‘Aim to climb the value-chain’

IN  September, Fitch Solutions revised downwards its forecast for Zimbabwean credit growth to 200 percent in 2023, from 220 percent previously, reflecting the slight strengthening of the Zim dollar following its May-June sell-off. The think tank then believed that credit growth would slow to 37 percent year-on-year at the end of 2024. Our staff writer, Almot Maqolo (AM), caught up with Jane Morley (JM), head of sub-Saharan African Risk-Fitch Solutions, for more insights on the researcher’s views of the overall structural backdrop of the country’s economy. Below are excerpts from the interview:

AM: What is the current state of Zimbabwe’s economy and what are the key macroeconomic indicators that highlight its performance?
JM: A sharp sell-off of the Zimdollar caused inflation to return to triple digits over June-July 2023, which will have eroded household purchasing power in the second half of 2023. Meanwhile, power blackouts of up to 19 hours a day and flooding disrupted the export-oriented mining sector in the first half of 2023. That said, strong agricultural production has bolstered the incomes of farmers (62 percent of the workforce), while in March the government approved a 100 percent hike in public wages as well as increases in various US dollar monthly allowances for public-sector workers. Overall, government spending has been rising due to political pressures stemming from the August 2023 election, and we expect that this, as well as buoyant private consumption, will see real gross domestic product growth accelerate from an estimated 3,4 percent in 2022 to 3,8 percent in 2023. However, we see growth easing to 3,3 percent in 2024 as drought erodes farmers’ incomes, government consumption moderates (in the wake of the Q3 23 elections) and investment tails off following the completion of major projects in 2023.

Jane Morley

The key macro variables to monitor are the standard ones: growth, inflation, foreign exchange, export receipts, government revenue and spending.
AM: How has Zimbabwe’s economic growth been affected by factors such as political instability, inflation and currency volatility?
JM: Badly. Political instability (and policy unpredictability) has served to deter foreign investors outside site-specific industries and weighed on demand for the Zimbabwe dollar, in turn driving inflation. That said, since liberalising the exchange rate in June, the Reserve Bank of Zimbabwe has introduced measures to support the Zimbabwe dollar, such as requiring companies to pay taxes in the local currency and exporters to surrender 25 percent of foreign-currency earnings to the central bank to stabilise the foreign exchange supply. These measures have helped ease pressure on the local dollar, which we see weakening by 23,1 percent from ZWL6 000/USD at the end of 2023 to ZWL7 800/USD at the end of 2024, after a much sharper depreciation of 97,7 percent over 2023.
AM: What measures can be taken to address the high levels of unemployment and poverty in Zimbabwe?
JM: It’s not an easy fix given the contributory factors such as low industrial capacity utilisation, unpredictable or inappropriate government policies, long-standing economic underperformance, and a mismatch between skills taught in schools and those required in the workplace. Some of the necessary steps include a reduction in hurdles to creating new businesses, guaranteeing property rights, increasing investment in infrastructure, stabilising inflation and gradually climbing the value chain.
AM: What is your impression of the country’s fiscal policies and public debt situation?
JM: We expect that Zimbabwe’s budget deficit will come in at three percent of GDP in 2023—the largest deficit since 2018. The government’s mid-year budget review indicated that expenditure in US dollar terms fell more sharply than revenues in H123, resulting in a fiscal surplus of around US$0,3 billion. However, we still expect a large deficit in H223. In March 2023, the government approved a 100 percent hike to public wages and in May 2023, it suspended import duties on basic commodities for six months to cushion households against rising inflation. Because of this and an inflation-driven slowdown in consumer activity in H223, we expect that revenue will lag significantly behind expenditure in the latter half of the year.
We forecast that the budget deficit will narrow to 2,5 percent of GDP in 2024, although this remains above the official target of 1,5 percent of GDP. The Budget Strategy Paper (BSP) released in August 2023 points to a tighter fiscal policy in 2024, with revenues projected at $30,7 trillion and expenditures at $33 trillion. This amounts to a shortfall of US$0,5 billion at the August 2023 exchange rate of ZWL4,580/USD. While we also believe that the deficit will narrow in 2024, we expect that higher-than-planned fiscal outlays, a muted outlook for mining revenues and slowing economic growth will limit the extent to which the deficit shrinks. For example, the BSP assumes real GDP growth of 5,2 percent in 2024, but the Ministry of Finance has since revised this down to 3,5 percent, meaning that the projected size of the deficit as a share of GDP has already increased.
We expect that public debt will gradually fall over the coming quarters but remain elevated. The Treasury took over $7,7 trillion worth of external debt from the RBZ; we estimate that this amounts to roughly US$1,5 billion at the June 2023 exchange rate. We expect that this and the anticipated budget deficit of US$821,3 million in 2023 will cause public debt to rise from an estimated 89,2 percent of GDP in 2022 to 91,6 percent in 2023. As the deficit shrinks, we see debt falling to 88,8 percent of GDP in 2024.
While this is above our Sub-Saharan African average forecast of 62,7 percent for 2024, the government is in arrears on half of its external debt, and interest payments accounted for just one percent of total expenditure in H123, pointing to a limited impact on public finances.
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