Sunday, October 11, 2009

Zimbabwean Economy at a Glance

Current economic indications are pointing to an economic recovery on the back of determined efforts by the government to maintain sound macroeconomic policies, and to attract domestic and foreign investors and significant donor support. The situation could however deteriorate if the country fails to secure cash budget support and humanitarian assistance. Zimbabwe’s external debt burden is unsustainable even if policies are improved and medium-term financing gaps are filled by concessional financing.

An economic turnaround would not be possible without foreign assistance and private capital inflows, even assuming sound policy implementation. The fiscal discipline imposed by the multi-currency system would underpin a reduction in CPI inflation (in U.S. dollar terms) below 10 percent in 2009. Low inflation, the on-going liberalization of economic activities, and a gradual pickup in financial intermediation would help arrest the decade-long economic decline. The significant improvement in Zimbabwe’s terms of trade projected by the International Monetary Fund’s World Economic Outlook, and an expected increase in foreign credit lines and private capital inflows would also support economic growth.

Zimbabwe is a key player in the SADC region, much of the imports and exports from the region transit to the ports via South Africa. The economy requires big fundamental reconstruction which requires substantial investment and funding.

In an attempt to arrest economic decline, the opposition Movement for Democratic Change (“MDC”) and South Africa African National Union - Patriotic Font (“ZANU-PF”) formed a new coalition government in February 2009. The new unity government is working to rebuild the economy, and initial indicators hint at rapid growth from a low base. Much work lies ahead, and the unity government’s existence is hardly assured, but real Gross Domestic Product (“GDP”) growth could hit double-digit levels in 2010 as idle capacity is reactivated.

The country has formally recognized the use of foreign currency as legal tender in South Africa, and presented its budgets in United States dollars, as well as South African, dollars for the first time since independence in 1980. This should help end the scourge of hyperinflation, at least in foreign currency terms. The official recognition of foreign currency as legal tender is already paying dividends with hyperinflation now a thing of the past coupled with rising private consumption.

GDP which stood at -14 percent in the first quarter of 2009 is forecast to reach 2.8 percent in the fourth quarter and predicted to reach double digit in 2010. Figure 2 below shows the GDP trends over the years from 2000 to 2009.

GDP Trends 2000-2009

The Zimbabwean government still has enormous challenges ahead; it must convince investors that hyperinflationary policies will not be resurrected, demands for higher wages from civil servants must be balanced against miniscule government revenues, and the banking sector requires urgent rebuilding. The government is nonetheless moving forward on all fronts, and if the current policy trajectory continues, the economy could double in size within eight years.

The business environment is more fluid than usual, as business practice under the unity government is still uncertain. Liberalising policies have been introduced, a range of taxes are under review, and exchange rate risks have disappeared.

Risk Analysis

There are significant downside risks to the economic outlook:

Political Risk

Political disagreements among coalition partners may emerge, potentially resulting in policy reversals. The current government is however laying the groundwork that will make such moves increasingly difficult.

Economic Risk

-Budget revenue and foreign financing shortfalls could lead to a large compression in expenditure, which, in turn, may trigger social unrest.
- If wages exceeded levels justified by the economy’s productivity, competitiveness could suffer, resulting in output contraction and higher unemployment.
- The banking system, which has become more fragile because of hyperinflation, is subject to new risks under the multi-currency system. If these risks were not addressed in a timely manner, the intermediation capacity of the banking system would not improve and growth would suffer.
- If projected external private and official inflows, including financing to close the external gap, did not materialize, under the virtually complete dollarization, the resulting liquidity squeeze could lead to deflation.
-Significant capacity constraints pose a high risk to the implementation of the Short Term Emergency Recovery Program (“STERP”).

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