Zimbabwe’s GDP forecast downgraded amid headwinds




Prof Hawkins

Global economic rating agency, Fitch Solutions, has downgraded its earlier 2022 gross domestic product (GDP) forecast for Zimbabwe to 1,5 percent from the initial 3,7 percent largely due to the resumption of inflationary pressures in the economy.

Similarly, renowned economist, Professor Tony Hawkins, sees slower economic growth in the country. He forecast growth to slow to around 2,5 percent “following mediocre rainfall season, allied with resurgent inflation and rapidly-worsening currency crisis”.

Fitch Solutions is a leading provider of credit intelligence and the primary distributor of Fitch Ratings content. About 90 percent of the world’s leading financial institutions, multinational companies, government agencies, and consulting firms based in 118 countries depend on Fitch content to inform their business decisions.

In its report on Zimbabwe, the rating agency said the downward revision reflects the likely impact of rising inflation on the domestic economy, which will weigh on real household incomes and consumption.
“We now forecast real GDP growth of just 1,5 percent in 2022 and this is down from a previous forecast of 3,7 percent, and is below an estimated average of 3,1 percent between 2011 and 2021.

“The main reason for our forecast revision is the resumption of inflationary pressures in Zimbabwe, as the Russia-Ukraine conflict has pushed up global energy and food prices since February.
“This has contributed to inflation rising to 96.4 percent year-on-year in April 2022 in Zimbabwe, the highest level since June 2021,” it said.

Prof Hawkins forecast inflation to accelerate from 50 percent (end 2021) to at least 400 percent to 500 percent by year-end.

“Main drivers are the collapsing exchange rate, higher global inflation, and increasing wage demands along with administered inflation as public service prices, including education and health, are raised,” said Prof Hawkins while speaking at a conference organised by the CAA Business School on Tuesday.

However, according to the latest figures from the Zimbabwe National Statistics Agency, the country’s annual inflation rate reached 191.60 percent in June from 131.70 percent in May of 2022.

Fitch Solutions said that Zimbabwe’s rising inflation and the measures implemented to tackle it will constrain private consumption growth in 2022.

“We forecast private consumption adding just 1.6 percentage points (pp) to headline growth in 2022, down from an estimated 4.9pp in 2021.

“Elevated inflation will dent real household disposable incomes, weighing on consumer
purchasing power and spending,” it said.

The rating agency said that tighter lending restrictions will also severely crimp commercial activity.

“The policy rate was increased by 2000 basis points to 80.0 percent in April, and will rise to 100.0 percent by year-end according to our forecasts, as the Reserve Bank of Zimbabwe (RBZ) attempts to stabilise the currency and reduce imported inflation,” reads part of the report.

On May 7, 2022, Zimbabwe’s authorities ordered all banks to stop lending indefinitely, before reversing the decision on May 19.

Fitch said that the uncertainty surrounding the decision will likely weigh on confidence in the banking sector in the months ahead.

“These factors imply consumer spending will be weak in the months ahead, even as restrictions aimed at tackling Covid-19 remain limited,” it said.

The rating agency noted that it expects government consumption to add 1.1pp to growth in 2022, with spending set to increase by 4.9 percent.

It said that a much more significant contribution to growth from the government and indeed an ability to prevent a growth slowdown will be prevented by Zimbabwe’s weak fiscal dynamics.

“A government debt load of over an estimated 150.0 percent of GDP in 2022, Zimbabwe’s lack of ability to borrow on international capital markets, and high inflation will constrain government spending in the months ahead,” Fitch said.

The agency noted that a larger slowdown in real GDP growth will be prevented by the external sector, with net exports set to subtract only 1.5pp from growth in 2022, compared to an average 2.1pp subtraction from 2016 to 2021.

Fitch said the devaluation of the Zimbabwe dollar (ZWL) will weaken import demand as imports become more expensive, and this trend will be exacerbated by weaker consumer demand for imports amid declining real disposable incomes.

“Furthermore, a rally in the global price of gold normally accounting for 40,0 percent of exports, will incentivise higher domestic gold production, boosting exports.

“The tourism sector should post a much more significant recovery in 2022, with arrivals having fallen by 85,0 percent from 2019 levels in 2021.

The sector usually accounts for over 6,0 percent of GDP in Zimbabwe, and will have a better year as confidence in global travel recovers gradually from the impact of the Covid-19 pandemic,” reads part of the report.

The agency also highlighted that there is a rising risk of re-dollarisation in the economy.
“We note that there is rising scope for ZWL to be abandoned at some stage in either 2022 or 2023 and to be replaced by the US dollar.

“Such a move would be viewed as a last resort for President Emmerson Mnangagwa’s government, which abandoned the currency’s previous peg to the US dollar in February 2019,” the agency said.

Prof Hawkins said given near-total lack of confidence in and support for the ZWL, re-dollarization looks increasingly inevitable.

He said while Government says re-dollarization would be disastrous such a move could actually save banks from collapsing as was the case in 2009.

“In fact, when Zimbabwe first dollarized in 2009, the banks were saved from collapse and within a year of hyperinflation, price increases were reduced to single digit levels.”

Prof Hawkins however said “re-dollarisation (perhaps using Rand) looks the most viable option, but unlikely to work unless underpinned by re-engagement, debt relief and access to new international finance”.

Fitch noted that the RBZ has limited foreign reserves (less than 2.0 months of import cover) and monetary policy tools to defend the currency and contain inflation.

“If the exchange rate and inflationary pressures continue building in the coming months, the authorities may resort to re-dollarising the economy and abandoning ZWL.

“Such an outcome would create significant economic shocks in the near term, with the value of household savings collapsing and the costs of basic goods and services likely to be unaffordable for many households,” said the rating agency.

Meanwhile, Fitch said that it sees real GDP growth accelerating to 3.1 percent in 2023, as easing inflationary pressures allows for a more sustained economic recovery.

“This slight uptick in growth is predicated on our expectation for private consumption to benefit from reduced inflation, as global commodity prices ease and the ZWL stabilises somewhat.

However, growth will remain sluggish for a country at Zimbabwe’s nascent level of economic development, implying limited convergence gains will be realised in the coming years,” said the agency. – Business Weekly