23 December 2017

Zimbabwe: A Difficult, Wasted Year - - Analysts

ANALYSTS have described the year 2017 as one of the toughest in the past decade. An acute foreign currency crisis that fed into an upsurge in inflation was a major drawback against economic growth.

The 2018 fiscal plan announced by Finance and Economic Planning Minister, Patrick Chinamasa this month projected 4,5 percent growth, riding on cutbacks in government spending and policy reforms aimed at bolstering investment inflows. Re-engagement with the international community and international financial institutions is also a key cornerstone of the reconstruction plan.

The $5,7 million 2018 Budget would deploy significant funding to capital projects, create jobs and try to stimulate demand for domestic goods. But essentially, spending would remain unsustainably high going into 2018. Nonetheless, the budget is a major shift from previous budgets that indulged bureaucratic extravagance in the form of foreign travel as well as senior officials' perks, including top of the range vehicles.

This was despite clear signs of a struggling economy characterised by low production and export, and unemployment levels estimated at over 90 percent. Economists talked of a "wasted" year and urged President Emmerson Mnangagwa to take steps to deal with the cash crisis, the biggest threat to any recovery measures. A number of critical industries face collapse under the burden of the worsening foreign payments gridlock, with key imported raw materials running out at some plants around the country, raising the spectre of more company closures and job losses.

"The foreign currency shortages are expected to continue," said Thomas Wushe, chairman at the Zimbabwe Stock Exchange listed manufacturing firm, Art Corporation. Sectors worst hit by the cash crisis include the manufacturing industry and mining, which contributes about 40 percent to exports. Indications are that operations in many firms could be mothballed due to failure to secure foreign currency. Bakers were among the first to feel the heat, when they were forced to hike prices this week after being driven into the black market to seek foreign currency.

Government directed the bakers to reverse the price increases, but that merely swept the problem under the carpet as the curtain comes down on 2017. "We saw a deterioration of the cash position due to a budget deficit caused by fiscal indiscipline by government," said Kingstone Kanyile, chief executive officer at Mtilikwe Financial Services. Extravagance in government has led to a budget deficit of nearly $2 billion in 2017, about 11 percent of GDP. Kanyile said problems were compounded by distortions brought about by the introduction of bond notes in November last year.

Immediately after the bond notes were introduced, a parallel currency market blossomed, triggering a sharp rise in the price of goods and services. The United States dollar, already diminished, disappeared and there was a spike in inflation. Kanyile said the new administration appeared keen to consult and deploy measures to address industry and investor concerns. "The failure of bond notes to hold their own created distortions on the market and inflation eroded the value of the currency. Doing business reforms were slow and inadequately addressed. The investment climate was affected by things like law enforcement on the roads.

"There should be a radical shift in the way law enforcement works now that the head of the police has retired. It affected the transport and logistics sector to facilitate the flow of goods in the region and within the country. But you may have noticed that there has been a shift in the way government is being run. I am seeing a government that is responsive, transparent and honest. Government expenditure is being trimmed. They are less than a month in office, but things have changed. Government is now conciliatory and more tolerant," Kanyile said.

Economist John Robertson said the debt crisis which has affected the country for close to two decades was also a big issue in 2017. The country owes close to US$13 billion, and its debt has affected attempts to look for new funding. Much anticipated arrears clearance plans with the World Bank (WB), African Development Bank and the International Monetary Fund (IMF) had been thrown into jeopardy after Harare failed to honour crucial conditions of the pact inked in Lima, Peru two years ago.

The debt plan was expected to clear Zimbabwe's arrears, accumulated since the turn of the century, and open up opportunities for fresh loans for the capital starved economy. Mugabe's questionable commitment to the debt plan and reforms was thrown into more doubt late October when he moved Chinamasa, who enjoyed warm ties with global lenders, from Treasury. Robertson said all that was now water under the bridge. "Prospects for 2018 have improved," said Robertson. "There are better prospects for getting funding from the WB and the IMF under the new government. We have to make sure we don't spoil the chances.

Day by day government must makes sure we do the things that improve chances of attracting investors and the WB and IMF. We must remove bond notes from circulation; they should be removed and destroyed so that we return to using the US dollar. We hope that the policies in the country must make sure that people do not move the US dollar out of the country," Robertson added. Government has since given people who moved funds to other countries a March 2018 deadline to bring back the money or face prosecution.

"If that happens we should be able to see a change in 2018," said Robertson. This week, the Confederation of Zimbabwe Industries (CZI) said the economic situation was deteriorating and conditions were likely to remain hard in 2018. CZI's third quarter composite business index (CBI) showed high levels of pessimism in the economy by business leaders. CZI's report is a complete opposite of the confidence that other sectors and analysts - have shown in the economy since a new government was established last month.


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