Lack of credit unsettling Zimbabwe’s industries

By The Standard and Newsday | Dec. 24, 2021 | 6 Min read

MACRO-ECONOMIC indicators revealed an improvement in growth and inflation developments between 2020 and 2021.

ZNCC

MACRO-ECONOMIC indicators revealed an improvement in growth and inflation developments between 2020 and 2021.

The economy is poised to record a 7,8% growth against a backdrop of positive developments in the agriculture, mining and manufacturing sectors as well as a significant decline in annual inflation. However, a resurgence in inflationary pressures, fuelled by money supply growth and the runaway parallel market exchange rate, threaten the envisaged growth going into 2022.

A look at new business establishments and closures shows that the number of companies filing with the Registrar of Companies and Zimra has been steadily growing since 2018, despite a heavy COVID-19-induced slump in 2020. These figures are supported by a positive trend in the number of active members in the National Social Security Authority (Nssa) database.

However, tax registration seems to consistently trail company registration, indicating that not all new entrants complete the formalisation process by registering for tax. This may point to incentive issues, among other challenges.

Regarding sectoral capacity utilisation, there were wide variations ranging from 10% to 80%, the average being 47,5%. The leading sectors were agriculture, hunting, fishing and forestry, transport and storage, information and communication, and human health and social welfare activities, were in the 67% to 80% range, while arts, entertainment and recreation, accommodation and food service activities, and financial and insurance activities trailed in the 10% to 27% range. The COVID-19 pandemic had a profound effect on capacity utilisation, with some sectors benefiting (ICTs) and others adversely affected (tourism).

On the ease of doing business front, despite the decrease in the proportion of companies considering the environment as unfavourable, from 92% in 2020 to 76% in 2021, the high figures remain worrisome. Major areas of concern are limited availability of credit and foreign currency, unpredictable policy landscape, multiple licence requirements and red tape in public offices.

While the country seems to be slowly moving in the right direction, considering that the 2020 World Bank Doing Business Report also noted an improvement between 2019 and 2020, more still needs to be done on this front to create a an investor-friendly environment.

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In the same vein, estimates of the overall business confidence revealed that slightly more companies consider 2021 to be a better year than 2020 regarding the situation of the business, sector, country, investment and profitability.

However, regarding expectations for 2022, the situation is to the contrary, with slightly more companies being pessimistic. The overall business confidence index for the country was measured as 8,6 on a scale of -100 to +100, indicating a cautious optimism. Uncertainty about the future of the COVID-19 pandemic and the impending campaign season ahead of the 2023 general elections were pointed out as the main reasons behind the scepticism.

The findings, therefore, point to the following recommendations:

The monetary authorities should extend the tight monetary policy stance to M1 growth (particularly local currency denominated transferrable deposits) to reduce resurgent inflationary pressures. Limiting the tight monetary policy stance to reserve money growth only will not be sufficient to control inflation.
The central bank should expedite interventions aimed at improving the efficiency of the foreign exchange auction market. The full tenets of the Dutch auction system should be adopted and preceded by the clearance of the backlog.
Government should maintain fiscal discipline as we enter the election season. This is critical for improving the business confidence.
Momentum in the COVID-19 vaccination campaign towards achieving herd immunity should be maintained to reduce the need for frequent lockdowns.
Efforts to clear external debt arrears as well as re-engagement with international creditors and financiers should be increased with a view to opening up international lines of credit. The country is in dire need of patient but cheap capital for recapitalisation across all sectors.
There is a need for stakeholder consultations and impact studies before statutory instruments are introduced to ensure both micro-economic and macroeconomic stability.
The Zimbabwe Anti-Corruption Commission (Zacc) should be capacitated with financial resources to fill vacant but critical posts so that it effectively discharges its mandate. Furthermore, there is need to consider giving the commission prosecuting powers for corruption cases as the National Prosecuting Authority (NPA) is overwhelmed.
Regarding the ease of doing business: The Zimbabwe Investment and Development Agency (Zida) needs to be allocated adequate financial resources to allow it to digitalise and integrate its systems with other institutions such as the Registrar of Companies and Zimra. This will help in achieving the goal of a one-stop shop for investment. The National Competitiveness Commission (NCC) should be capacitated to allow it to undertake in-depth research into the various factors impeding the ease of doing business and competitiveness.

NCC should send delegates to countries such as Seychelles and Rwanda to learn from their experiences. Government should come up with a simplified tax regime that encourages formalisation of businesses given the high level of informality in the economy.

The upgrading of clearing and monitoring systems at all ports of entry should be accelerated to enhance trade facilitation. The ASCUDA system needs constant and timely upgrades to minimise downtime, which causes unnecessary congestion.

Macroeconomic stability is critical for the attainment of sustained economic growth, full employment, favourable balance of payments position and equity. In 2021, Zimbabwe is poised to experience a 7,8% growth rate on the back of a successful 2020/21 agricultural season, favourable international commodity prices and improved manufacturing sector capacity utilisation.

However, the COVID-19-induced restrictions, the runaway parallel market exchange rate and resurgent inflationary pressures remain a threat to the envisaged economic growth.

The year 2021 started under strict lockdown conditions as the economy battled to contain the second wave of the COVID-19 pandemic. With the advent of COVID-19 in 2020 and the associated lockdowns and movement restrictions, economic activities were largely subdued. In addition to the non-pharmaceutical interventions (NPIs) implemented, the government has accelerated the vaccination programme, which saw Zimbabwe being ranked among the top 10 in Africa in terms of the vaccination rate.

The private sector played and continues to play a critical role in the fight against the pandemic through the production of personal protective equipment and sanitisers, procuring vaccines for their employees and adherence to the World Health Organisation COVID-19 protocols.

As the country moves towards herd immunity, complete opening up of the economy will be crucial for business to thrive and achieve higher growth rates.

On the fiscal front, the fruits of fiscal consolidation adopted since 2018 are now being reaped as evidenced by a $570 million surplus realised in 2020. Revenue collection has been impressive; exceeding the target of the first half of 2021. In the first half of 2021, an expenditure overrun of $7,8 billion was replaced by a positive variance in revenue collections, which exceeded the $182,1 billion target by $16,1 billion.

However, government expenditure towards payment for road construction and rehabilitation, grain deliveries and the local currency component of tobacco farmer payments has had unintended consequences through fuelling growth in local currency transferable deposits.

The statistics indicate a contradiction to the central bank’s tight monetary policy stance. While central bank comments on money supply growth have mainly focused on stability in reserve money growth, there has been significant growth in M1.

The local currency and FCA components of transferable deposits grew by 588% and 575%, respectively. Of interest is the growth in local currency transferable deposits used for day-to-day transactions, including the buying of forex on the parallel market.

Between January 2020 and September 2021, there was a 620% increase in the black-market rate, from about US$1:$25 to the current US$1:$180, which can be attributed to the growth in local currency transferable deposits.

This has resulted in the persistent increase in the parallel market premium against the backdrop of a stable foreign exchange auction rate.

There is a hive of activity on the black market, with recipients of diaspora remittances supplying a significant chunk while illegal/informal gold buyers, businesses which cannot access fund on the auction market and general economic agents sustain the demand.

The denomination of prices of some critical commodities such as fuel in foreign currency does not help the situation. Given the persistent excess demand, the parallel market premium shall maintain the upward trajectory, driving the prices of goods and services up.

The foreign exchange auction system, which has as of October 14, 2021 dispensed over US$2 billion since its inception in June 2020, has ensured uninterrupted financing of importation of key raw materials and equipment for the productive sectors of the economy (RBZ, 2021).

The Mid-term Monetary Policy statement indicates that on account of the strong external sector performance, foreign currency receipts have remained buoyant, with US$4,02 billion having been received in the first half of the year 2021, compared to US$3,12 billion received over the same period in 2020, representing a 29,1% increase in foreign currency supply into the economy.