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2011: economic risks, prospects

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Zimbabwe’s multi-currency system has exposed the country to a significant exchange rate risk: on one hand, the country uses the US dollar as the base currency and on the other a significant part of its import costs are in rand terms.

A weaker rand exerts downwards price pressures in Zimbabwe, but indirectly exerts upward price pressures through a build-up of price pressures in South Africa, which is Zimbabwe’s largest trading partner. The rand appreciation however appears to have stronger more direct effects on price formation in Zimbabwe.

The combination of enhanced productivity, higher capacity utilisation and retaining zero duty on food imports implies containment of inflation pressures, while high domestic costs of borrowing, utilities and food prices, exert upward pressures on domestic prices.

The headline inflation is forecast at about 4,2% in December 2010, implying an average inflation of 3,2% (3,9% if the January 2010 outlier is stripped).
2011 Inflation outlook

The 2011 inflation outlook, the upper and lower boundaries have been generated by two univariate models, the difference stationary model (DSM) and the trend stationary Model (TSM). The modelling process utilises past CPI information (from December 2008) to profile the possible future inflation path.

Both modelling processes have no underlying structure and apply time series data (monthly CPI data) to generate parameters of the model.

The average month on month CPI is 0,04, with the TSM factoring an adjustment in respect of the time trend, hence the higher inflation path for the TSM model.

The above forecasts show that inflation is likely to remain within the 4,9%-5,9% range, conditional on continued capacity utilisation recovery, and no election induced uncertainty. Barring, unforeseen development, inflation is likely to remain low during 2011.

The forecast initial deceleration of inflation in the first half of 2011 also reflects the base year technical effects as month-on-month inflation was higher during the first half of 2010.

Economic activity and GDP

The pace of economic growth continues steadily, though unevenly. Fiscal revenue collections, now at $200 million per month and the growth of individual and corporate taxes confirm that growth is picking, albeit slowly.

The economic recovery has been constrained by several intertwined factors, intermittent energy and power disruptions, the slow recapitalisation and working capital challenges. Low domestic demand is an additional factor with retail demand only growing at a moderate pace.

Significantly, the economy has been affected by bouts of domestic developments, the indigenisation measures announced in January 2010, deflated the economic recovery and the subsequent revisions were insufficient to spur activity. Equally, the recurring power-sharing disputes and related GPA issues have cast doubt on the GNU sustainability.

Accordingly, fears of political instability are constraining investment and growth. Broadly, the country is viewed both at home and abroad as potentially unstable, defining the high risk perception of Zimbabwe as an investment destination. The Chamber of Mines estimates growth of about 7,7% in 2010 and about 8,5% in 2011, underpinned by mining and agriculture growth.

Mining sector growth

There is universal concurrence, among most stakeholders that the mining sector represents the best potential for underpinning economy wide growth. The mining sector is the fastest growing and has multiplier effects across many other sectors such as manufacturing, construction and services.

As a capital-intensive industry, mining contribution to capital accumulation is substantial and readily translates to community development as mining development or expansion is associated with new infrastructure, roads, housing, schools and clinics/health centers.

Mining accounted for 50% of exports in 2009 and this share had increased to 65% in 2010. Mining growth in projected at 44,5% in 2010 and is forecast at 43,4% in 2011.

The growth momentum is likely to be sustained over the medium term, subject to key enablers such as power availability, recapitalisation and working capital financing. The mining sector requires infusion of substantial capital inflows for enhanced growth of the sector.

Mining sector growth prospects reflect the immediate benefits of the liberalised marketing environment and the 100% retention of export proceeds. The new measures since STERP inception have enhanced viability of mining businesses, and reinvestment in capacity restoration. The new economic policies have also enhanced access to wider funding options, in terms of both debt and equity financing.

Project expansion initiatives are also envisaged, the Platinum and diamond sub-sectors continue to perform strongly and operating at near full capacity levels. The gold sector recovery continues to strengthen, with capacity utilisation at about 30-40%, constrained, in the main by power and financing challenges. The sub sector has potential to surpass the 1999 peak levels by 2013, subject to recapitalisation progress.

Chrome recovery continues to gain pace, with 2010 output forecast at more than twice the output in 2009. As with other sub-sectors, major recapitalisation efforts are underway, subject to the securing new capital.

Coal output increased measurably in 2010, recording a growth of 50% notwithstanding the recurring stoppages due to machinery breakdown, notably the dragline. Mining sector recovery will continue to underpin economy-wide growth over the medium-term and such impetus will be enhanced through injection of new capital. Principally, mining sector growth will also underpin balance of payments improvement as the mining sector growth accounts for increasing merchandise exports.

Balance of payments

The current account (as a percentage of GDP) is forecast to improve from about -18% in 2009 to -15,7% in 2010 and further to single digit levels of -8,1% by 2012. On current macroeconomic policies and further improvement in the investment climate, we forecast the current account deficit will improve to levels below 5,5% by 2015.

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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