Macro-economic priorities in 2020

ZIMBABWE’S prospects for 2020 look quite bleak with the 2019/20 farming season slowly turning into a successive drought as a result of poor rainfall patterns.

The World Food Programme (WFP) has highlighted that 8 million people (over 50% of the population) face starvation in the next three months. The hunger has been worsened by runaway inflation and economic decline which have eroded incomes. According to the country’s treasury, the economy contracted by about 6,5% in 2019 while a World Bank report puts the figure at 7,1%. Economic decline in 2019 was accelerated by monetary changes that saw the banning of the multi-currency system in June after close to a decade of positive economic growth rates which were underwritten by currency stability.

The economy is also suffering from a massive confidence deficit emanating from the disputed 2018 national elections, failure to tackle widespread corruption by the government and the decay of key national institutions.

Persistent power cuts, foreign currency and fuel shortages have also done no favour to policy pronouncements by the government.Without implementing the much-needed social, economic and political reforms, Zimbabwe will slide into the abyss. In September 2019, the International Monetary Fund (IMF) warned that Zimbabwe needed to intensify reform efforts and meaningfully improve transparency in governance. The institution noted that policy actions are urgently needed to tackle the root causes of economic instability and to enable private-sector led growth. An independent world economic analyst (the Economic Intelligence Unit) forecasts that the country’s economy will contract by 12,9% in 2020, highlighting the above-mentioned risks as key causes.

Zimbabwe’s macro-economic priorities for 2020 are demanding, yet achievable, with a clear commitment and political will. The following are the top priorities for 2020:

Currency stability

With year-on-year inflation ending 2019 at over 500%, there is no doubt that currency instability lies at the heart of Zimbabwe’s economic meltdown and the price distortions that are rife in the local market.

The primary cause of currency instability can be traced back to the RBZ Debt Assumption Bill of August 2015 which paved the way for the introduction of bond notes in November 2015, unrestrained issuance of Treasury Bills (TBs) and unbacked Real-Time Gross Settlement (RTGS) credits to plug fiscal deficits or fund various government programmes.

From January to October 2019, broad money supply in the economy grew from Z$9,9 billion to over Z$28,93 billion (growth of 192% in 10 months). Within the same period, official inflation jumped from 56,9% to 440%.

Unrestrained money supply has been fuelling price increases and income erosion for all economic players from labour, financial securities and corporates. To give the returning Zimbabwean dollar a fighting chance, treasury has to curb excessive consumption and limit expenditure to collectable tax revenues.

This will stabilise inflation, restore incomes and marginally improve aggregate demand. Without stabilising inflation, the local market will fully reset back to the US dollar before June 2020.

Energy solution

Zimbabwe is facing a severe power crisis since May 2019 when treasury cut foreign currency allocations for power imports from the region. National grid output from three power stations (Hwange, Kariba and Munyati) has dropped to less than 650 megawatts (MW) against daily peak demand of 1 400MW currently.

Harare and Bulawayo power stations are not generating any electricity due to persistent equipment breakdowns and lack of investment over the years. The power supply gap has resulted in massive load shedding varying between six to 18 hours per day for different consumers on the grid. Power cuts have caused economic decline extremely greater than the foreign currency savings of US$14 million per month required to import 600MW of electricity during off-peak hours (10am-5pm). The worst affected sectors are mining, manufacturing, telecommunications and agriculture which consume much of the energy supplied by the power utility.

The power crisis can be ended either through allocating more foreign currency to electricity imports or aligning the electricity tariff to supply costs so as to temporarily increase imports. Without these measures, de-industrialisation will accelerate and the local cost of production will remain high.

Equally damaging are the persistent fuel shortages that also increase the cost of production. The government needs to cut the amount of foreign currency allocated to fuel importation by more than 50% for starters and allow licensed petroleum companies to import that 50% using their own funds. For this to be sustainable, the pump price of fuel has to be very close to import and distribution cost. Ideally, the government should focus on importing fuel for its own strategic reserves and operations.

Targeted fuel subsidies to specific economic sectors can be continued if they make economic sense, instead of subsiding consumption for all motorists which may have limited value to the economy. The energy crisis poses a direct threat to any policies aimed at improving production.

Political dialogue

Economic growth is premised on political stability and market confidence. The European Union (EU) and Southern African Development Community (Sadc) have headlined calls from the international community for key political parties to give genuine national dialogue a chance so as to bring stability.

Key milestones for the dialogue should focus on the implementation of social, economic and political reforms that can allow Zimbabwe to re-engage the international community, bring credibility to key institutions and improve transparency in governance. The parties to the dialogue have been widely encouraged to prioritise the livelihoods of millions of Zimbabweans sinking in poverty and fully implement the 2013 constitution before charting a path to credible elections in future.

The 1987 Unity Accord brought economic stability and the same can be said of the 2009 Global Political Agreement (GPA) that ushered in the government of national unity between 2009 and 2013. Without political stability, it is practically impossible for the government to source significant credit lines for retooling the local economy, bring market confidence for meaningful local or foreign investment, and achieve monetary or economic stability in 2020.

Debt management

Zimbabwe’s true public debt position remains murky. According to the 2019 National Budget, total public debt stood at US$17,69 billion as at September 2018, while the 2019 Budget Statement stated that external debt was US$7,7 billion and domestic debt was US$9,6 billion (total debt US$17,3 billion). However, the Reserve Bank of Zimbabwe (RBZ) pointed that total debt stood at US$23,53 billion in January 2019 in contradiction to the 2019 Pre-Budget Strategy paper estimates of US$9,2 billion. The 2020 Budget statement deliberately omitted the public debt aspect, even though external debt has grown to over US$8 billion.

Treasury needs to communicate the true extent of public debt while making efforts towards a debt repayment plan.

Forex management

Zimbabwe’s export receipts from January to October 2019 were US$5,7 billion with exports netting US$3,6 billion. The country’s exports are estimated to be over US$4,3 billion before other sources are considered. However, the country faces foreign currency shortages that are pronounced on importation of critical commodities such as medicines, water treatment chemicals, electricity, fuel and raw materials for local production.

To stabilise the economy in 2020, the central bank has to efficiently allocate the earned foreign currency. Priority has to be given to value-adding and import-substituting industries (such as the producers of consumer goods, plastic products, pharmaceuticals and fertilizers). There is also an urgent need to prioritise power imports of about 500MW from the region to salvage local production capacity which has plummeted by over 25% across all economic sectors.

The country faces serious social and economic headwinds that need political will to solve. Drought relief efforts will inevitably be stepped up in partnership with international donors to prevent the starvation of over half the population. Zimbabwe requires 2,1 million metric tonnes of maize per year to adequately cover human, livestock and industrial consumption.

However, successive droughts mean that more than half of that demand has to be met through imports. Poverty has rapidly widened in the last two years with basic human needs such as affordable health care, access to clean water and sanitation, access to electricity and decent clothing fast becoming luxury for millions in the country. It is only by genuinely addressing the above macroeconomic priorities that Zimbabwe can register positive economic growth in 2020.

Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.Bhoroma is an economic analyst.

He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or follow him on Twitter: @VictorBhoroma1. This article was first published here in the Zimbabwe Independent.