Harare – After two consecutive years of inconsistent policies, a volatile currency, droughts, and skyrocketing prices, it turns out that authorities are on course to strike the right chord and bring back sanity in the market. Animal spirits which are key for economic recovery are starting to rise again. The prominent economist normally referred to as the ‘Father of Macroeconomics’ John Maynard Keynes, used the term animal spirits to describe the instincts, proclivities, and emotions that ostensibly influence and guide human behavior, and affect business and consumer confidence.
Zimbabwe’s real GDP growth has never been stable for decades as it depicts huge down and upswings. Taking a glance at the data shows a downward trend line from 1961 (6.3%) to 2020 (-10.1%). This summarily indicates a country on a free fall thanks to decades of populist policies at the expense of the private sector. There is a consensus among development economists that the private sector is the engine for growth with the government acting as a moderating factor.
The economy is commodity-based with 70% of the population relying on the Agric sector to earn a living. Also, the Agric sector provides 60% of raw materials used by the industry. The fast-tracked Land Reform Program in the early 2000s saw massive unorderly farm invasions which consequently affected production. Zimbabwe, which was once the breadbasket of the region was reduced into a net-importer. Manufacturing tattered to an extent that most exports are even up to this day, shipped in raw form. Value addition is vital as it increases earnings and also creates jobs for the domestic economy.
After a world record hyperinflation in 2007/8, authorities dumped the local currency in favor of a multicurrency regime that was dominated by the greenback. This has helped to bring down inflation to single digits, boosted consumer and business confidence from historical lows. However, during the period, the country achieved the most unsustainable trade deficit averaging US$2.5 billion annually. Foreign-produced goods became cheaper thanks to a strong dollar and this facilitated massive dumping of foreign goods and externalization of hard currency. According to the Confederation of Zimbabwe Industries (CZI), capacity utilization hovered below 50% in that period as local firms faced stiff competition from imports.
Due to the impact of the twin deficit (fiscal and trade) and forex externalization, physical cash started to disappear in the market. All this led to the re-introduction of a full-fledged currency in 2019. Confidence deficiency in the currency coupled with drought, cyclone, acute energy deficit, and excessive money printing against falling economic activity powered exchange rate depreciation thereby causing inflation to rage havoc in the market. By end of 2019, the reserve money supply ballooned by 170% year-on-year, ZW$ plunged 85% on the interbank, and annual inflation spiked by 478.9 percentage points to close the year at 521%. Typically, base money growth should move in tandem with the rate of growth of activity in the real sector. Base money is the most price-sensitive component of the money supply as it is pumped directly into the economy at the discretion of the Bank. High inflation wiped incomes thereby reducing aggregate demand and business confidence.
Again, in the first part of 2020, the local currency continued plunging on a weekly basis and prices rising thus affecting proper business planning. Between December 2019 and July 2020, reserve money grew by 84% to settle at ZW$16.2 billion forcing the ZW$ to fall 78% on the interbank (80% on the parallel market) and inflation climbed to its highest-level post-dollarization of 838%. Contributing to a volatile ZW$ was the lack of an efficient exchange rate management system to find the true market price.
Nevertheless, as the Bank changed its policy thrust in the second part of 2020, the market began moving towards stability. The Bank re-introduced the interbank market in late June 2020 in the form of a Dutch Forex Auction System and started to maintain a conservative reserve money targeting framework. Also, the Bank instituted transaction limits on mobile money transfers as lack of limits was providing liquidity avenue for all black-market activities. By Aug 2020, parallel market rates plunged from the highs of ZW$130 to an average of ZW$100 and sailed stable through Oct 2020. The levels of trades on the interbank have improved since the restoration of the market on June 23. The auction market was faring better in trades than the interbank used prior to March which saw trades averaging US$2 million per day leaving the parallel market thriving.
It is this increased forex liquidity on the formal market, tightened ZW$ liquidity, and sustainable treasury spending that helped put the local unit on a solid run against the greenback. Many companies recorded an improvement in sales volume in Q3 and Q4 thanks to subsiding inflation. According to CZI, manufacturing sector capacity utilization rose by 11 percentage points to 47% in 2020 from 36.4% in 2019 mainly on the back of improved foreign currency availability which brought certainty and predictability to the economy. Prioritization of raw materials and machinery on the auction saw increased production and industrial retooling. This exchange and price stability in HY2020 helped in reducing the magnitude of economic decline to -8% from -15% anticipated by many economic analysts.
The agriculture and mining sector are key locomotive sectors that will anchor economic recovery in 2021. In 2020 alone, mining defied the Covid-19 impact and contributed about 70% of total export earnings pushing full-year exports up 4% from the 2019 level. This year, thanks to a global vaccine campaign taking momentum, commodity prices like the Platinum Group Metals (PGMs) are rising. This is a plus for commodity-dependent developing nations like Zimbabwe. In agriculture, the sector is currently experiencing El Viejo weather conditions with average dam levels at 89%, their highest in 50 years. The country is on course to a record bumper harvest of grains and cash crops like tobacco. This will help in moderating inflation, reducing import bills, and increase forex earnings which will support the auction system. The Bank reported that 60% of forex traded on the interbank is coming from exporters. Cognizant of these factors, many institutions project a positive GDP growth in 2021: Govt 7.4%, Equity Axis 3%, IMF 4.3%, World Bank 2.9%, and AfDB 5.6%.
In my view, the exchange rate instability incurred between November and January is attributed to seasonality and therefore transitory in nature. Generally, the end of Q4 and the early part of the year is associated with increased government spending and forex demand while forex generation is low. The outbreak of a deadly second wave of covid-19 early 2021 also saw reduced economic activity as the government has instituted lockdown and curfew to help the situation. This reduced economic activity versus increased ZW$ liquidity in the market saw the local unit plunging in both markets with the gap between the two widening. However, in February as the average weekly forex supply on the auction increased by 2.9% from January level and reserve money growth tumbled 3.4%, inflation nosedived and parallel rates sailed stable with signs of downward pressure.
With the launch of the 2021 Monetary Policy, one is satisfied that if authorities adhere to the dictates of this document, exchange rate and price stability will hold in 2021 as was the case in 2HY2020. The Bank aims to continue on a conservative monetary targeting framework and achieve a 22.5% reserve money growth quarter-on-quarter from 25% in 2020. Also, Policy Rate for overnight accommodation was hiked to 40% from 30% while statutory reserves on-call deposits were also increased to 5% from 2.5%. The former reduces borrowing for speculative purposes while the latter reduces the amount available to banks for discretionary lending. The National Treasury has also promised to spend within its means and eliminate quasi-fiscal activities to support the local currency and economic growth.
Business confidence is now recovering from low levels attained in 2019 which is key to long-term economic growth. In the outlook, businesses project industrial capacity utilization to shoot to 61% in 2021. To solidify this momentum, the onus is now on authorities to remain consistent in policy processes, reduce existing structural rigidities to lower the cost of doing business, uproot public corruption, and strengthen the value chain.
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