The fallacy of Zimbabwe’s economic growth


    Harare – In 2018 government projected a fairer economic growth rate which was projected initially to reach 4.5% coming from  an estimated 3.7% growth in 2017. Midday into the year the growth rate was to be adjusted upwards to 6% a growth rate which government maintained until November. Given the economic status at the end of the year, that of a seemingly worse off economy characterised with inflation, shortages, cash challenges and adverse exchange rate, it intrigues the mind to make a more fairer assessment for posterity.

    To begin with a nation’s produce in a given year at market value is computed as gross domestic product, which is a basic quantum multiplied by price. So the more a nation produces the more its GDP goes up. In 2018, demand for goods and services reached a new record high in the post dollarization history of Zimbabwe. This demand emanated particularly from increased money supply which created excess liquidity. Producing and retailing companies responded to the surge in demand through increased production volumes and although individual company and other sectors’ volumes growth were double digit, the aggregate figure could only be marginal due to scale and high concentration in a select sectors.

    If there were no other factors, this growth would have broadly been positive as it meant increased earnings, government revenue and forex receipts. It would also cascade to increased disposable income for the general populace. However as the year progressed, inflation began to grow and the rate of growth exponentially expanding. The inflation, whose effects we will interrogate, rose to a level above the targeted SADC benchmark of 8% and beyond the budget projection of 25%. Now to determine what impact the inflation growth, which stood at 31% as at end of November had on economic growth, we examine further the 2 variables.

    At an annual inflation rate of 31% it means general price of goods and services soared by that respective margin, on the same period last year. So in essence as at November prices had gone up by an average of 31% year on year. Looking at GDP numbers as per government projection and ZIMSTAT files shows that GDP for 2018 in nominal terms was $25.6 billion which is a 11.6% growth on the 2017 outturn. Given that the initial inflation target was an average of 6%, government was targeting a real GDP growth of 6% adjusted for inflation. Inflation has the impact of eroding the purchasing power of money. So in essence an economy has to grow faster than inflation to achieve positive growth.

    In the case of Zimbabwe, inflation evidently grew faster than GDP which means the net economic growth rate for 2018 was negative. The positives in volumes growth which drove the nominal figure were erased by a faster growing inflation. Now let’s look intricately at the dynamics around the respective performances of these variables. The growth in production of mainly consumptive goods was driven by the increase in demand which in turn was a response to the growth in money supply. In the year money supply grew by 35% to $11 billion and interestingly this was within range of inflation. As government borrowed on the local market to satisfy mostly budgetary support and interest accrued coupled with discounts, the rate of credit creation in the economy became rapid. This money created meant RTGS money ballooned hence the spike in demand and spend. Sectors such as agric, financial services were among those that most benefitted and the impact cascaded to the broader economy.

    The challenge now began when this level of money supply began competing for more scarce US dollars to satisfy import demand. Given the 1:1 official exchange rate and the ever spiking level of money supply, demand for forex intensified. Now look at this measure, the net current account balance for Zimbabwe is on average at -$250 million given the higher imports relative to exports. This means our current account has not been favourable as a nation. The perennial negative current account and respective negative BOP shows we are predominantly have a higher importing propensity as an economy and that given extra cash we are likely to spend it on imports other than local production.

    The system of monetary allocation manned by the central bank, evidently became overwhelmed as the year progressed given the upsurge in demand. Another game changing phenomena was the pressure from exporters to increase their retention as inflation and the exchange rate worsened. For example some gold miners charged that they were receiving only 15% of their forex receipts in hard currency thus threatening viability. Given the evident plunge in deliveries to Fidelity Printers since September, RBZ yielded on the matter and thus promised to give back more of the forex to miners. This evidently widened the gap in terms of forex ready for allocation and the competing imports and other forex payments demand. These factors militated to crack an evident gap in the market and help push the parallel exchange rate further into premium. A low level and depleting confidence on the new administration particularly post elections also weighed on the local currency equivalents.

    It should therefore cease to be debatable whether Zim has been enjoying growth in 2018 or not, the answer is, to the extent that adjusted inflation weighed same. The same can be extrapolated to individual companies’ performance, especially now that the crisis threatens to wipe off balance sheets if currency reforms are implemented or not implemented. Using the same method such developments as the achieved containment of expenditure and fiscus surplus can also be tested. In December ZIMRA collected close to $600 million against a $445 million target. Treasury also says a budget surplus has been achieved since October.

    If one pose a minute to look closely at the numbers, we are not in any way better off. Collection of $600 million in Dec against $445 million target may be a worse off outturn on an adjusted basis. This is a 34% outperformance compared to an inflation rate as at December which is slightly above that level. The goods and services that $445 million could buy when the same projections were made are now more expensive beyond $600 million given the prevailing inflation level. In terms of achieving a fiscal balance in October and December, we can also easily deduce that given the inflation levels the 2019 expenditure targets can no longer be maintained. Starting January we will begin to see a spike in spend beyond budget as government addresses the cost of living challenges. A 50% increase in civil service wage bill, which is what I anticipate, will easily push the deficit level up beyond $2.5 billion and added to the cost adjustments on infrastructure projects, the net deficit will be beyond $3 billion and we all know which instruments will be used to fund the deficit and their implication.

    Equity Axis Research


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