Economic growth prospects under the spotlight

Business Writer

Economists have issued a bleak warning about Zimbabwe’s economic prospects, with some even predicting a negative growth this year, Business Weekly can report.

Economic professor, Gift Mugano, forecasted a challenging economic outlook, warning of potential risks that could lead to a negative growth rate.

While the Government has projected a growth target of 2 percent in 2024, Prof Mugano believes that the country is more likely to experience a significant economic contraction largely due to the impact of the drought.

Harare-based economist, Gladys Shumbamhini, echoed Prof Mugano’s concerns about the Zimbabwean economy’s outlook and identified high inflation and persistent foreign currency shortages among key challenges.

And on Tuesday this week, the Confederation of Zimbabwe Retailers (CRZ), warned that the volatility of the exchange rate and ongoing currency imbalances are placing enormous strain on businesses’ operational capacities, disrupting supply chains and hindering sustainable growth.

“My view is that going forward we have a lot of complicities and challenges or rather risks ahead which paint a gloomy picture going forward, characterised by slow economic growth rate, which might hit a negative growth rate,” said Prof Mugano.

“I am aware that the Minister of Finance (Economic Development and Investment Promotion Prof Mthuli Ncube) is targeting a 2 percent growth rate but the chances of dipping into negative growth rate is very high, mainly because of a number of factors.”

Among the major concerns, Prof Mugano said was the drought, which poses a significant threat to economic activity and consumer spending.

He said the drought’s impact on aggregate demand was severe, as “it limits people’s income and reduces overall economic activity.” This was evident in the decline of jobs, especially in sectors like agriculture and related value chains, due to the devastating effects of the drought.

Prof Mugano noted that the Government’s monetary tightening measures, aimed at stabilising the exchange rate by reducing money supply, were also negatively impacting demand.

While printing money is not inherently harmful when it aligns with demand, the focus on draining the market was creating liquidity crisis, Prof Mugano said.

This trade-off between stability and economic growth was unsustainable, as it hinders economic activity and limits people’s access to resources.

“When you do that, when people cannot get access, there is no liquidity,” said Prof Mugano.

“Again, it creates a problem because you are actually winning stability at the expense of economic growth. You are putting yourself in a position of fasting.

“You know what it does when you fast . . . you lose weight and the economy also losses weight.

Prof Mugano said the lack of ZIG convertibility into US dollars was also a significant challenge for businesses seeking foreign currency, making it difficult for companies to conduct transactions.

He said the isssue of fungibility “limits companies’ stocking capabilities and can lead to shortages.”

In a Mid-Term Monetary Policy consultative paper addressed to Reserve Bank of Zimbabwe (RBZ) governor Dr John Mushayavanhu on Tuesday, CRZ president Dr Denford Mutashu, said the inadequate access to foreign currency through formal banking channels was a major exacerbating factor.

This has left formal retailers and wholesalers with large, illiquid holdings of ZiG, the domestic currency, making it difficult to restock and cover operational costs.

Dr Mutashu said the creation of a liquidity trap due to the situation, which, if left unaddressed, could severely undermine the viability of formal retail and wholesale operations.

“The primary constraint currently facing businesses in the retail wholesale sector is the volatility of the exchange rate, which is severely hampering operations across the supply chain,” said Dr Mutashu.

“The existing exchange rate mechanism is making it nearly impossible for businesses to recoup their investments.

“This instability has led to a significant demand for the US dollar, which is not readily accessible through formal banking channels, further exacerbating the issue.

“Retailers and wholesalers are burdened with substantial stocks of ZiG, yet there is insufficient market capacity to absorb these funds, creating a liquidity trap.”

Prof Mugano said the challenge was around the lack of convertibility of ZIGs into US dollars whenever companies want foreign currency.

“It is actually making it harder for businesses to transact,” he said. “We hear, as you saw in the report of the Confederation of Retailers of Zimbabwe, they have a lot of ZIGs but they cannot change them.

“The fungibility is a challenge. This curtails the stocking of companies and might run into shortages (of commodities),” said Prof Mugano.

Shumbamhini predicted that inflation would remain high, driven by factors such as currency devaluation, rising fuel prices and ongoing supply chain disruptions.

The Zimbabwean dollar was anticipated to depreciate further against the US dollar due to low foreign currency reserves, high demand for foreign currency, inflationary pressures, and a lack of confidence in the local currency.

To address the challenges, Shumbamhimi proposed several measures for the Reserve Bank of Zimbabwe.

These include raising interest rates or reduce the money supply to curb inflation, make the Zimbabwean dollar more attractive to hold by adjusting interest rates and explore ways to increase foreign currency inflows, such as attracting foreign investment or promoting exports.

She also recommended measures to encourage banks to reduce and standardise bank charges to make digital transactions more viable and reduce the reliance on a cash economy and all businesses to access foreign currency through formal channels by implementing a transparent and market-driven exchange rate system.

Economic analyst, Enoch Rukarwa noted that the ZIG inflation rate is likely to correlate with de-dollarisation.

As the use of the local currency increases, inflationary pressures may follow due to factors such as inflationary expectations and a lack of confidence in the local currency.

“To anchor inflationary pressures and exchange rate volatility, a contractionary fiscal and monetary policy may be necessary,” he said. However, this policy should be implemented in a way that supports business operations.

In recent times, fiscal policy measures have shown some effectiveness in cooling inflation and reducing exchange rate volatility.