How Zimbabwe could avert a looming depression

AS the coronavirus bites, Zimbabwe’s chances of recovering from a recession have all but faded. In 2019, the economy suffered a -7,5% dip in GDP. This means output shrunk on an annual basis after almost 10 years of growth. The dip was a culmination of fiscus rebalancing whose objective was to suppress expenditure and to curtail the trade imbalance.

Respect Gwenzi

All these collective measures were pursued under the banner of austerity, which naturally targeted the demand side but whose impact swelled to the supply side through relational effect. Other factors which contributed to the 2019 recession included the El Nino drought, energy challenges (fuel and electricity), currency instability (reforms) and inflation.

These broader economic challenges were quite evident as latest financials from listed companies show. Dairibord, the country’s largest milk processor recorded a 17% volumes dip in 2019 as demand waned. For NatFoods, which is the largest food processor in Zimbabwe, the story is bleaker. In the six months period to December 2019, its flour division reported a 49% dip in volumes, stockfeeds -21% and Puredrop, its oil processing division -13%. Delta, the country’s largest beverages producer’s lager beer volumes dipped 46%, while soft drinks eased by 38% in the nine months period to December.

Into 2020, the same challenges present themselves and are further compounded by the coronavirus. The coronavirus is set to wipe out 3% in total global output despite massive bailouts and rollout of several austerity programmes, which will total circa US$10 trillion in the least. Sub-Saharan Africa, including Zimbabwe, where the disease has not hit hard, will equally not be spared in terms of economic impact.

In essence, companies will lose more income by reducing volumes as business shrink further. The devastating impact of Covid-19 will push many businesses out of operation. Sectors that will immediately be hit hard include tourism. Zimbabwe had targeted to grow the tourism sector to US$6 billion by 2023 from US$1,5 billion in 2019.

Global tourism is expected to slow down by 50% in 2020 and given that Zimbabwe tourism contribution to GDP is 9% and circa 15% to foreign currency receipts, the impact on the economy is going to be devastating. Transport and logistics have a lower contribution to GDP, but with warped, global supply chains the industry is under serious threat.

Zimbabwe had targeted to rollout massive infrastructure projects which accounted for a fairer share of the budget. The money has now since been rechannelled towards fighting Covid-19. By implication this means growth has been robbed and a potential economic rebound deferred. The manufacturing sector in Zimbabwe is pre-dominantly on the food processing side and with the intensifying economic challenges, production will further slowdown. High fixed costs will low capacity utilisation will push most producers into working capital challenges.

While all this is a given, it is important to note that depression economics requires government to take counter cyclical action in times of economic recessions in order to restore equilibrium. Left alone, market forces may only worsen the situation, further taking the economy into depression. In the case of Zimbabwe, the argument is about both substance and form of government intervention. With a deficit to GDP percent of 120%, government has less room to manoeuvre, but some other nations will after Covid-19 funding. A highly reactive exchange rate, which responds to even the slightest form of money supply manipulation and a dwindling productive base collectively reduces government’s ability to respond.

Zimbabwe is, however, richly endowed with an enormous resource base, which it could leverage to unlock the impasse. Already the government has securitised a significant share of our gold resources to Afreximbank, for credit, but we can do more on this front. We need to tighten our governance, intensify our research on the resource base and bargain for favourable deals. We could expand the base to other minerals such as platinum and chrome so we can attract new lines of up to US$5 billion taking advantage of the lower interest rates prevailing globally.

Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. – The Zimbabwe Independent

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