MDC Economic Review 2015

The Economic Situation in Zimbabwe and its Implications for the future

Gross Domestic Product (GDP)

1.1    The most common measure of national output is the Gross Domestic Product which is the sum total of everything produced within a nation’s borders. In the context of Zimbabwe, the highest national output was recorded in 1972 and to date the economy has failed, for a variety of reasons, to attain the output reached then. However, consistent with international trends, Zimbabwe uses the year on year percentage growth rates as an index to measure the performance of the economy. This index has its limitations and it is essential for analyst to be wary of its limitations when using it in comparing performance of our economy against those of other countries.

1.2    Notwithstanding this, and coming from a very low national economic output base achieved during the years of the Zimbabwe’s economic meltdown, the country registered GDP growth rates of  5,7 % in 2009, 8,1% in 2010 and this started to peter out in 2013 when it registered a growth rate of 4,5%, 3,5% in 2014 and a forecast rate of 1,5% for 2015.

The first observation is that these growth rates compare very poorly with both the continental and regional rates which reached 5% in 2014 and forecast at 4,4% in 2015 for Sub-Sahara Africa and 3,4% and 3,8% in SADC for the years 2014 and 2015 respectively. The second observation is that the GDP growth rates achieved in Zimbabwe are lower than the annual population growth rates of 3% implying that the country is increasingly unable to fend for its citizens.

1.3    Significant growth in the economy is crucial and necessary and should be higher than the population growth rate if the welfare of the citizens is to improve. But this is not the case in Zimbabwe where the Gross Domestic Product has consistently been below the 1972 levels. This implies that, on the average, our national average living standards have continued to go down below those, achieved in 1972.

The poor performance as depicted by this index puts paid to the aims and objects of a plethora of national plans and manifestos which continue to hoodwink citizens into believing that their economic welfare would improve. As a result the persistent failure to increase national output explains why poverty levels in the country are escalating, why the nation is finding it difficult to provide essential and basic social services to the general public, why parents are finding it difficult to access quality medical services and education for their children, why the average life expectancy in Zimbabwe has declined drastically, and why hordes of its people continue to seek economic sanctuary beyond the borders of this country.

1.4    Yet significant growth in the economy is very possible as demonstrated by the performance of other economies in Africa and beyond, if appropriate development policies and development agenda are adopted and implemented. This has been amply demonstrated in countries like Zambia, Mozambique, Angola, India, Singapore and China, to name just a few.

2    Investment
2.1    Zimbabwe’s growing poverty is due to its poor performance on the investment front. National Statistics show that the Gross Fixed Capital Formation (GFCF) has been consistently low since independence.  Yet capital investment creates the much needed capacity for an economy to grow and develop. Its absence, as a result, creates, at best, stagnation, or at worst, negative growth and entrenches poverty in a nation.

2.2    Investment can either come from nationals or foreigners who hope to derive reasonable financial returns from such an activity in both the short and long terms. Accordingly, Zimbabwe’s lack of significant investment is due to the persistently poor economic environment which fails to guarantee reasonable returns to investment over time. As a result, the failure to grow the national output since the attainment of independence is due to the low investment levels achieved following the poor and inconsistent economic policies pronounced by the government throughout its tenure in office. In particular, the country has persistently failed to promote domestic and foreign investment due to its innately sceptical view of potential investors, particularly outsiders.

The indigenisation policies, government bureaucracy, the vitriol occasionally directed at potential investors, the high levels of government corruption and policy inconsistencies are factors which have connived to create a very unfriendly environment for investment. As a result foreign direct investment (FDI) inflows into the country have been so low that a paltry average FDI of $400m for the years 2012 and 2013 was realized. This compares poorly with over $5 billion accessed annually by Mozambique, $8 billion by South Africa, $2 billion by Zambia, $124 billion by China, $77 billion by Hong Kong, and $122 billion by the Korea Republic. What is more disheartening is the fact that the FDI inflows to Zimbabwe is worsening with time as only $67 million was accessed in the first six months of 2014 compared with the $165 million received in the same period in 2013. More importantly it is instructive to note that this performance comes at a time when the FDI to low and middle-income countries are, on the average, well above $650 billion per year. In short, the world is forging ahead without Zimbabwe and it is the citizens who continue to suffer inordinately due to the country’s failure to attract investment.

3    Ease of doing business
3.1    The private sector is an important contributor to the welfare of the people of most economies. This is also true in Zimbabwe since Government cannot do it alone in all sectors of the economy. Accordingly, the country’s ability to attract private sector investment is a crucial factor in the process of making a decision of where FDI will eventually go. But the dismal ranks that Zimbabwe gets time to time again attest to the poor investment destination that this country is. For instance the World Bank Global Competitiveness put Zimbabwe at 154 out of 187 countries in 2007 and this worsened to 171 out of 189 in 2014/15.

Again on the Perception Index done by Transparency International, Zimbabwe’s position worsened from 150 out of 179 in 2007/8 to 157 out of 177 in 2013/14. The critical factors which give Zimbabwe these poor ratings include: difficulties in accessing finance (25%); policy instability and unreliability (20%); poor infrastructure (15%); Government bureaucracy (12%); corruption (11%) and labour regulations. Obviously until and unless the country is able to make significant progress in all these areas no substantial investment can be realised. The net effect of this is the unbridled worsening of the living standards and the condemnation of the masses into penury and destitution.

4    Unemployment levels
4.1    The levels of unemployment in Zimbabwe are alarming, to say the least. Whilst there is controversy on what constitutes gainful employment in the country, figures of around 90% unemployment levels have been quoted, it is a truism that all sectors of the economy (private and public) are struggling to keep the small number of employees on their books in employment because of the harsh economic environment. Government and Private Sector alike is struggling to pay workers and any opportunity which is availed to rid them of labour is used with finesse to do so. Government, in its own wisdom  has already announced in its Mid Term Fiscal Policy Review that it will cut its employment expenditures by over 40% in the coming months and an opportunity availed to non-government actors by the Judiciary saw over 20 000  workers losing their jobs in the recent past.

These developments are taking place in a country promised 2,2 million new jobs by government in 2013, where a horrendous number of people have left the country in search of jobs, where hordes of school leavers and other economically active population stand no chance of ever getting a job in this country in the foreseeable future.

4.2    More importantly, the attitude that developed towards vendors who are trying to eke meagre living off the streets is totally untenable. The suffering and destitution which the average Zimbabwean is facing due to lack of income is unparalleled for all time and God knows for how long it can be allowed to continue.

5    Inflation
5.1    This economy is currently characterised by negative inflation which reached levels of -2,8% by the middle of the year. It is forecast to remain negative for the remainder of the year due to the ever declining incomes consequent upon the onslaught of vendors, the government planned 40% cuts in expenditures on wage income, and the labour shedding that was initiated by the supreme  Court rulings.

5.2    The impact of these developments will not only be felt in the empty pockets of consumers but also in reduced aggregate demand for goods and services nationwide. This reduction in aggregate demand will in turn lead to declines in capacity utilisation in industry and commerce, worsening financial viability leading to more company closures. We therefore foresee a situation where even Central Government revenues will continue to fall and this will worsen its ability to finance the Civil Service. The adverse impact of this trend is clear to see for all discerning Zimbabweans as delays in payment of salaries and wages, pensions, medical aid, and other employment costs are the order of the day. In making this point we are fully aware of the hunger that is lurking at the doors of Zimbabweans throughout which hunger and starvation has to be met from non-existent coffers.

6    Commodity Prices
6.1    The Mid-Term Fiscal Policy Review forecast a continued fall in mineral commodity prices in 2015 and, naturally, the adverse impact this has on the country’s export earnings such as gold and platinum. This weak export performance due to lower commodity prices will be exacerbated by the decelerating growth in the economies of our major trading partners. This can only imply additional losses in the unit prices of our export products. Hence the revenues generated by the country’s exports are likely to be adversely affected accentuating the growing mismatch between the country’s exports and imports bill. Managing this is a serious challenge to Zimbabwe where other foreign currency inflows are constrained by low capital inflows due to the existing dearth in positive policy prescriptions.

7    Agricultural Sector
7.1    The situation prevailing in the agricultural sector is worsening by the day. Agricultural output in the 2014/15 season was poor due to a compendium of factors including, poor rainfall conditions, lack of timely investment, lack of working capital, poor agricultural infrastructure, poor marketing conditions, lack of viability, and unwarranted competition from imports. As a result the total agricultural output was forecast to decline by some 8% in 2015. It is instructive to note that the output growth in this sector has been falling from a positive growth of 33% realised in 2010 to the -8,2% for the current season.

7.2    As indicated elsewhere in this discussion lack of investment continues to militate against improved output and productivity in Zimbabwe. In the agriculture sector, in particular, lack of long-term investible funds, non-existent research and development, destruction of agriculture infrastructure following the chaotic land reform programme, and lack of collateral security continue to be the major impediments to agricultural output in the country. Further, the failure of the GMB to pay farmers for products delivered has not only caused serious shortages of working capital needed by farmers but it has also created a disincentive to farmers to continue producing beyond subsistence levels. In addition, the GMB and Government continue to run outstanding payments to farmers for deliveries of products in previous marketing seasons even in cases where products would have been sold by the parastatal and cash payments made to board.

7.3    More importantly, the GMB continues to require Government to finance the purchase of the Strategic Grain Reserve every year, a situation which should have been addressed by a one-time payment. But because of mismanagement and unbridled corruption, this type of funding has become an annual budgetary requirement with no effort being expended to stop the rot at the GMB.

7.4    More serious is the impact of the drought this season where the masses are already starving particularly in the grain deficit regions of the country and Government has failed to put into place a viable programme to import grain that will obviate and avert the massive starvation facing the country this current season. The hunger situation is going to be more acute especially in view of the logistical problems of importing grain from suppliers outside the African continent.

7.5    Finally, government has estimated that the country needs at least $1,700 billion to finance the agricultural sector this season. Yet the problems of accessing those funds have not been resolved and the growing season is only two months away. The important observation is that the problems militating against the growth in output in the sector, will continue to assail the economy until government gathers enough political will to resolve it.

7.6    The importance of irrigation as a measure to mitigate against recurring droughts have been emphasized worldwide. Yet in Zimbabwe, despite the existence of such irrigation schemes, a significant number of irrigation projects are moribund due to lack of maintenance, the absence of irrigation infrastructure where dams have been constructed, and the misallocation of funds or failure to prioritize irrigation expenditure in the budgetary process. To allocate a mere $1,6million for irrigation schemes in a nation beset with drought problems is criminal to say the least.

8    Mining Sector
8.1    Expansion of the mining sector is critical in a country reputed to hold vast mineral resources like Zimbabwe. This sector could support the growth of other sectors if a more viable policy on mining development was in place. But due to the country’s indigenisation policy, mineral exploration efforts, for starters, are at their lowest ebb. Furthermore, the infrastructural problems relating to road and railway facilities, the energy and water constraints, and the telecommunication facilities all continue to put brakes on the extent to which this sector can contribute immensely to the welfare of Zimbabweans.

9    The Manufacturing Sector
9.1    Output in this sector used to contribute about 25% of the GDP in Zimbabwe but its ability to do so has been seriously jeopardised by several factors which, inter-alia, include the collapse of the agricultural sector with which it had very strong inter-sectoral linkages, the infrastructural deficits the country is experiencing (especially energy and water). In addition the lack of working capital, the absence of long term investible funds at competitive rates, the unfair competition from cheap imported products, the unfriendly business climate created by poor domestic policies, the indigenization policy, and the declining aggregate demand for goods and services have all militated against expansion of the sector. Government failure to satisfactorily address these issues has compounded the capacity utilization problems, and has created difficulties for the private sector to access the new and cost competitive production technologies needed to keep them in business. As a result, industry has been and continues to struggle to survive and more companies will be vulnerable to mothball operations sooner rather than later. 
          
10    Public Finances
10.1    Consistent with its appetite for conspicuous consumption, the ZANU PF government   continues to spend excessively on current consumption at the expense of capital investment. Whilst sanity would dictate that government allocates a significant proportion of its revenues towards infrastructural development, only $31,4 million was expended on capital projects in the first six months of the year. Given the serious need to address the infrastructural deficit that is militating against the growth of this economy and the fiscal space problems confronting the fiscus, this paltry allocation for capital expenditure demonstrates the serious lack of political will, at the highest level. The unbridled expenditures pertaining to the presidential travelling cost estimated at 50million from January to June 2015 alone, exceeded the total amount spent on capital projects during the same period for the whole nation.

10.2    Further, it is instructive to note that government borrowed heavily on the domestic financial markets for current consumption amounts which are far in excess of ten times the amount expended on capital projects. This tendency, unfortunately, illustrates the utmost insensitivity to the welfare of the poverty stricken people of Zimbabwe and crowds out the private sector in the financial markets.

10.3    The perennial problems of poor public finance management practices and the leakages which result there from continue unabated.  Year after year reports of the Auditor General attest to a growing culture of public funds mismanagement which go unpunished. Both the police and the Anti- Corruption Commission cast a blind eye to these frauds and as a result the volume of crimes related to abuse of public funds continues to grow at the expense of the suffering masses of the country. It is not enough for government to recognise the problem but to stop the practices forthwith and bring to book all perpetrators of these crimes without further delay.

11    Public  Debt
11.1    Zimbabwe’s debt overhang continues to be a serious impediment to the growth of the economy as the failure to service debt necessarily inhibits the inflow of new cheap loanable funds from abroad. Such funds are desperately needed for investment in the productive sectors of the economy and to unlock productive capacities in industry and commerce. A loan repayment of $183,6 million in a six month period represents 2,2 % of the $8,4 billion public and public guaranteed debt and a paltry 8,9 % of total expenditures during the first half of the year. It is in the context of the urgent need to unlock the structural problems militating against improving the liquidity situation in the country at the earliest opportunity that the priority placed on repayment of loans is found wanting to say the least.

11.2    Moreover, the time it is taking to flush out ghost workers who continue to drain the fiscus at the expense of the majority is inordinately long and can only be sustained in order to boost the political fortunes of the ruling party during elections.

11.3    Further to this, the time it is taking for government to decide on which parastatals to   commercialise or sell off is a policy which is weighing down the prospects of economic recovery as the revenues generated in the process could have a telling impact on both the debt overhang and on speeding up infrastructural development in the country. Commercialisation or selling off some of these entities would increase cash inflows into the consolidated revenue fund, create opportunities for higher debt repayments, and reduce government loan obligations to the creditors in and outside the country.

11.4    It is important, however, to note that the debt officially reported by government understates the quantum figure that is owed on the domestic market due to the fact that ministries and government departments continue to contract services in the absence of funds needed to pay for them. This practice not only creates financial difficulties to the service providers from a cash flow point of view, but also to the nation at large as the funds required to pay for such expenditures may not be available in the Consolidated Revenue Fund.

These practices are a clear demonstration that expenditure controls on the part of the Ministry of Finance are either non-existent or not implemented at all. More importantly, The Auditor General raises these issues every year and yet the Ministry and The Executive take no action to restrain errant ministries from perpetuating this illegal practice. The net effect is that government continues to contract unauthorised debt which the man in the street is compelled to pay for in the long run.

12    Conclusion
12.1    In conclusion, the net effect of the issues discussed in this presentation and many others not touched will militate against the improved performance of the economy in general and Zimbabweans will continue to face a bleak future until the politics of this country is addressed immediately.