eBusiness Weekly
Harare. — The African Development Bank is projecting a 1 percent GDP growth rate for Zimbabwe in 2018 from an estimated 2,6 percent in 2017. This is within range of the forecast released by the World Bank last week of 0,9 percent.
The outlook for the economy comes as Finance and Economic Development Minister Patrick Chinamasa said that Zimbabwe would require growth rates of between 7-8 percent in the next 10-15 years to come out of its economic quagmire.
According to the 2018 African Economic Outlook released by the bank yesterday, economic performance in Zimbabwe is likely to be affected by political changes but at the same time continues to face structural challenges from high informality, weak domestic demand, high public debt, weak investor confidence.
The country is experiencing a liquidity crisis, which is a manifestation of structural deficiencies and distortions in the economy. AfDB noted that although progress was made in improving the business climate, governance and accountability remain problematic.
The economy is projected to grow 1,2 percent in 2019. The bank categorised Zimbabwe under countries, which have Failed to Take Off noting that Côte d’Ivoire, Nigeria, and Zimbabwe experienced deep troughs, which reduced GDP per capita following initial accelerations.
“Growth acceleration episodes followed by crisis episodes are considered failed take-offs, as in Algeria, Cameroon, Congo, Côte d’Ivoire, Equatorial Guinea, Ethiopia, Gabon, Malawi, Nigeria, Sierra Leone, Zambia, and Zimbabwe,” said the bank.
In a failed take-off, the crisis often has economic roots, possibly related to characteristics of the previous acceleration episode that make it unsustainable. In Zimbabwe, ADB noted, political events derailed growth. The country experienced a growth spike in 1964 – 1975 but failed to take off in 1994 resulting in a crisis in 2008.
“In Cameroon, Congo, and Zimbabwe early acceleration in the 1960s was followed by a failed take-off and a deep crisis beginning in the 1980s. In this sequence, the first acceleration episode could possibly be considered a growth spike.
“In such cases the initial acceleration cannot be considered as having contributed to economic progress. On average the growth observed after a failed take-off sequence is slightly negative. In half the countries (Cameroon, Congo, Côte d’Ivoire, Malawi, Zambia, and Zimbabwe), the failed take-off was not followed by an acceleration (in Côte d’Ivoire, it was followed by another crisis).”
ADB said that in Algeria, Equatorial Guinea, Ethiopia, Gabon, Nigeria, and Sierra Leone, the failed take-off was followed by a recovery. “This second post-crisis acceleration episode may be considered a mere recovery in Nigeria and Sierra Leone, where GDP per capita was still below the level attained before the failed take-off.”
For Zimbabwe, fiscal policy is highly consumption-oriented, limiting fiscal space for capital and social expenditures. Total expenditure picked up as the government expanded the Command Agriculture Programme and maintained the high public sector wage bill (around 19 percent of GDP). With limited access to foreign inflows, the budget deficit reached 8.7 percent of GDP in 2016, up from 2.4 percent in 2015.
“The 2018 elections are likely to put further pressures on the budget, and the government is resorting to domestic borrowing to cover the budget deficit. Public domestic debt almost doubled, to 25 percent of GDP in 2016; external debt stood at 42,6 percent of GDP.”
Monetary financing of the budget deficit led to sharp increases in money supply by about 24 percent in 2017, fueled inflationary pressures, and undermined banks’ ability to finance private-sector activities.
Tailwinds and headwinds for Zimbabwe
The ADB notes that a modest recovery in international commodity prices is projected to spur growth in mining. Energy production is expected to improve following the completion of the Kariba South Extension Plant in December 2017. Agricultural output growth will be supported by scaled up coordination and funding from the government and private-sector and greater investment in irrigation development.
However, headwinds remain; weak economic activity in 2016 led to a fall in total revenues of 6 percent (in nominal terms), exacerbating liquidity shortages. The 2016 introduction of bond notes pegged to the
US dollar saw the emergence of a parallel market for foreign exchange, owing to the shortage of foreign currency. The real exchange rate remains overvalued, undermining external competitiveness.
The external sector remains weak; net international reserves declined from $339 million in 2015 to $310 million in 2016, equivalent to 0,6 month of imports.
“The elections scheduled for 2018 are likely to generate uncertainties that will hinder economic growth and investment. The investment environment remains gloomy.”
According to the World Economic Forum’s 2017/18 Global Competitiveness Report, the most problematic factors for doing business include policy instability, inadequate foreign currency regulations, inefficient government bureaucracy, difficulties in access to finance, inadequate supply of infrastructure, restrictive labor regulations, and inefficient tax administration and regulations.
Africa to grow at 4,1 percent as ADB makes a compelling case for industrialisation
Overall on the African continent, Real output growth is estimated to have increased 3,6 percent in 2017 and to accelerate to 4,1 percent in 2018 and 2019. The recovery of growth has been faster than envisaged, especially among non-resource–intensive economies.
“But challenges remain, especially for the structural transformations that would create more jobs and reduce poverty by deepening investment in agriculture and developing agricultural value chains to spur modern manufacturing and services.”
AfDB said that key to solving the continent’s problems would be economic diversification especially in the context of a challenging demographic structure.
“A first priority for African governments is to encourage a shift toward labour-absorbing growth paths. A second is to invest in human capital, particularly in the entrepreneurial skills of youth, to facilitate the transition to higher-productivity modern sectors.”
The bank said continued prudent macroeconomic efforts are needed to create the incentives and business environment for the private sector to play its role.
Macro-economic policy should aim at ensuring external competitiveness to avoid real exchange rate over-valuations and get the full benefits of trade, improve fiscal revenue, and rationalise public expenditure.
To achieve these goals, the macroeconomic framework must blend real exchange rate flexibility, domestic revenue mobilisation, and judicious demand management.
“Also needed are massive investments in infrastructure. To take advantage of the great potential for infrastructure development, governments will have to put in place effective institutional arrangements to manage the complex tasks of project planning, design, co-ordination, implementation, and regulation.
They should also focus on the soft side of infrastructure development — on tackling the big policy and regulatory issues, on training the teams assembling the financing packages, and on conducting constant research to keep up with the knowledge frontier.”
New work by the bank reveals that Africa’s infrastructure requirements run to $130–170 billion a year. That’s far higher than the long-accepted figure of $93 billion a year.
Agric, mining and services to spur Southern Africa growth
Growth in Southern Africa nearly doubled in 2017, to 1,6 percent, up from 0,9 percent in 2016. The improvement reflects better performance of the three main commodity exporters: South Africa, which doubled its growth (still low, at 0,6 percent); Angola, where output expanded by 2,1 percent; and Zambia, which grew 4,1 percent.
The three countries accounted for about 1 percentage point of Africa’s growth rate.
Growth is forecast to increase to 2,0 percent in 2018 and 2,4 percent in 2019, underpinned by expansion in agriculture, mining, and services. These figures are lower than the African average, mainly because of slow growth in South Africa, which has strong neighbourhood spillover effects (through trade and revenues sharing) on the subregion’s customs union. Policy uncertainty in South Africa could delay much needed fiscal adjustments, especially of support to state enterprises. Lesotho, Malawi, Mauritius, and Mozambique are expected to grow about 4 percent or more, but their contribution to the subregion’s GDP is small.
