Further economic decline projected

14 Feb, 2020 - 00:02 0 Views
Further economic decline projected

eBusiness Weekly

Golden Sibanda

ZIMBABWE will likely post negative economic growth of up to 6,5 percent this year, as currency issues, severe impact of last year’s drought, power shortage, weak consumer demand and high inflation continue to weigh on the economy, analysts have said.

To the contrary, Finance and Economic Development Minister Mthuli Ncube though sees the economy growing 3 percent this year after a 6,5 percent decline last year, weighed down by cyclones Idai and Kenneth, which ravaged most parts of Chimanimani and Masvingo provinces.

The tropical cyclones extensively destroyed roads, houses, key infrastructures as well as crops while killing hundreds of thousands and leaving scores others injured, displaced and requiring substantial assistance to get started again.

The domestic economy also suffered the devastating impact of drought, which has left 3,2 million to 6,5 million people requiring food support. The drought has affected hydro power production at Kariba, further denting prospects for recovery.

Kariba, a 1 050 megawatt hydro power plant, is Zimbabwe’s largest power station. Production has been curtailed to an average 200MW.  Zimbabwe needs 1 800MW at peak of demand , but can only produce less than half the amount.

Zimbabwe’ was last year bogged down by economic reforms that entailed liberalisation of the exchange rate, reintroduction of domestic currency, liberalisation of fuel procurement and removal of some subsidies, among others.

The International Monetary Fund (IMF) estimates that Zimbabwe’s economy contracted by 7,1 percent last years while MHMK believes it shrunk by 10,1 percent.

The African development Bank (AfDB) argues the economy declined 12 percent.

Notably though, the World Bank and the IMF have projected the Zimbabwean economy to register growth of about 2,7 percent conditionally basing their assertion on improved agriculture performance, better power supply and higher

commodity prices.

An underwhelming start to the rainy season has, however, raised concern over its potential impact on agriculture and the wider economy while power supply remains a challenge and will likely negatively impact productive sectors.

However, Minister Ncube expects the economy to rebound by 3 percent this year, rejuvenated by a cocktail of incentives he availed through his 2020 budget to reboot production, improved power supply and expected good rains. And to an extent, MHMK agrees the economy may get some boost from increased Government consumption, as authorities steer from austerity to create jobs and ramp up productivity in agriculture, manufacturing, mining and services.

“The 2020 Budget highlights plans to invest in irrigation infrastructure, dam construction and desalination, a “smart city” in Mount Hampden, roads, and ICT and social sectors infrastructure,” the private equity investment firm said.

AfDB also anticipates the economy to rebound 4,6 percent this year, but only if macro-economic fundamentals are realigned. The IMF also sees positive growth at 2,7 percent this year if agriculture does well and global commodity prices tick. Economist Eddie Cross says although it is difficult to see any real growth in 2020,  the economy will not do as bad as in 2019 on expected better rainy season, likely strong mining sector performance and non-recurrence of last year’s natural disasters.

But the leading private equity investment firm, MHMK Capital, sees the Zimbabwean economy taking a further knock this year, as constraints from last year linger and only start to recover next year when key economic fundamentals are restored.

“A further decline, of  minus 6,5 percent is expected in 2020 compared to Government’s 3 percent growth projection, highlighting the impact of drought and constrained  private consumption,” MHMK Capital said in its latest research findings.

For instance, constraints include drought, which is weighing on hydro-power production, constraining activity across all sectors of the economy. Also, slow progress towards stable “mono-currency” continues to weigh on confidence, affecting economic activity.

Further, inflation remains high with year-on-year rate closing 2019 at an estimated 598 percent,  cash  and  energy  shortages  (fuel  and  electricity) have persisted,  impact of last year’s drought lingers as do policy inconsistencies and low confidence levels.

MHMK has projected the domestic economy to remain in hyperinflation throughout the current year. The firm says monetary policy conduct will be particularly challenging given the combination of economic recession and hyperinflation. The investment research firm said given the worsening economic environment, the Government will continue to prioritise short-term political requirements  such  as  the  need to retain the  support  of  key stakeholders.

According to MHMK, a return to real economic growth is projected from 2021, with forecast real Gross Domestic Product (GDP) growth gradually rising from 1,8 percent in 2021 to 2,3 percent in 2022.

“This is predicated on a recovery from drought, which will contribute to higher levels of agriculture and mining output, as well as domestic energy production, leading to a rise in foreign exchange reserves and improved monetary conditions,” MHMK said.

Cross said late start of the rains and prolonged dry spells in December mean half the crop this season has been lost and that while tobacco managed to recover, output will not be as good as last season’s production.

He expects strong gold prices and other minerals to partly offset the effects of a subdued agricultural season and anticipated exchange rate stability helping to keep the destabilising effect of high inflation in check.

But Cross said sagging confidence levels will keep investment at bay while capital flight will persist to safer havens.

“I do not see negative growth, I think there will be some positive growth this year,” Cross said.

He said a more stable exchange rate and declining inflation should lay the foundation for real growth in 2021.

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