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Beyond 2010: The re-making of an economy


The year 2010 is coming to a close, as the build-up to end-of-year festivities gathers pace and the economy is slowing down in tandem.

Economic activity across most sectors has visibly improved during 2010. Treasury forecasts real GDP growth at 8,1% for 2010 and projects 9,3% for 2011.

Remarkably, headline inflation has remained subdued with year-end forecasts at about 4,2% and the average for the year at 3,3%.

Fiscal revenue collections have continued to grow albeit at a slow pace to a monthly total of $235 million per month compared to $120 million per month in January 2010.

Industry capacity utilisation recovery has steadily improved to an average of 40-50% from 33-35% in 2009. Deposit growth continues steadily with total deposits at $2,3 billion, though over 95% are short-term deposits.

Lending has also improved progressively, with the loan/deposit ratio now to 65% and total loans amounting to $1,4 billion.

The short-term loan maturity structure of 3-6 months remains a major constraint.

Significant gains have been realised over the past two years — inflation pressures continue to subside, food availability has improved greatly, fuel availability and hence public transport has improved. Commendably, social services have, to a great extent, been restored in education and health.

Month by month there are signs of aggregate demand gains and production is also steadily gaining.

The spectre of asset price bubbles and arbitrage opportunities, reminiscent of hyperinflation has been extinguished.

Notwithstanding, the remarkable progress thus far, we must not mistake the green shoots of recovery for a tropical forest yet for the economy faces enormous challenges.

The economy is still fragile and can easily relapse. Liquidity constraints remain an albatross.

Local banking sector vulnerabilities are much more pronounced compared to the region, particularly in the absence of a functional Lender of last resort.

A paltry $7 million endowment for lender of last resort induces little confidence.

Capitalisation for many companies is a major challenge and constrains increased production. Many companies have expanded their capital raising initiatives — through the local, regional and international capital markets.

As the economy has not capitalised significantly over the past decade, substantial capital is required for increased production. Estimates show that as much as $3 – $5 billion capitalisation is required in the mining sector over the next 5 years.

The mining sector, however has potential to catalyse overall economic growth and spur economic recovery.

Recurring energy and power supply interruptions, sanitation and water and railway transport challenges are but symptoms of decades-long neglect of investment in infrastructure.

The economy faces substantial infrastructure development challenges, requiring huge injections of capital for new infrastructure and rehabilitation of old infrastructure.

At present, the economy does not have the requisite amount of capital and the reality is that for several years to come, the economy will continue to experience insufficient capital.

For this reason, the Chamber of Mines continues to advocate for improving the country’s investment environment to attract the much-needed capital for economic growth.

There are a few issues to ponder. The post-World War II era was dominated by the Cold War — an ideological divide between capitalist West and Sino-Soviet Communism in the East.

It was an East-West divide that more than once, nearly brought the world to the brink of nuclear war. That has all dramatically changed with the fall of communism in Europe and Russia.

All countries are patently capitalist, including “Communist” China and more importantly what has transformed the Chinese economy is the global flow of capital — mainly from Japan and the West.

The world has no ideological divide and yes, there is residual, simmering East-West tension — but this has nothing to do with past ideologies — like a pride of lions before a slain buffalo, this has more to do with big powers brawling for preferential access to scarce mineral and natural resources, for which Africa is way ahead of any other region in resource endowment. The global economy is increasingly competitive and all the great and emerging powers are positioning themselves for Africa’s resources.

Africa has an abundance of mineral and natural resources:

lAfrica has 20% of the global land mass
l 90% of diamond reserves
l 40% of gold reserves
l 66% of phosphates
l 60% of PGMs
l 10% of Petroleum
l 8% of Natural Gas

Source: Ritesh Anand: Invictus Investment Management

The US, UK, France, Russia, Germany, Japan, India and China — all without exception, cater for their own interests.

There is a new scramble for Africa — only this time without the overt military subjugation of the 19th century. The Chinese know what they want in Africa.

The same applies with the Japanese, Russians, Americans, Canadians; Europeans or any other people.

Each of the above ultimately seeks their own interests — they may pursue this objective differently, some overt, others with convivial and effable diplomacy, but the end objective is the same.

In light of the above, it is up to Africa to stake her claim and structure her development strategy in such an environment.

She has to sharpen her negotiation skills, be alert, keep options open, and offer her resources to the highest bidder within the context of an optimally structured development model.

Such a model should not be beholden to ideology — the only important consideration must be what is best for Africa and her people.

The most beneficial and optimum way for Africa to benefit from her natural and mineral resources and hasten economic development, is through foreign direct investment (FDI).

When the Chinese pour as much as $3 billion into resource- rich Angola and sign up several infrastructure development agreements in the DRC, this is testimony that the big powers are willing to spend appreciably to access Africa’s resources.

Attracting large FDI flows is the clearest guarantee towards sustainable development of the economy and everywhere, economies are out competing against each other to design the most attractive investment regimes.

Even late arrivals to the banquet such as Rwanda have made dramatic progress over a very short period of time, becoming one of Africa’s most attractive investment destinations, with greatly improved doing business conditions.

FDI has transformed economies that were among the poorest of the world — Chile, Malaysia, South Korea, Singapore, India, and China to name a few.

Over a short period of a few decades these economies were radically transformed for good, with evidence of improvement in standards of living and real progress on many development indicators.

Even post-war Vietnam has made remarkable progress in just two decades.

Across the globe, as a direct result of investment and economic growth, poverty reduction is truly underway — employment has increased, school enrolments have increased; child and maternal mortality rates have fallen dramatically in many countries, as economic growth allows more resources for the critical sectors of education and health.

Inflation developments and outlook

The month-on-month inflation for November picked up pace, increasing from 0,2% in October to 0,5%. More than anything else, this represents the “bonus” effect with retailers having had a difficult year of narrow margins and low demand, are now remorselessly cashing in on festive season spending.

Fundamentally, the economy should not experience sustained upward drift in inflation because South Africa, the main trading partner, continues to experience low inflation.

The downside risk relates to the strength of the Rand against the US dollar, which translates to higher import costs for Zimbabwe.

But the rand has been strong for a more than a year and has not gained any new strength, but has rather stabilised around R6,4/US dollar.

Headline inflation had picked up considerable pace during the first half of 2010, but subsided, with annual headline inflation decelerating from 5,3% in June to 4,1% in July 2010 and 3,6% in October.

The annual headline inflation is now forecast at 4,2% for December 2010.

Month-on-month inflation increased from 0,2% in October to 0,5% in November and may remain around that range in December.

Price declines are likely in January and February as post-festivities price realignments occur and the lower retail demand as parents focus on school fees and uniforms for the new term.

Going forward, the direction of monthly and annual inflation will be conditional on several interrelated domestic but also exogenous factors, notably trends in international food and oil prices. The pace of price formation in 2011 is likely to be influenced by the following factors:

l Elections/electioneering;
l Rand/dollar strengthening;
l Productivity and capacity utilisation;
l Domestic costs of borrowing;
l Domestic and international food prices;
l International oil prices.

Of the domestic factors, elections in 2011 represent the single biggest source of uncertainty and will determine the pace of how prices evolve.

In particular the electioneering process has potential to sap confidence in the economy, amplifying uncertainty and adverse inflation expectations.

The experiences of the recent past are fresh upon the populace and heightened concerns may even give rise to hoarding and price hikes.

The strengthening of the rand against the US dollar continues to exert upward price pressures in Zimbabwe.

With South Africa inflation at its lowest in several years, the recent Central Bank rate cut in South Africa, has not reversed any of the recent rand appreciation.

Joseph Mverecha is Chamber of Mines economic policy manager and writes in his personal capacity. He can be contacted on jmverecha@chamines.co.zw

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