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Zim at crossroads, recovery fragile

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Zimbabwe is at a crossroads and the economy is slowing. Finance minister Tendai Biti was blunt on Wednesday, describing the first six months of the year as a “disappointing half ”. He sees the economy stagnating and the future as a sad journey backwards with “fragile prospects for growth”, unless the country snaps out of a “business as usual” disposition and makes every effort to “regenerate, revive and refocus” the economy.
About seven months earlier, Zimbabwe’s head of Treasury had described 2010 as a year of economic reconstruction with equitable growth. “A large part of these objectives have not been met and we’re back to a stabilisation economy,” Biti said.
The review statement officially downgraded Zimbabwe’s projected annual growth rate to 5,4% this year from around 7,7% after fiscal authorities noted that the recovery of all but one key sector would be slower than initially projected. Agriculture is predicted to produce more than expected, quickening to 18,8% and above an earlier forecast of 10%.
But downgrades were effected for resources, which would only rise 31% instead of $40%, manufacturing (4,5% instead of 10%), tourism (3,5% instead of 10%) and construction (1,5% instead of 3,2%).
A resurgence of inflation also presents further worries. But fiscal authorities are optimistic that, year-on-year, the rate of increase in the price level would come down to around 4,5% instead of 5,1% as the rand/US$ exchange rate stabilises.
The price at which the two currencies trade — the most transacted in Zimbabwe — is important for the country as nearly half of the food stocks by its retail chains is imported from South Africa. This low inflation rate outlook is also based on plans by government to curb excessive consumption expenditure by importing coins and smaller denominations to address the challenge of an acute shortage of change, widely blamed on the absence of small denominations.
“Small denominations have created some inflationary pressures”, Biti said. “Sometimes you go to a supermarket and you’re given sweets (as change) when you don’t have teeth. The government will deal with the issue of smaller denominations in the second half.” This measure was long overdue. But it will only solve Zimbabwe’s crisis in part. The economy needs nothing short of a huge stimulation to boost domestic investment, sales and aggregate domestic demand in terms of both consumption and procurement.
On Wednesday, Biti estimated the economy will need $10 billion a year over the next three years to break free from the trappings of an enduring recession.
“Some of this will have to come through foreign direct investment (FDI),” Biti said. But given the disappointing performance of FDI since last year, this optimism may be an attempt to lick one’s elbow.
For the whole of 2009, the country approved $852 million worth of FDI, but only $105 million of this was actually investment in the first half of the year. I can guess that very little or nothing of this money has been committed to infrastructure development.
According to the Treasury, Zimbabwe’s budgetary votes to the public sector investment programme have declined gradually since the 1970s, eventually stopping in 2007, creating a huge backlog of infrastructure rehabilitation.
“If you resurrect someone who died 40 years ago, he’ll not get lost in the City of Harare,” Biti said, pointing out the Reserve Bank of Zimbabwe (RBZ) headquarters and Joina City as the few exceptions.
“We need to close the 40-year gap in infrastructure development. To do that, we need about $10 billion per year.”
Though improved compared to the year before, the ratio of capital expenditure to total expenditures in the first half of the year was only 14%. Biti thinks he has a solution to this funding crisis — clearing or reducing its arrears with the International Monetary Fund (IMF), the World Bank, the African Development Bank (AfDB) and other multilateral lenders to unlock cheap funding.
The total external debt overhang is estimated at $6,7 billion.
“We want to do that in the second half,” Biti said. “Zimbabwe is missing out on cheap money.”
He revealed the AfDB will be disbursing $30 billion to various African countries in 2011, at concessional interest rates of around 1% – 2%.
During the first half of the year, the country committed 3% of its expenditures to debt servicing. The country is now bustling about setting up a national debt office — a hybrid programme of the Bretton Woods institutions — to agree with these consortiums of external creditors on a way forward. The main worry is a commitment to pay alone will not do the trick. But paying will.
But there is one more. The economy is firing on one cylinder — fiscal policy.
Monetary policy was rendered dormant last year after Treasury deliberately denied the RBZ budgetary support, and chickens are now coming home to roost. “We’re relying on only one instrument – fiscal policy – in the management of the economy. We need a stable and debt-free central bank to ensure that monetary policy complements fiscal policy.”
The starting point is to retire its debts, restructure it back to core business and recapitalise its operations so that it resumes the lender of last resort role considered critical for financial sector defence.
Even if the central bank’s insistence on minimum bank capital in line with Basel II rules may build a bulwark around the industry, the risk of bank failure is still overly high since frauds have increased in the context of tight liquidity and an inactive interbank market.
Although government said it would “give the RBZ money” to resume lending to banks, it is not yet conceivable where that money would come from given that it already faces grave fiscal vulnerabilities.
So, it’s too early to say at last.

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