the most hurt during the so-called lost decade to 2008, has maintained its recovery momentum since adoption of a hard currency regime.

It's contribution to economic growth is, however, expected to slacken this year at 3,9 percent, from a growth of 4,3 percent in 2011.

In 2013, the sector is expected to grow by about four percent, a percentage point higher than this year, underpinned by the hotels and restaurants sector.

The hosting of the 20th Session of the United Nations World Tourism Organisation General Assembly next year by both Zimbabwe and Zambia is likely to help the country to showcase its tourism products, facilities and infrastructure.

This could spur future growth.

The country's banking sector, which should underpin recovery, is itself still limping, unable to support recovery due to liquidity challenges, high operating costs and high risk premium in accessing external lines of credit.

The deposit base has, however, been growing slowly. This year, it grew from US$3,1 billion in January to US$3,73 billion in September.

Bankers note, however, that deposits remain of a short-term nature, making long-term lending for capitalisation by local industries impossible.

Due to the high risk and high operating costs, short term lending from domestic banks has been prohibitive.

This has limited economic growth.

Despite noting that there had been a rebound in exports due to stabilisation since 2009, Biti highlighted his biggest worry: The external position remains under pressure from a high import bill, as the rebound of exports does not match the steep rise in imports, leaving an anticipated current account deficit of 28,5 percent of GDP.

The mounting current account deficit triggered largely by the high import bill has worsened the liquidity crunch in the economy and threatens the stability of the financial sector as well as the viability of local industries due to demand challenges created by lack of disposable incomes.

Biti hopes that he will be remembered for his national budgets which supported various national programmes that brought stability and spurred growth since 2009.

"This performance was remarkable since it was achieved with minimal external support and investment and also during a period of subdued global growth and international financial turmoil," said Biti about the growth between 2009 and 2011.

Now, he says, development and prosperity, underdevelopment and poverty, will emerge from "the choices we make".

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