The quest for recovery
After five consecutive years of economic slowdown the economy is now on the rebound. It is expected to grow by 3.7 percent in 2017 against the initial target of 1.7 percent and previous year growth rate of 0.7 percent, driven by the performance of agriculture, mining, electricity generation and services sectors, mainly tourism and communication.
This growth momentum is expected to be maintained into the future, with projected growth of 3 percent supported by the new political dispensation headed by President Mnangagwa who took the reins from Comrade R.G Mugabe following the latter’s resignation on 21 November 2017.
This new political dispensation resulted in renewed hope and confidence by both locals and outsiders, which need to be sustained by the implementation of sound economic policies. Though the projected growth is comparable to average Sub-Saharan Africa growth of 3.6 percent in 2017 and 3.4 percent in 2018 it is still inadequate to deliver the country from the depth of economic decay.
This is why the Minister of Finance underscored the need to implement of economic reforms required to address the deep seated structural challenges that are weighing down the recovery efforts in Zimbabwe today.
Towards a new order.
The Minister attributed the economic slumber in Zimbabwe to lack of political will to implement the required structural reforms as well as economic policies. Therefore, commitment by the new political leadership to implement prescribed reforms and policies will characterize the “new economic order”.
Clearly the implementation of the required structural reforms will be painful in the short term and thus requires all stakeholders to sacrifice for medium term benefits. There is need to break up from the tendency to take half measures were bold actions are required. The new economic order will be centered on economic rebalancing which would supported by housekeeping issues to fight mis-behaviours and acts of indiscipline which have characterised the past.
Enter economic rebalancing.
Economic rebalancing would take the form of increased production which will be supported by reduction in government expenditures to reduce imports and increase exports. Achieving this economic imperative would assist in addressing the domestic and external imbalances that are weighing down the economy today. At $1billion, the current account deficit is unsustainable as it is mostly financed by debt.
The projected budget deficit outturn for 2017 is equally unsustainable at $1.707 billion. The rebalancing imperative has given rise to a pro-production budget which will be anchored by increase in investment. The Minister identified capital is a binding constraint to increasing investment in Zimbabwe today.
The investment to GDP ratio of 11 percent fall short of the 30 percent that is required to growth the economy at the ZIM-ASSET target of 7 percent per annum. As such, the country will expedite the implementation of the ease of doing business reforms which are currently underway. It’s quite comforting that some significant strides have been made so far which saw an improvement in the country’s ranking from 161 out of 190 countries in 2016 to 159 in 2017.
Unlocking capital for growth
Zimbabwe requires significant amount of capital to grow. It is estimated that an amount of $14-20 billion is required to close the infrastructure gap whilst an amount of $5 billion is required to reindustrialize.
Mobilizing the required financial resources would be very difficult due to limited fiscal space and the poor risk perception of the country. Therefore, measures to attract and retain capital both local and foreign capital will be prioritized.
Importantly, increased reliance on traditional funding sources as IMF and the World Bank is no longer a viable option today due to the high levels of indebtedness. This could be the reason why the Minister’s emphasized Build Operate and Transfer (BOT) and Public and Private Partnerships (PPPs) to fund mainly infrastructure projects in country. However lack of capacity to deal with these kind of investment projects seem to be a challenge at responsible ministries.
Delays in concluding the ZISCO transaction as well as the Beitbridge-Chirundu Road and the National Railways of Zimbabwe (NRZ) structures would reveal this. No wonder why the Minister emphasized on capacitating the Ministries with the required expertise.
Revision of the Indigenization and Economic Empowerment Act
Consistent with the thrust to improve the flow of capital in the economy, the Minister hinted that the process of amending the Indigenisation and Empowerment Act has been initiated.
This would bring radical changes to the Act effective April 2018. The extractive subsector will only apply to diamond and platinum while the 51/49 threshold will not apply to the rest of the extractive sector, nor will it apply to the other sectors of the economy, which will be open to any investor regardless of nationality.
The amendments to the Act together with the authorities’ resolve protect to property rights through compensation to those who were affected by the violation of Bilateral Investment Promotion and Protection Agreement (BIPPAS) and as well as victims of the land reform program, come at a time when the Act and lack of property rights were being viewed as major deterrent to the follow of capital into the country.
Special economic Zones to attract capital
Attracting capital will also be enabled by the Special Economic Zones concept. This concept will be operated through different forms such as industrial estates, free trade zones and export processing zones which will enjoy preferential treatment from the Government in respect of regulations, taxations and even subsidies.
Treasury reported that it has already received requests for funding the development of such infrastructure at Sunway City and Victoria Falls amounting to $16.7 million, and is considering submissions on the Diamond Cutting and Polishing Special Economic Zone in Mutare. With effective implementation of the concept the country would be able to achieve increased FDI flows, employment creation as well as growth of the export sector.
The demise of the manufacturing sector could be identified as the biggest economic challenge in Zimbabwe today. At its peak in the 1990s the sector used to contribute more than 25 percent of GDP.
This sector is now contributing half that percent due to massive deindustrialization. The importance of the manufacturing sector in the economy cannot be debated. It is a significant contributor to employment creation and export growth.
The manufacturing sector today is experiencing challenges that are affecting its growth and contribution to GDP. In 2017 the manufacturing sector is expected to grow by 1 percent and is expected to expect to grow by 2.1 percent in 2018 benefitting from improved agro processing value chains in foodstuffs, drinks, and ginning, also amid supportive import management measures. This largely reflect the construction of the Zimbabwe economy wherein the agriculture sector provides key raw materials for the manufacturing sector.
Therefore, the projected growth in the manufacturing sector will be supported by the 15.9 percent growth in agriculture sector in 2017.
Growing the manufacturing sector will be important to address the informalisation problem as the sector will support the jobs in the service sector. The high level of informalisation is attributed to the huge service sector at around 60 percent of GDP, which is not supported by the manufacturing sector.
Clearly the sustaining growth of the manufacturing sector would require investment in infrastructure and improved performance of public utilities. This is why it is important to revive the parastatals who are the major providers of utilities and infrastructure.
Value addition and beneficiation
Being a commodity dependent economy which derives more that 80 percent of its revenue from a narrow range of five commodities, value addition and beneficiation would be key to enhance revenue growth. This economic imperative would be supported by investments in energy projects, which are expected to add about 2 000 MGW to the electricity grid.
Value addition would be important to unlock value from our primary commodities and minerals that are largely being exported in their raw or semi processed form.
Dealing with parastatals and state enterprises
Parastatals and state enterprises have been draining the fiscus for a long time. This could be because of lack of political will to privatize in case where it was imperative. In line with the new order spelt by the Minister, we shall see radical transformation of these entities including privatization so that they will start to contribute to the fiscus. This is quite possible considering that these entities used to contribute about 60 percent of the country’s GDP but they are now contributing a paltry 2 percent.
Given the limited fiscal space, considerations for PPPs and BOT structures would be important to unlock the potential from parastatals and state enterprises.
The revelation that CSC is being resuscitated by NASSA through injection of capital amounting to $20 million is comforting. The structures to rescuisciate NRZ and ZISCO steel are plausible but the slow pace is worrying. Importantly, the parastatals should implement the National Code of Corporate Governance to ensure adherence to best corporate governance practices. Effectively dealing with parastatals would help in fiscal consolidation, which was identified as one of the top prioritized of the country today.
Expenditure rationalization measures
Zimbabwe is a consumptive country, which requires a significant reduction in especially government expenditure to create the required capital resources for growth. A number of policy measures to rationalize government expenditure were not implemented because of lack of political will.
A more recent example is the reversal of the freezing of civil servants bonus for two years to 2017 by the former President. Thus, the commitment to new order by new political leadership would go a long way in achieving fiscal consolidation. The reduction in government ministries from 27 to 21 will help reduce the government expenditures. But emphasis was placed on increasing efficiency in service delivery.
Importantly, the Minister announced measures to curb non-essential and non-priority expenditures at government level. It is envisaged that with the effective implementation of these measures the country would be able to increase capital budget from the current 11% to 15% in 2018 and 25% by 2020. Importantly, the rationalization of government expenditure would support efforts to stabilize the cash situation in the country. Delays in implementing the mooted expenditure rationalization measures would result on in the blooming government debt to unsustainable levels.
Dealing with debt
The country’s debt levels are unsustainable. At a debt to GDP ratio of 75 percent the country has already breached the statutory requirement of 70 percent.
More worrying is the growth in domestic debt occasioned by issuance of treasury bills.
The current trend and manner of issuance of Treasury bills is unsustainable, and has not only led to mounting interest payment obligations, and poses significant risk of resurgence of macro-economic instability.
Of the $1.75 billion Treasury bills issued to September 2017, $386.45 million financed Government programmes, whilst $1.07 billion was channelled towards servicing legacy debts. Budget deficit financing through direct borrowing from the Reserve Bank amounted to US$393.4 million. This has resulted in domestic debt of $6.031m which has the effect of crowding out private sector investment.
On the issue of foreign debt of $7.548 billon the government is commitment to continue with the Lima plan to clear the arrears for qualification to accessing new loans with favourable terms.
What lies ahead
The projected 3.4 percent for 2018 appear realistic as given that the oncoming elections will impede the growth momentum. The increase improvement in revenue and reduction in government expenditures will increase the amount allocated towards capital expenditures to $1.2billion, which is important to support growth.
The budget chat the course of the economic recovery. Consistent to the new order, implementation will be a key differentiator.
Persistence Gwanyanya is the founder and futurist of Percycon Global Fund managers (SA) and Bullion Leaf Zimbabwe. For feedback email to [email protected] or WhatsApp at +263 77 030 691