The year 2019 was extremely difficult for the country, due to an economic crisis characterised by prolonged power cuts, fuel and foreign currency shortages as well as runaway inflation. Business Reporter Kudzai Kuwaza (KK) caught up with Confederation of Zimbabwe Industry (CZI) chief economist Tafadzwa Bandama (TB), who expressed her views on various issues, including the economic outlook for 2020 and solutions to the currency conundrum.
KK: What are your expectations for 2020 with regards to the performance of the economy?
TB: The challenges to economic stabilisation targets that should set the scene for growth are likely to persist in 2020 so that the economy will remain in a low-equilibrium growth trap and these include:
- High inflation;
- Shortage of foreign currency;
- Depressed aggregate demand;
- Debilitating constraints in key economic enablers; and
- The currency issue and the de-dollarisation challenge.
And the above will have a disproportionate negative impact on the productive sector's capacity to produce goods and services for the economy.
The 2020 National Budget had projected 3% growth rate for the economy in 2020. The projected growth rate was premised on a good rainy season to imply good agricultural performance and supply of throughput to agro-processors in the manufacturing sector. Due to the mere fact that the economy is experiencing a poor rainfall season due to climate change effects means that the country is not going to achieve a growth target of 3% in 2020 since agriculture plays a critical role in the economy.
The economy is also faced with an incapacitating shortage of foreign currency to import critical raw materials and intermediate inputs. Coupled with an ineffective and inefficient foreign exchange interbank market, foreign currency shortages have curtailed the ability of companies to produce, which negatively affects economic growth. The official exchange rate has very little significance to the productive sector because industry is failing to access foreign currency on the interbank market. Recourse to the parallel market for foreign exchange is prohibitive and unviable and, in any case, causes inflation.
Owing to lack of access to forex, industry is having to make do with high replacement costs in a cost structure that is indexed against the US dollar. For business to be able to restock in an inflationary environment, a risk premium becomes part of the pricing mechanism. This also explains the redollarisation tide that has swept the economy as those who can safely navigate the legal and business terrain are left with no option but to re-dollarise their transactions, particularly the informal sector.
The failure to service foreign obligations by both the private and public sector has worsened country risk thereby closing raw material and other lines of credit. This is squeezing industry's capacity to produce for the economy. The absence of key economic enablers in the form of fuel, electricity and water is weighing down the growth prospects.
The occurrence of another drought in 2020 implies that the electricity generating capacity of the economy is reduced, hence industry needs to brace for electricity supply for only a quarter of the day during the night. Industry remains with excess capacity for 16 hours of the day since they can only operate a single shift under the current energy supply levels.
The economy is likely to experience high inflation in 2020 due to the drought. Poor agricultural performance and low raw materials volume to the manufacturing sector will cause a domino effect on output with shortages resulting in higher prices. Drought episodes always result in higher inflation rates.
For instance, in 1992 inflation rose to 42% from 23,3% in 1991. The drought will also worsen foreign currency shortages as some raw materials and products that are otherwise produced locally will need to be imported.
Although the 2020 National Budget announced a budget deficit of ZW$5 billion, which is 1,5% of GPD, the fragility of the economy causes any increases in money supply to have a disproportionate impact on the exchange rate, which subsequently feeds into prices. Growth in money supply is looming as the government may resort to bank borrowing and monetisation of budget deficit to finance maturities of US dollar-denominated Treasury Bills which may be converted to ZW$ at the going exchange rate. We can expect increased employment costs for the public service given that they are calling for higher wages due to inflation.
If government seeks central bank accommodation, a high subsidy bill for basic commodities will cause inflation, considering that the country is faced with another drought in the 2019/2020 agricultural season.
The year 2020 is also faced with high unemployment prospects and the erosion of disposable incomes will translate into failure by many to access basic commodities and services like education and health.
The economy is also faced with a re-dollarisation tide as transactions are charged in US dollars or indexed to the US dollars. Fuel, electricity, health sector fees, school fees are indexed to the US dollar, except wages and salaries, which is creating a disequilibrium between aggregate demand and aggregate supply in the economy.
KK: What is needed to breathe life into industry?
TB: By the end of the Transitional Stabilisation Programme period, at least, the competitiveness question needs to be tackled with resolve to achieve balanced orientation towards competitiveness which will create an environment that is ripe for the implementation of the industrialisation policy objectives.
The business regulatory environment should be made competitive for all sub-sectors.The currency question needs to be resolved decisively once and for all by taking an irrevocable position that will be implemented without exceptions up to a point where it can actually be evaluated. At the moment, the economy is officially (on paper) in a mono-currency regime but in reality we are in full scale re-dollarisation mode. The government is charging for certain fees and licences in foreign currency and other statutory payments and duties with prices and price movements of fuel and electricity pegged against the US dollar.
There are special dispensations and exceptions extended to certain pockets of the economy to trade in foreign currency. The informal sector is transacting in US dollars and this uneven playing field is hurting formal sector players.
Improved access to foreign currency will enable industry to procure critical inputs for production. The authorities should ensure uninterrupted supply of electricity, fuel and water to the productive sector.
The doing business environment should improve to ensure that there are no policy instabilities. The government should align and harmonise all policies that are to deliver economic growth. For instance, where there is a local content policy or industrial development policy, there is need to reconcile all policies to ensure harmonisation as much as possible for effective policy implementation.
KK: Finance minister Mthuli Ncube has projected 3% growth in the economy while the Economist Intelligence Unit has projected that the economy will contract by 12,9%. What is your projection?
TB: It is certain that the 3% growth target is not achievable given the headwinds that are pounding the economy. Like I said in the beginning, we are faced with a low equilibrium growth trap. We are, however, still working on a revised economic growth framework in all sectors given the drought, shortage of foreign currency and absence of key economic enablers.
KK: Treasury has spoken of recording surplus in the fiscus but there have been questions over how the surplus has benefitted the country's populace. In your view, how can this surplus be used to revive the economy?
TB: The surpluses should be used to capacitate efficient public service delivery, particularly the health sector. The surpluses should also be used to procure key economic enablers such as electricity and fuel so that industry operates uninterrupted.
KK: Reserve Bank governor John Mangudya is expected to soon present his Monetary Policy Statement. What are your expectations from the monetary authorities?
TB: The monetary policy should tackle the currency issue head on. At the moment the economy is experiencing currency ambiguity with the informal sector transacting in US dollars, whilst in the formal sector there is implied dollarisation where prices are charged in local currency at highly depreciated exchange rates. The central bank should strive to make the interbank market work effectively and efficiently to facilitate easy access to foreign currency by the productive sector. The RBZ should aim to stabilise inflation and bring it down to single-digit levels. In order to deal with deeply entrenched inflation expectations where past inflation has become a major determinant of inflation, the publication of high frequency data by monetary authorities and (fiscal authorities) should help bridge the confidence gap in the economy. Policy consistency and credibility should also help retrench the confidence deficit.
We also expect monetary and fiscal policy alignment.
KK: United States-based stockbroking firm Morgan & Co Research have urged Zimbabwe to join the Rand Monetary Union to resolve the prevailing currency volatility. Is this a view you subscribe to?
TB: My view is that the monetary authorities should work round the clock to stabilise our own currency and make the interbank market work to facilitate efficient foreign exchange. However, we have been chasing this stabilisation since the introduction of the local currency in June 2019 and fast running out of time.
In the event of failure to stabilise the local currency, then the adoption of the rand as exchange rate anchor and functional currency alongside the local currency is a better option than re-dollarisation. The authorities could consider the rand route as a stop-gap measure to buy time and build confidence in the local currency. Confidence in the local currency is currently operating in negative territory. The rand can stabilise the currency situation obtaining in the economy given that South Africa is our major trading partner in addition to Bulawayo and Matabeleland South provinces already transacting in rand.
The rand should not be a hard peg which can be allowed to circulate alongside the ZW$ and Zimbabwe does not need to join the Rand Monetary Union. This way, there will be no need for RBZ to use scarce foreign exchange reserves to defend the currency. The crucial issue, however, remains that there should be no money creation by the monetary authorities in order to achieve currency stability. Money creation will cause the adoption of the rand to fail to achieve stability.
If stability is not achieved, being rational, economic agents will re-dollarise transactions, wiping out a significant portion of the economy in the process.
It is also important to note that without a stable currency, printing more money will not solve the cash challenges in a sustainable manner.
The currency of currency is confidence and due to a confidence deficit in the economy and an active parallel market for foreign exchange, any liquidity injections will flow to the parallel market like what happened during the new millennium decade, with all the undesired effects in pursuit.
KK: Government has been involved in the Staff-Monitored Programme, under the International Monetary Fund, but the SMP is currently in limbo after government failed to meet targets. How critical is it to get funding from these multilateral institutions?
TB: It is good to get balance of payments support where necessary, but I think as a people we need to improve the governance of the extraction of our natural resources for economic growth. We can leverage on our rich natural heritage in order to grow the national cake.
Let us improve our public financial management systems so that we are better able to manage our natural flora and fauna for the good of our economy and everyone. Addressing corruption should also go a long way in creating equal opportunities, growing the economy and creating a conducive doing business environment.
Accessing funding from multi-lateral institutions is not a panacea to our economic challenges.There are other tenets of economic growth that we need to embrace as a nation. Besides, the loans that we access should be repaid at some point and we don't want to leave an indebted country to future generations.