As it becomes increasingly clear that Zimbabwe’s economy is heading south and prospects of meeting growth targets set out in the Transitional Stabilization Programme appear dim, Finance minister Mthuli Ncube brew a shocker ahead of the 2020 National Budget that the fiscal policy document will focus on productivity, growth and job creation.

Wait a minute. How he would do that would be the most logical question that begs an answer. Let us take you aback. Barely a month after being appointed head of treasury, Ncube promised to wave the magic wand and turn around the economy. That was a strong statement which not only spoke about his predecessor but was also loaded with self-praise.

Now, barely a year after President Emmerson Mnangagwa appointed his first cabinet after the 2018 elections, Zimbabwe appears to be on auto-pilot. Key economic indicators such as inflation, unemployment and exports are not projecting a rosy picture. Gold output has been plummeting due to poor policies that fuel side marketing and tourist arrivals have also declined.

Data derived from Chamber of Mines

Zimbabwe has become a case study for economics students as well as international financial institutions. Essentially, it has become an experiment for Ncube who de-dollarized 10 years after dollarisation despite the absence of key fundamentals to support the introduction of a domestic currency. Studies by monetary experts such as Steven Hanke have shown this.

The Finance minister is probably seeing Zimbabwe’s growth through rose-coated lenses. He has rebased the economy in the past, blacked out the publication of inflation figures and has trumpeted his exploits in reducing the budget deficit. In fact he sees deficit closing the year at 4 percent of the budget size. Time will tell.

Early this year, Ncube bragged that Zimbabwe had registered a budget surplus and international creditors were pleased with this achievement. In reality though, what is a budget surplus when hospitals have no basic drugs such as painkillers and when the value of the domestic currency loses up to 80 percent within the first 60 days of its reintroduction.

Zimbabwe is suffering from a confidence deficiency and government is not doing much to address this. A week before the announcement of the budget, President Mnangagwa increased the number of government ministers when he appointed deputy ministers of Finance and Foreign Affairs. A new ministry was also formed.

For a government that asked its citizenry to tighten belts and endure austerity measures, this flies in the face of authorities who preached fiscal consolidation.

Secondly the false start to the new bank notes and coins is also dampening confidence in the financial services sector. Banks only started dispensing the units on Tuesday despite an earlier announcement that this would be done a day earlier. To make matters worse, the $2 bond coins were printed in 2018, raising questions on why government took this long to introduce them into the market.

Expectations

That the domestic economy is facing serious headwinds stemming from a devastating drought, rising inflation and erratic fuel and power supplies, is now an open secret.

For an economy with no budgetary support and a high rate of tax incompliance, the Budget should answer how the Finance minister will strike a balance between the needs of hungry servicemen and those of capital projects. In our view the Health and Education ministries should be well funded for Zimbabwe to achieve current and future development goals.

Zimbabwe wants to dream again and policies that support entrepreneurship should be in place among other measures.

Ncube’s ambitious plan to create jobs in an environment where there is rising inflation and low business activity due to factors such as lack of capitalization, could be a fait accompli.

In our view, we contend that the Finance minister should shift focus from agriculture to mining particularly gold, coal and chrome. Legacy issues around agriculture make it difficult for the sector to attract significant funding to mechanize in line with modern trends.

Normalising relations with IFIs and establishing partnerships with states that play a greater role in advancing Zimbabwe’s economic interests should also be top on the agenda. As it stands, it’s still a long way to go before Zimbabwe can start talking of job creation. Let’s go back to the basics first. It’s the politics that need to be addressed first before the economy can tick.

Data derived from: Chamber of Mines Zimbabwe

The Zimbabwe dollar this week crashed against the United States dollar, a development that immediately ignited debate on the currency issue. After abandoning the multi-currency system for the introduction of the domestic currency, authorities have over the past few months grappled to defend the value of the local unit.

When Finance Minister Mthuli Ncube said the introduction of the Zimbabwe dollar would make local exports competitive and this monetary reform would stabilize inflation not many believed him. Studies have shown that countries that have re-introduced their currencies after dollarisation have often failed. Zimbabwe’s experiment could be the latest case study. The balance of payments position of the economy is weak albeit with some improvements.

Official figures show that the current account deficit narrowed to US$1.4 billion last year from US$2.7 billion in 2011. We contend that this year it is expected to widen further due to some of the factors we highlight in this analysis. Demand for the greenback keeps increasing and foreign currency receipts are not being used to grow local industry but import basics from neighboring countries and abroad.

Annual inflation which we now project to be around 390 percent from 175.66 percent in June keeps soaring and discourages domestic savings. Savings are key in any country’s development, more so for Zimbabwe which has no budgetary support and limited concessionary loans to stimulate growth.

As authorities craft the 2020 National Budget, more focus should be put on formalizing activities of artisanal miners who now contribute more than 50 percent of gold deliveries. Health and safety and better mining practices are but some of the immediate issues that should be addressed to promote output. Structural reforms to the cost of doing business are required to stimulate exports and in the absence of this Zimbabwe will not develop.

In our view, government programmes like Command Agriculture should be led by the private sector to reduce rent-seeking behavior by some of the contractors. Speculation is ripe that the plunge of the local unit has been attributed to some government contractors who are on the market buying foreign exchange to finance critical projects. Private sector participation should lead the import substitution programme which has been mired by controversy.

The end of the tobacco marketing season, power imports have also piled pressure on the scarce foreign currency reserves and in the process the Zimbabwe dollar has lost its value.

At this rate, Zimbabwe’s economy will certainly contract by 5.7 and could weaken by up to 8 percent. Reversing this trend requires a multi-pronged approach which requires strong political will and critical economic thinking. Clearly the use of high interest rates to discourage borrowing has not achieved the desired results and it could create arbitrage opportunities for foreign currency dealers. A new approach is needed which should be anchored on domestic production and exports.

Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement while the country was mourning the death of former President Robert Mugabe.

The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The apex bank said it would drip-feed new notes into the economy to ease cash shortages on the market.

This development also comes at a time when reports show that crispy new notes are finding their way onto the parallel market. The central bank denies these claims. The current shortage of physical cash has led to a supply and demand disequilibrium, and arbitrage opportunities for differential pricing models, depending on the mode of payment.

In February this year, the central bank formalised the trading of foreign currency by introducing the inter-bank foreign exchange market and licencing of bureaux de change. Back then trades where managed and there was a huge discrepancy between the parallel market and the formal sector.

RBZ governor John Mangudya now sees inflation softening in the short to medium term mainly due to the discontinuation of Central Bank financing of Government deficits to curtail money supply growth; high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, we contend that Zimbabwe still has to address its external sector as well as stimulate domestic production. The latest figures from the RBZ show that South Africa and Singapore are still the country’s major sources of imports. Imports from South Africa reflect on the state of the country’s manufacturing sector while fuel imports from the south east Asian country contribute the bulk of imports.

 Currently most companies are facing bottlenecks in buying foreign currency for their raw materials and their balance sheets have weakened following the introduction of the mono-currency regime. Early this year, the central bank committed to take over legacy debts resulting from the monetary reforms. The bank is yet to settle these debts and companies are already feeling the heat.

It is our view that the country’s monetary policy statement is not being effectively being complemented by the fiscal side. As the local currency weakens, inflation soars, public spending is also gradually rising. Civil servants are demanding higher salaries and with no budgetary support the central bank will be forced to inject more liquidity into the market, a decision which is inflationary. The onset of the summer cropping season and a push for more support on the Command Agriculture programme will also result in sharp spike in money growth.

It is our view that under the current circumstances, the central bank’s tools to manage inflation will have a limited effect.

The Zimbabwe dollar this week weakened against the United States as authorities struggle to defend the value of the domestic currency. The local currency, which was trading at ZW$11.11: US$1 lost 30 percent of its value.

With gold deliveries declining due to side-marketing triggered by unfavourable prices, the depreciation of the domestic currency is seen continuing in the short to medium term.  Gold is the single largest foreign currency earner after overtaking tobacco last year. As the tobacco marketing season ends and mop up sales are completed, Zimbabwe will transit to a cyclical period of low foreign currency reserves, weakening domestic currency and rising inflation.

After announcing that the price of fuel will be FOB costs and foreign exchange movements, the price of fuel marginally declined and pushed demand. Resultantly long queues which had almost disappeared last week have re-emerged. This is expected to continue in the coming weeks as schools re-open. With increased demand for fuel, demand for foreign currency is also expected to surge. The growing number of bureau de changes in Zimbabwe also speaks on how government wants to widen avenues for buying foreign currency on the market. Mobile phone companies like Econet and NetOne have also joined the fray.

In our view, as Zimbabwe enters a lean period of foreign currency scarcity, government should avoid the temptations of announcing any policy measure that will prejudice foreign currency earners. Going forward, remittances from Zimbabweans living in the diaspora will be a vital source of foreign currency. Ongoing xenophobic attacks in South Africa will however affect these remittances as many locals living in South Africa are on the knife edge. We don’t anticipate any financial package for Zimbabwe during the last quarter of the year.

Apart from fuel, treasury will seek more foreign currency to settle arrears owed to regional power utilities such as Eskom of South Africa. Eskom has given Zimbabwe strict conditions for power imports to ensure that she doesn’t default. Should negotiations with HCB of Mozambique succeed, Zimbabwe will need more foreign currency for new imports. With nearly a third of the population in need of food assistance, grain imports will compete with other critical requirements for the scarce foreign currency reserves.

In this all, one can argue that Zimbabwe’s concentration of exports exposes the economy to both domestic and exogenous factors. Diversification of exports, value addition is what government should be seriously working on to ensure that the economy manoeuvres turbulent cycles. These cycles are inflationary and may cause civil unrest as the cost of living soars.