What are the Notable risks for the Zimbabwean economy in 2022

The Zimbabwean economy is widely expected to grow in 2022 with the government forecasting a 5,5% real Gross Domestic Product (GDP) growth. The International Monetary Fund (IMF) predicts a modest growth of 3,1% for the same period while the World Bank is closely aligned to government expectations as it expects the economy to grow by 5,1%.

The underlying observation is that the local economy is in a better fiscal space than it was in 2019 and 2020 when price instability and high inflation ran riot. The increase in diaspora remittances and bullish commodity prices on the world market have been instrumental to economic stability. Export receipts for 2021 are set to eclipse US$4,7 billion, while Diaspora remittances value should exceed US$1,4 billion.

Partial dollarisation has also been key in re-establishing real savings for households and businesses. Consumer demand has improved for the retail sector, just as much as it has for the manufacturing sector which contributed at least 19% to economic output in 2021.

The real estate sector has witnessed significant levels of investment in the past year due to lack of alternative dollar investments on the local money markets and because of the sector’s ability to guarantee recurring income in real money. Despite the current stability, several risks can weigh down on the anticipated growth in 2022.

Drought

Agriculture remains a critical sector for the local economy in terms of backward and forward linkages in the market, even though it has fallen below 8% in terms of economic output.

Improved agriculture production plays a key role in import substitution (foreign currency savings), provision of raw materials for the food processing industry, income generation for over 2,5 million smallholder farmers and overall food security for the country.

However, Zimbabwe’s overreliance on rain fed agriculture in the face of climate change has cost the nation dearly. It is a worrying trend that after every decade the country experiences a severe drought with notable years being 1982, 1992, 2002 and 2012.

Zimbabwe has been a net importer of food for the past two decades and the country’s import bill is dominated by grain imports with maize imports averaging 1,1 million metric tonnes (mt) per year in the last 10 years, while wheat and soybeans account for 300 000mt and 150 000mt in import quantities respectively.

National demand for maize stands at 2,1 million mt for industrial and domestic consumption. Therefore, a drought will disrupt various supply chains and create more demand for foreign currency.

Critically, a drought will plunge millions into extreme poverty considering the current nutrition vulnerabilities.

Resurgent Covid-19

The Covid-19 pandemic continues to pose significant downside risks for the economy from a trade to business operations point of view. The Delta variant left a trail of disaster for Zimbabwe with the tourism sector hardest hit in 2020 and 2021.

It is estimated that the tourism, hospitality and transport sectors lost over 80% in output due to Covid-19 travel restrictions. A prolonged pandemic or new severe variants could choke economic growth, subdue foreign currency earnings from international tourists and increase poverty levels in tourism hotspots across the country.

Several cities and towns in Zimbabwe rely heavily on tourism revenues (for example, Victoria Falls, Kariba, Nyanga, Mutare, Hwange and Chinhoyi).

Currency depreciation, inflation

The Zimbabwean dollar has lost over 95% of its value since launch and continues to lose value despite the soft peg adopted by the central bank. Unhinged growth in money supply and quasi-fiscal operations by the central bank will continue to create artificial demand for foreign currency.

Heading towards the 2023 harmonised elections, the risk for increase in money supply to fund infrastructure development projects and agriculture subsidies (among other unbudgeted government interventions) remains very high. This will keep annual inflation in double digit figures. However, the pinch will be painfully felt by labour which is remunerated in local currency.

Consumer confidence in the local currency will wane as the election campaign season draws closer. This means that the local currency will continue to be relegated to an electronic currency (high velocity money) for transacting only and be disposed of for hard currency by all market players when there is a need to restock, trade, save or buy assets. The parallel market will also be driven by market confidence (behavioural economics).

Partial dollarisation will be further entrenched with local currency depreciation, and this will lead to sustained pressure on government and employers to pay salaries in hard currency. Civil service industrial action will likely continue.

Power cuts

The prospects for above normal rainfall across the country are slowly fading and this is bad news for the country’s electricity supply as over 75% of power produced in Zimbabwe is generated at Kariba Hydro Power Station.

Currently, local production is at 1 275MW versus peak demand of between 1 400-1 600MW. The balance is augmented through imports from Hidro-Eléctrica de Cahora Bassa of Mozambique, Eskom of South Africa and from the Southern Africa Power Pool (SAPP).

In June, the power utility started a 6-to-12-hour power cuts to balance demand and this has been negatively affecting business. Low rainfall in the 2021/22 season will further entrench the power cuts and lead to significant loss of production time and economic output.

Auction system inefficiency

Zimbabwe’s foreign currency allocation platform is far from being efficient due to government control, pegging of the exchange rate and reluctance by the central bank to let free market forces determine the exchange rate.

Independent suppliers of foreign currency have stayed away from the auction as they see no value in it. The parallel market premium now averages 100% and this impacts on viability for various businesses who are compelled by law to index prices using the pegged auction rate.

Similarly, exporters suffer substantial exchange rate losses on their foreign earnings. As demand for foreign currency increases in 2022, allotment delays for winning bids will widen to more than the current 4-8 weeks average. The auction allocation inefficiencies will create operational bottlenecks for formal players in the economy, thus impacting viability.

Illicit financial outflows

It is estimated that Zimbabwe loses over US$1,5 billion every year through illicit financial flows (IFFs) that could potentially benefit the country in terms of tax revenues, foreign exchange supplies and downstream payments in various value chains. IFFs take various forms: from minerals smuggling, foreign currency externalisation (in hard currency), overstating foreign supplies and tax evasion by businesses.

History has proved that millions are siphoned off from the local economy in the run up to the harmonised elections (mostly by foreign business owners and politically connected persons). The outflows are largely motivated by heightened risk of electoral disputes, knee-jerk policy changes and political instability that may follow elections.

The fight against the Covid-19 pandemic will continue to consume significant state resources, while posing business risks for the fragile Zimbabwean economy. It may slow down international trade while dampening investment and tourist inflows into the country.

The 2023 campaign season is now in full swing, and the election mood is building even though elections are 18 months away (at least). This has an effect of shifting government attention from sustainable or long-term economic plans to policies which bring quick electoral wins and funding for various subsidies to entice the electorate. This will create debt trapping agriculture and consumption subsidies which are funded through parallel government structures.

Similarly, any election related unrest or dispute will be detrimental to economic stability and the country’s image as an investment destination.