IMF forecasts GDP contraction, here is why

12 Apr, 2019 - 00:04 0 Views
IMF forecasts GDP contraction, here is why

eBusiness Weekly

Kudzanai Sharara
The International Monetary Fund this week released economic growth forecast for the world including a negative Gross Domestic Product growth rate of 5,2 percent for Zimbabwe.

The IMF’s forecasts which are included in the 2019 World Economic Outlook Report, predicts that Zimbabwe might fail to meet Government’s 2019 economic growth projections of 3,1 percent.

Even the projected strong growth rate of 7 percent in 2020 according to the 2019 National Budget Statement is seen as unachievable with the IMF forecasting 3,3 percent.

Although the IMF had not released supporting information on why Zimbabwe would record negative growth, its first since 2008, the tell-tale signs have been playing out.

The impact of unfavourable weather on agriculture and macro-fiscal vulnerabilities from previous unsustainable fiscal and current account deficits were already expected to limit positive growth according to Finance and Economic Development Minister Mthuli Ncube in his 2019 National Budget, but developments on the ground have meant the country’s economy might end the year far from its growth projections and here is why.

The country’s economy is likely to be held back by a plethora of challenges that have seen the productive sector operating way below capacity while consumers are barely managing.

The negative growth reflects ongoing economic uncertainty, but increasingly comes from domestic macro-economic instability including foreign exchange instability, poorly managed interbank market, and inflation.

Exporters not happy with exchange rate

For a country that claims to have $700 million in nostro accounts, failure to access foreign currency by corporates, even when the foreign exchange market is said to have been liberalised should be a cause for concern.

Just this week, Zimbabwe Stock Exchange-listed entity Proplastics claimed that it has received less than US$100 000 through the interbank exchange system against a monthly requirement of half a million. As reported in this publication last week, cooking oil producers are buckling under US$100 million external payments debts, as foreign currency shortages in the country continue taking a toll on their operations.

Key industry players said the majority of cooking oil producers had run out of raw materials that include crude soya bean and palm fats. These are just two examples, but the bottom line is that production is being seriously affected. In fact, two major cooking oil producers, Willowton and Olivine Industries, have either significantly scaled down or shut down completely.

Exporters not playing ball

The foreign currency exchange rate between the RTGS$ and the US$ has moved from the start rate of RTGS$2,5:US$1 to RTGS$3.1383: US$1 as of Wednesday but this has not enticed exporters to come to liquidate some of their holdings. Even deliveries to the auction floors, for one of the country’s biggest foreign currency earners, tobacco, drastically fell short of last year’s deliveries by more than 70 percent. This should be of concern, why are farmers not selling? It’s not far-fetched to conclude that they are not happy with the exchange rate system and how they are to be paid. Some could be holding up for a higher rate or for a change in payment modalities.

Inflation also wreaking havoc

When it comes to inflation, this column explained extensively last week how it would impact economic growth. And the message is repeated again, there is need to pay a lot of attention to the way consumers feel at the moment.

The World Bank last week said, “the currently spiralling price increases in Zimbabwe will have a negative impact on the country’s growth prospects”.

“The increases in prices that we have witnessed since October last year will affect the growth rate for 2019,” World Bank Zimbabwe country chief economist Marko Kwaramba said.

The Zimbabwean consumer is experiencing a decline in disposable income. Following the liberalisation of the exchange rate, incomes and subsequently the purchasing power lost value in US dollar terms.

Although some employers have tried to cushion employees by increasing wages and salaries, none could have done it at a scale that can 100 percent compensate for the lost value.

So, whichever way you look at it, incomes have been eroded in value by at least 75 percent and this will have detrimental impact on the economy.

If disposable income decreases, households have less money to spend and save, which then forces consumers to use less and become more frugal. This decrease in consumption could then decrease corporate sales and corporate earnings and subsequently the overall economy.

Consumers can be the driving force behind the growth of the economy and economists and policymakers should worry about how sustainable the current level of consumer spending is, given modest wage growth and higher inflation.

The trend doesn’t seem to be slowing down and April figures will almost certainly show a higher inflation rate because of the price increases witnessed from late March.

Wage increases will also start feeding into production costs and many businesses are being charged higher rents.

The contraction could also be a result of Government’s decision to implement austerity measures that have seen spending seriously reduced.

Further, other measures such as the 2 percent tax have reduced cash flows for both individuals and corporates. Such contractionary monetary or fiscal policies when used excessively, can lead to a decline in demand for goods and services, eventually resulting in contraction or recession as forecast by the IMF.

Economic recessions are infrequent but costly

If IMF’s prediction comes through, then this would have confirmed RBZ governor Dr John Mangudya’s fear about the country falling into a recession and struggle to get out of.

Speaking before parliament sometime this year, Dr Mangudya said: “In my Monetary Policy Statement (MPS), I stated that I was more worried about going into recession and when that happens, it will be very difficult to get out of it.”

Although each recession has unique features, recessions often exhibit a number of common characteristics: In particular, a recession is usually associated with a decline of 2 percent in GDP, which the IMF’s prediction of a 5,2 percent decline would be severe.

But as the World bank say, if Government manages to craft appropriate growth policies in terms of macro-economic stability (including exchange rate), manage deficits and inflation, the country could grow its economy.

Share This:

Sponsored Links