The economic headwinds being carried over from last year are likely to persist in 2020, curtailing overall economic growth. The economic challenges prevailing in the country will likely be worsened climatic shocks chief among them, the droughts that have been experienced in the country which have affected power generation, and food security. Given the foregoing, major downside risks in the economy remain, and 2020 will likely be a very challenging year.
GDP Trends
In official government forecasts, the Ministry of Finance projected GDP growth of 3% for 2019, which was above the 3.5% growth rate originally estimated by the World Bank. However, the World Bank now forecasts that Zimbabwe`s economy shrunk by as much as 7.5% in 2019, and the Bank is forecasting GDP growth of 2.7% in 2020.
Zimbabwe's projected growth for this year lags behind the sub-Saharan Africa growth forecast of 2.9%, which is based on the assumption that investor confidence improves in some large economies, energy bottlenecks ease, a pickup in oil production contributes to recovery in oil exporters and robust growth continues among agricultural commodity exporters. The forecast is nonetheless weaker than previously expected reflecting softer demand from key trading partners such as China and India, lower commodity prices, and adverse domestic developments in several countries.
The United Nations on the other hand is far less optimistic compared to the World Bank. The UN anticipates that Zimbabwe’s economy will register a negative GDP growth of 5.5% and 2.5% in 2019 and 2020 respectively, owing to foreign currency shortages, elevated public debt and uncontrolled inflation, before growing by 3% in 2021.
Globally, debates have been growing on the usefulness of such metrics as GDP growth, as a measure of the economic well-being of citizens in general. Renowned Economist and Nobel Laureate, Joseph Stiglitz puts it succinctly. He posits that, “So what if GDP goes up, if most citizens are worse off? Essentially, the argument is that, GDP does not take into account such issues as environmental degradation or resource depletion, nor inequality, middle-class suffering, or lower standards of living. For now however, we will have to make do with GDP as a measure of economic growth.
BOP Trends
The country`s import bill, mainly made up of fuel imports (diesel worth US$856 million and unleaded petrol worth US$281 million in 2019) continue to decline, reflecting more than anything, the acute foreign currency shortages in the market, as well as the generally suppressed aggregate demand. The FY2019 deficit declined to US$549 million after recording trade surpluses in November and December 2019, after some modest improvement in the exports of semi-manufactured goods.
Revenue performance for 2019 was fair, although the country missed its revenue targets, with total inflows of US$4.2 billion being recorded against a target of US$4.5 billion. Of concern, is the deceleration of historically key contributors to foreign currency receipts such as mining, tobacco and international money remittances, which have not been performing as expected. Zimbabwe`s current realities which include rolling power cuts which are affecting industrial and agricultural activity, foreign currency shortages, and climatic shocks are all likely to hamstring the earning capacity of the country`s major foreign exchange earners.
Given the foregoing, pressure on the exchange rate is likely to subsist until the end of the year. In 2019, the total the imported fuel amounted to US$1.137 billion which constituted 23.63% of the total Import bill for the year. Analysts content that in order to cover the fuel import, bill the country needed to export gold totalling 25,266kgs in 2019, at an average price of US$45,000 per kg. However, the country only exported gold worth US$1.058 billion in 2019.
FX Market & Exchange Rates
The latest minutes of the RBZ`s Monetary Policy Committee (MPC) show that the electronic deal tracker system under the Reuters platform went live on a trial basis on 2 December 2019. The main aim of the framework according to the MPC, is to improve the operation and efficiency of the foreign exchange market through a more transparent price discovery process set by market makers.
Overall, this is a notable development which in theory is supposed to enhance the effectiveness of the country`s interbank exchange rate system as well as market transparency. Despite, the steps towards liberalisation, the central bank will continue to set aside resources to intervene and ‘stabilise’ the market when needed to.
Historically, whenever market forces have been relegated in favour of planned economy style interventions, market failure has always abounded. Market intervention results in market inefficiencies, and continued interventions will lead to further divergence between the parallel and formal market rates, giving the black market longevity.
Since February 2019, when the interbank foreign exchange market was established, a total of US$1.5 billion has been traded on the interbank market. Since it was launched the ZWL has fallen from its initial level of ZWL2.5 to the US dollar (USD) to almost ZWL17.28 to USD 1 as at Tuesday 28 January 2019, using the official interbank rate. The black market rate is currently averaging ZWL25 to USD 1, a difference of around 40% between the two rates.
The direct implication of the continued depreciation of the exchange rate in particular to financial institutions, is dire. Commercial Banks are likely to encounter challenges in lending to the productive sectors of the economy as their balance sheets have been heavily eroded. This obviously highlights the need for a foreign bailout package to plug the gap left by local financial institutions whose capacity to lend is now constrained. Unfortunately, foreign investor interest in the country seems to have waned primarily due to the capital controls in respect of repatriation of profits and dividends.
Of close interest is the apparent re-dollarisation of the economy, in spite of the government`s insistence on the mono-currency system. As it stands, the tourism, mining and petroleum industries have the right to conduct trade in foreign currency, and the obligation to settle their taxes in foreign currency, including US dollar, Euro, Pound etc.
The Zimbabwe Revenue Authority (ZIMRA) recently announced that with effect from January 1, 2020, for capital-gains tax purposes, all asset disposals will be assumed to have been in U.S. dollars, unless documentary proof is submitted that the transactions were conducted in the local currency. Effectively, this is a tacit acknowledgement of primarily the US dollar acting as a medium of exchange for most local transactions.
Inflation
The December month-on-month inflation rate was reported at 16.55%, shedding 0.91 percentage points from the November 2019 figure of 17.46%. Resultantly, the implied annual inflation is at 521.1% from 481.05% recorded in November. Zimstat is set to resume the publication of annual inflation figures starting February 2020. Government had targeted a monthly inflation rate of 10% with expectation that the rate would continue to move downwards from October till February 2020 barring any unexpected shocks.
The Ministry of Finance are expecting a drop in the annual numbers from February 2020, which would be a full year from the time the Zim dollar was floated. The RBZ is forecasting a range of 5% monthly inflation for this year due to expectations of sustained slower rate of price increases on the back of currency stability. According to the central bank, receding inflation is on condition that there will be relative stability on the exchange rate and while prices would remain stable to align with subdued or effective demand. Furthermore, the RBZ projects inflation to close 2020 at around 50%.
However, the general market sentiment is that inflation is expected to peak as the year progresses on the back of liberalisation of food imports, as well as the rising costs of imported inputs, which will spur imported inflation, bearing in mind the low foreign currency reserves.
Downside pressure on the inflation outlook will also likely emanate from the growing need to adjust civil service worker salaries. Already, government has awarded its workers a cushioning allowance ranging between ZWL400 and a maximum of ZWL800 for the respective lowest and highest grades. Civil service workers have previously rejected government`s salary increment offer of last week a 100% pay rise, which would have resulted in the least-paid worker taking home $2 033, up from $1 023 per month.
Banking Sector Developments
The most notable developments within the local banking sector have been to do with the minimum capital requirements which are set to come into effect on 31 December 2020. The tiered minimum capital for Tier 1 (Large Indigenous Commercial & all Foreign Banks) is the ZWL equivalent of US$30 million, Tier 2 (Commercial Banks, Building Societies & Merchant Banks) the ZWL equivalent of US$20 million, Tier 3 (Deposit taking Micro-finance banks) the ZWL equivalent of US$5 million, and lastly, Credit only microfinance institutions are expected to hold the ZWL equivalent of US$25,000.00.
The central bank argues that the move is meant to ensure that banks hold sufficient capital to ensure continued stability and soundness of the financial services sector, as well as ensuring that banks continue to be able to underwrite financial transactions that are necessary for improving production and productivity in the economy. Generally, bank balance sheets have been falling rapidly in real terms as compared with those of their borrowing clients, as most bank assets are denominated in ZWL, while their clients’ revenues and profits have been moving more in line with inflation.
Put simply, banking sector borrowers have become far greater in balance sheet terms than the banks themselves. This has resulted in a reduction in capacity for banks to lend. Since dollarisation in 2009, the bulk of bank deposits have been of a short-term nature hence the large amounts held in the banking system to cover customers’ use of swipe cards and mobile money transactions.
As at 30 September 2019 the level of bank capital and reserves which stood at ZWL 3.9 billion or just USD257 million. On the main, the rather stringent deadline for the new capital requirements may likely lead to consolidation of some banking institutions, while banks will also have to re-look their risk and their lending capacity which in the short term may further affect liquidity within the economy.
Landmark Ruling on Debts Incurred Prior to SI33 of 2019
The Supreme Court recently passed a judgement that effectively meant that debts incurred prior to the enactment of Statutory Instrument 33 of 2019 were to be settled in local currency. This has the effect of benefiting debtors that had incurred foreign currency liabilities. However from a country risk perspective, this increases the country risk, and may serve to dissuade foreign investor participation in the local economy, by heightening political risk. Zimbabwe already fares considerably worse compared to regional peers, and such developments only seek to underline the policy inconsistency and unpredictability of the doing business in Zimbabwe.
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