3 January 2014

Zimbabwe: Economic Outlook for 2014 Remains Gloomy

GOVERNMENT'S much-touted blueprint, ZimAsset, paints a picture of a gradual recovery in the economy, but indicators and the experiences of millions of Zimbabweans suggest a completely different story for this year, with liquidity challenges set to worsen.

Economists say the majority of the citizenry will continue to suffer the impact of a mismanaged economy, warning tight liquidity conditions prevailing in the market would persist, coupled with deteriorating domestic production and a widening current account balance.

Figures released by the Bankers Association of Zimbabwe (Baz) two months ago show that growth in exports has remained low, averaging less than 1% monthly over the past year against a backcloth of rising imports and low domestic industry production.

An expansion in imports against static exports means the current account continues to widen and the economy is hemorrhaging.

Furthermore, lines of credit remain limited and expensive due to the risk premium attached to the current external debt and arrears.

Zimbabwe has an external debt of US$7 billion, according to Finance minister Patrick Chinamasa.

The high risk premium on the external debt has become an albatross on the economy, economists say.

Worryingly, bank deposits remain short-term in nature. According to Baz, 83% of total deposits are transitory.

Transitory deposits are funds held in bank accounts from which deposited funds can be withdrawn at any time without any advance notice to the banking institution. These can be "demanded" by an account holder at any time.

Apart from transitory deposits, banks are also grappling with rising non-performing loans (NPLs).

Economists say there was need to mobilise liquidity through exports, lines of credit, foreign direct investments (FDI), portfolio investment and diaspora flows (unrequited transfers).

The economy is currently hemorrhaging via the current account, as the balance of payments continues to deteriorate, reflecting low and declining domestic industry capacity utilisation levels, analysts said.

While in his budget statement Chinamasa addressed issues such as the recapitalisation of the RBZ, restoring the RBZ's lender of last resort function, repayment of corporate FCAs, developing money and capital markets and the retention of the multicurrency regime, the strengthening of RBZ supervision and oversight function, he backed the controversial indigenisation policy in its current form, a comment that sapped the little confidence investors had left in the economy and Zanu PF government.

Against such a background, analysts say there is need to restore confidence in the economy in the wake of Zanu PF's controversial triumph in the July 31 general elections.

Economist John Robertson said 2014 is likely to be worse than 2013 unless government makes major changes in respect of legislation such as the Indigenisation Act.

"Currently, investors are making deliberate decisions not to come to Zimbabwe because indigenisation demands too much," he said.

With policies that do not attract investment still in place, economic growth is likely to be minor and less than the projected 6,1%, Robertson said.

"In fact, there could be shrinkage and prospects of paying civil servants will be gloomy," he said.

Robertson would not be drawn to give his own growth projections.

In a bullish scenario the Zimbabwean economy will grow by 2,9% in 2014, and 1,3% in a bearish one, Econometre Global Capital researcher Takunda Mugaga said.

Mugaga said a US$4,1 billion budget does not have the capacity to drive a 6,1 % economic growth given the current state of the country's capital account and a balance of payment that is further deteriorating.

"No substantive approach will be in place for tackling the country's US$7 billion external debt," Mugaga said.

He said prospects of automating the Zimbabwe Stock Exchange (ZSE) by end of 2014 are very remote given the challenges that have delayed the process over the years. No new listing is expected on the local bourse.

The Econometre researcher said two or three indigenisation deals might accrue due to certainty from the last budget in forging ahead with the exercise, but politicians may highjack the process and destroy possible benefits.

Economist Brains Muchemwa said economic prospects for 2014 remained uninspiring as the economy would likely be characterised by rising corporate bankruptcies, increasing unemployment levels and tight liquidity conditions that will dent hopes of reasonable growth above 3%.

He said the existing multiple currency regime would continue to render both fiscal and money policies blunt instruments to directly stimulate the economy.

"In the absence of these two very important interventionist policies, it is reasonable and indeed wise to conclude that the current auto-pilot mode that the economy is in will persist for some time," Muchemwa said.

Commercial Farmers' Union president Charles Taffs said government's projected 9% growth for agriculture in 2014 is unattainable largely due to unavailability of finance for farmers.

In an interview with our sister publication Southern Eye, Taffs said the projections were too ambitious and at most the sector could achieve 1% growth driven by the anticipated increase in tobacco production.

"To achieve the target, agriculture funding must be on the right footing, banks should first reignite funding of the sector and then we can even achieve 10% growth," Taffs said.

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