adminHowever, the economy is failing to significantly move from stabilisation to remarkable growth. To shed light on how the economy is expected to perform in the next four years, a discussion of macroeconomic fundamentals like income per capita, current account, foreign direct investments, national debt, general performance of selected sectors of the economic and infrastructure will be reviewed.
Income per capita
Income per capita is average household income. Capita income is often used as a measure of the wealth of the nation’s households of a nation. It can be used to compare nations’ well-being.
Income per capita fell drastically as a result of pervasive economic collapse. Income per capita fell from around US$900 in 2001 to around US$400 in 2008. Although it began to peak up from 2009 it is growing at a sluggish rate. For the next four years, income per capita is expected to reach US$700 in 2016.
Low incomes can have two-pronged effect on the local industry. Firstly, because incomes are low, there is naturally low demand and companies’ sales are low. Secondly, low incomes results in low and transitory savings which makes it difficult for local banks to give local industry long term loans.
As a result of low incomes coupled with liquidity challenges have made it virtually almost impossible for local companies to raise production capacities to competitive levels. On average capacity utilisation is in the neighbourhood of 47 percent.
Zimbabwe companies cannot compete with foreign companies. As a result, Zimbabwe has become a retail economy.
Regional comparison reveals that Zimbabwe compares well with Malawi, Madagascar and Mozambique. Income per capita is far below its major trading partners like South Africa and Botswana by more than 10 times such. Its northern trading partner, Zambia, is favourably doing well.
An economy with weak incomes will certainly see its households consuming more of basic commodities at the expense of other commodities due to constrained optimisation. Because of low capacity utilisation, Zimbabwean products have been uncompetitive in the regional markets. Local companies as a result cannot therefore exploit market access created through trade liberalisation. And, there is no sign that this can be reversed!
Current account
Current account is the sum of the balance of trade that is exports minus imports. A current account surplus increases a country’s net foreign assets by the corresponding amount. On the other hand, current account deficit decreases the country’s net foreign assets by the same amount.
Since independence in 1980, Zimbabwe’s trade performance was poor as exhibited by current account deficit which dominated the period under review. Zimbabwe managed to register positive current account in 1988, 1997, 1998 and 1999 only. Going forward, the future is very bleak as the country is expected to realise a continuous increase in current account deficits up to 2016 unless there is a positive shock in the economy. According to the World Bank, Zimbabwe is number 133 in world rankings Current Account Balance (US Dollars) performance in year 2010.
The development of the negative current account is worrisome for a country which virtually imports 100 percent of its fuel, 40 percent electricity, essential drugs and equipment for industrial re-tooling.
Zimbabwe thus remains susceptible to the vagaries of the adverse external macroeconomic environment, particularly within the aegis of the multiple currency system which is typified by limited macroeconomic policy instruments.
Because of the multi-currency system, the country has virtually lost monetary policy autonomy, making it difficult for the country to intervene with appropriate stimulus packages in the event of exogenous shocks. As a result of the absence of adequate foreign exchange reserve buffers to respond to exogenous shocks due to negative current account, the economy is in a bad state.
Government debt
Gross Government debt consists of all liabilities that require payment or payments of interest and or principal by the debtor to the creditor at a date or dates in the future. Debt liabilities include special drawing rights, currency and deposits, debt securities, loans, insurance, pensions and standardised guarantee schemes, and other accounts payable.
Zimbabwe debt has been increasing at an exponential rate. In 2005 the debt was US$3 billion. Current statistics shows that the debt has shot up to around US$ 8 billion.
Zimbabwe in recent years has seen a continuous sustenance in the increase in the debt and there a limited options to reverse that.
National debt has ripple effects such as:
- Reduction in Government expenditure which can cause stagnation of the economy;
- Capital flight as a debt-ridden country tend to raise taxes in order to repay the debt and at the same time meet national obligation;
- Increase in the debt due to the compounding effect of interest rate and this is the main problem in Zimbabwe.
Zimbabwe seems to be having limited options on debt management because of limited foreign exchange.
In recent years, Government assets have been attached by creditors. The debt overhang scares away investors especially in cases where national assets are being attached. In December 2011 national airline was impounded in London because of a US$1,2 million debt it owed a United States firm. The airline is not performing well. Efforts to look for strategic partner are in vain because of the debt problem.
Because of the debt, local companies are failing to access external credit lines due to the country’s high credit risk profile.
Foreign direct investment
Zimbabwe suffered massive capital flight due to bad publicity. Foreign direct investment averaged 18 percent of GDP in the 1980s and 20 percent in the 1990s. As a result of economic meltdown, the period between 2000 and 2009 witnessed a mere FDI of 1,1 percent of GDP. Zimbabwe’s capital account inflows, thus, remain a sad story, with 2011 foreign direct investment levels at US$125 million.
Regionally, Zimbabwe is the worst performer in terms of attracting foreign direct investments. Angola performed exceptionally well with FDI contributing 22,8 percent of GDP, followed by Zambia, Namibia and Mozambique with 6,4 percent, 5,9 percent and 5,3 percent respectively.
Going into the future, there is no sign that this trend can be reversed especially with the European economic crisis and stagnant growth in the United States, which are traditionally major sources of FDIs.
Performance of agricultural sector
Although the sector is registering significant improvements the yields being produced per unit area are still far below potential. The agricultural sector has suffered from drought of funding.
The sector requires about US$2 billion to produce optimally and this figure is not near to come by. Poor performance of this sector will be reflected in the manufacturing sector. As a result, the manufacturing sector will remain uncompetitive.
Manufacturing sector
The manufacturing sector is slowly recovering with the sector having grown by a mere 3 percent in 2010 after a decade-long de-industrialisation experience. In 2000 average capacity utilisation was 55 percent.
It fluctuated between 50 and 60 percent up to 2004. From 2004 the economy witness a sharp decline of capacity utilisation which saw companies average output hovering around 10 percent in 2008.
At this period, many companies shut and the majority of them are still struggling to come back. The national output peaked up in 2009 to 33 percent. From 2009 the production trend is growing at a sluggish rate to 43,7 percent in 2010, 57,2 percent in 2011 and is expected to reach 59 percent in 2012.
At this rate of production Zimbabwe products will be uncompetitive because of high unit cost as the costs associated with idle capacity such as fixed costs will be spread over few units produced.
However, some sectors such as foodstuffs, drinks, tobacco and beverages, wood and furniture, metals and metal products, non-metal and mineral products witnessed a remarkable improvement. Capacity utilisation in these sectors averaged 65 percent in 2011
However, capacity utilisation in such sub-sectors as clothing, textiles and printing is set to remain poor, with levels of as low as 20 percent anticipated in some industries.
The subsectors such as clothing and footwear, paper printing and publishing, textile and ginning and transport equipment paint a gloomy picture in terms of competitiveness of these sectors to both regional and international products.
The local manufacturing industry in general faces international competitiveness challenges due to high production costs related to antiquated plants and equipment, power shortages, and lack of working capital, among others.
Due to industrial capacity utilisation and supply-side challenges, the economy has been absorbing disproportionately large amounts of imports of finished goods, further threatening the survival of the local industry.
The loss of skills and the lagging behind of training institutions has exacerbated the labour market. The private sector was also not investing in human capital development thus affecting the production of goods and services. As a result, locally produced products are relatively expensive compared to foreign products especially from South Africa. It explains why Zimbabwe is now called the “tenth province of South Africa”.
Next week we will look at the performance of the mining sector and economic infrastructure
Gift Mugano is a trade expert based in Port Elizabeth, SA. He is studying for a PhD in Economics at Nelson Mandela Metropolitan University (NMMU). He is a lecturer of Applied Business Analysis in the Graduate Business School at the NMMU, consultant and Chief Executive Officer of Africa Economic Development Strategies. Feedback: [email protected], cell: +2778 017 4112
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