Zim economy to contract by 1.5%

Zim economy to contract by 1.5%
Published: 02 February 2018
Zimbabwe's economy will contract by 1,5% this year on the back of the ongoing liquidity crisis, but rebound in 2019, a leading international research firm has said.

In his 2018 National Budget, Finance and Economic Development minister Patrick Chinamasa projected a growth rate of 4,5% this year.

In the February 2018 Africa Monitor of Southern Africa released this week, BMI Research said the increase in crop yields in the previous season were not enough to support economic growth.

"Zimbabwe's economy will likely sink back into a recession in 2018, as the ongoing liquidity crisis continues to weigh on production in import-dependent sectors. Although a substantial increase in crop yields will have supported positive real GDP growth over 2017, our agribusiness team does not believe this is sustainable, given it was largely a result of positive base effects after a severe drought crippled harvests in 2016," he said.

"While the ouster of long-serving President Robert Mugabe and appointment of the more reform-minded President Emmerson Mnangagwa offers hope of more sustainable economic growth going forward, we do not expect any benefits to fully materialise until 2019.

"Until they do, the lack of monetary liquidity in circulation will continue to weigh on economic activity, informing our forecast for the economy to contract by 1,5% in 2018, before growing by 3% the following year as foreign investment begins flowing into the cash-strapped economy."

In its 2018, economic outlook, the African Development Bank projected real GDP growth of 1% this year and 1,2% in 2019. It said economic performance would be affected by political changes. It said the economy continues to face structural challenges from high informality, weak domestic demand, high public debt, weak investor confidence, and a challenging political environment.

Since taking over the reins in November, Mnangagwa has received some goodwill from western countries and the international financial institutions, who see him as a reformer unlike his predecessor, Mugabe.

Despite the goodwill, liquidity challenges persist.

In 2017, total foreign currency receipts were $5,5 billion, but that amount was mostly gobbled by just imports, which as of November were $4,93 billion.

The foreign currency earned at the end of the year was not enough, as the foreign currency backlog close to the end of the year was nearly $600 million.

According to the government, the mismatch is between stock of foreign currency available, as represented by hard currency and nostro balances, and electronic real time gross settlement money balances in banks.

This has largely been fuelled by borrowing requirements to finance the budget deficit.

"The lack of monetary liquidity in Zimbabwe will continue to undermine prospects for economic growth over 2018. Since dollarising the economy in 2009, a lack of inward investment has meant years of deep current account deficits have been financed with reserves of hard cash intended for day-to-day domestic transactions," BMI Research said.

"In this environment, businesses and consumers have found it increasingly difficult to access the hard currency needed to buy goods and services, particularly those imported from abroad, weighing on economic activity."

BMI Research said without substantial inward investment or a sudden surge in exports, monetary liquidity is unlikely to return to levels needed to support a more robust GDP growth.

Zimbabwe is enticing foreign direct investment with a pledge to adopt investor-friendly policies. The toxic Indigenisation and Economic Empowerment Act is being reviewed to make the 51:49% threshold only applicable to diamond and platinum. The legislation compelled all companies with a net asset value of at least $500 000 to sell at least 51% shareholding to locals was seen as a hindrance to attracting foreign direct investment.

Mnangagwa attended the World Economic Forum meeting in Davos last week, where he said Zimbabwe is open for business.
- newsday
Tags: Economy,

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