Zimbabwe stuck in a ‘holding pattern’

via Zimbabwe stuck in a ‘holding pattern’ December 5, 2014

The 2015 budget statement announced by Finance minister Patrick Chinamasa last week was somewhat disappointing. The budget reflects the lack of engagement and consultation with key stakeholders and fails to address some of the key challenges facing the economy. It failed to inspire confidence and provide much-needed support to kick-start the economy.

GDP growth is projected at 3,2%, well below the ZimAsset target of 6% and sub-Saharan Africa growth of 5,8%. This is disappointing especially when considering the potential for growth for Zimbabwe.

Zimbabwe is in a “holding pattern” as government fails to make key decisions. As long as key decisions are not taken, the economy is likely to slide further towards a recession. Government needs to act decisively to avoid a recession and find ways to re-ignite growth and confidence in the economy.

GDP growth has slowed significantly in recent years and there is some risk that Zimbabwe will fall into a recession this year. Growth has been driven primarily by agriculture and mining sectors.

The mining sector might suffer in 2015 given the sharp fall in most commodity prices this year. Gold and platinum prices are down more than 40% from their peak and are unlikely to recover in the short-term.

While government projects growth at 3,2%, Growth could be a lot lower and perhaps between 1% and 2%.

Inflation remains low reflecting the slowdown in economic activity. While imports have declined somewhat, export revenues remain low and the trade deficit remains unsustainably high.

Deposits grew marginally from US$3,9 billion to US$4,3bn while loans remained steady at around US$3,7bn. The loan-to-deposit ratio has therefore declined marginally from 92% to 86%. Of concern is the increase in non-performing loans (NPLs) from 15% in Dec 2013 to around 20% currently.

As we have said many times before, government needs to take decisive action to restore confidence in the economy. We were hoping the budget would address some of our key concerns:

Government spending: Of the US$4,1bn budget, almost 81% (and soon 92%) is allocated to recurrent expenditure leaving very little for capital expenditure. Government needs to dramatically cut consumptive expenditure such as wages and divert funds to capital development. Capital expenditure will boost economic activity and create more jobs. Capital spending to the end of October 2014 was US$268 million against a budget of US$401m.

Financial sector stability: The new Banking Act and the RBZ Debt Assumption Bill combined with the establishment of the Zimbabwe Asset Managaement Corporation are all positive steps by government to restore confidence in the financial sector. NPLs remain worrisome.

Government debt: The nation is expected to see a little more clarity on how government seeks to address the ballooning debt. While the ongoing engagement with the IMF, through the Staff-Monitored Programme (SMP), is positive move although a lot more needs to be done to re-engage with the international community. A clearly defined plan for the settlement of outstanding debt needs to be considered.

Investment policy: Once again we were hoping for some clarity on policy implementation going forward. Investors are looking for clarity and consistency.

Zimbabwe needs investment and unless and until we provide clarity no one will invest in Zimbabwe. FDI flows halved from US$311m in 2013 to US$146m in 2014.

Total FDI flows to sub-Saharan Africa are expected to increase to US$82bn which means that Zimbabwe accounts for less than 0,20% of total FDI flows to Africa.

Government needs to think carefully about its investment policy and attitude towards FDI.

Trade deficit: We continue to spend more than we earn. While the trade deficit has declined somewhat due to the slowdown in economic activity, the trade deficit remains high and unsustainable. We need to find ways to boost our exports and limit imports not through protection but through investment.

The establishment of Special Economic Zones (SEZs) has been muted for sometime, but there has been no action.

In the mid-1990s, Zimbabwe successfully implemented SEZs which led to expansion in domestic production. New industries were established in previously unattractive zones.

Government needs to push ahead aggressively with the establishment of SEZs in key areas such as Bulawayo, Gweru, Masvingo, Plumtree and Victoria Falls.

Zimbabwe desperately needs an expansionary fiscal budget. The great economist John Maynard Keynes believed strongly in demand-side economics. Government needs to find a way to stimulate aggregate demand.

This can be done in two ways, printing money (which is no longer an option) and capital investment. Government can stimulate economic activity by investing in capital development rather than consumption. Furthermore, it can encourage investment through favourable investment policies.

The most frustrating thing about being in a “holding pattern” is that you can see the destination.

You see the bright lights of the city, but have no choice but to wait patiently for clearance to land. The solutions are clear but require bold and decisive action.

The budget failed to address key issues facing the economy. Zimbabwe is running out of time and options. The longer we leave it the more difficult the choices become. Let’s hope we get clearance to land before we run out of fuel and crash.