The Sunday News
Butler Tambo
THE prognosis of the Zimbabwean economy by the International Monetary Fund (IMF) in 2016 was one of a bleak and receding economy needing bold steps to jump-start. IMF noted the economy was operating well below capacity and there was urgent need for ambitious reforms to transform the economy and unleash the country’s growth potential.
The country’s output is increasingly constrained by infrastructural bottlenecks — electricity, water, transport; unavailability and high cost of long-term capital; high cost of doing business; low productivity; and an uncompetitive manufacturing sector.
In order to get out of this economic situation which saw overall requirements for infrastructural development for 2016 having been projected at US$2,7 billion while that year’s budget allocated an awfully paltry US$315 million (2,1 percent of GDP) for infrastructure development, this week we look at the logjam caused by poor and obsolete infrastructure.
Zimbabwe’s infrastructure deficit
It is acknowledged that poor infrastructure is a barrier to accelerating growth and poverty reduction, especially in Africa. Hence, studies have shown that increasing the stock of infrastructure by one percent can raise GDP by the same margin. Infrastructure typically reduces the cost of doing business and facilitates access to markets and is therefore a key enabler of economic activity, growth and development.
The state of the country’s basic infrastructure for the power, transport, water and sanitation, and information and communications technology sectors is detailed in the report by the African Development Bank. It is noted that notwithstanding that the coverage and quality of Zimbabwe’s basic infrastructure was among the best in Southern Africa in the early 1990s, it underwent substantial deterioration in quality relative to the region. The sustained deterioration is related to the inadequate levels of public expenditures for routine and periodic maintenance of the infrastructure networks, especially in power, water and sanitation, and transport. In sectors dominated by parastatals such as power, rail transport, and fixed line communications, low service prices raised the economic costs of the deterioration, resulting in unsustainable operating losses.
This deterioration in the physical infrastructure was exacerbated by failure to build institutional capacities for management and regulation of the basic network services. The problems reflect and are caused by the disjointed approach to regulation and oversight among the various ministries involved.
This has been worsened by the loss of technical skills in the sector through brain drain. Furthermore, the institutional and regulatory inadequacies undermined investment by the private sector in basic infrastructure. Given the role of basic infrastructure as an enabler of economic activity, its deterioration impacted negatively on productive sectors of the economy and the level and quality of services. Therefore, AfDB estimated that at constant 2009 prices, US$14,2 billion is required to rehabilitate the infrastructure between 2011 and 2020 in Zimbabwe.
Competitiveness Constraints in Zimbabwe
A number of factors have made it difficult for Zimbabwe to get funding for its infrastructure projects and some of them briefly are that the large current account imbalances and low international reserves keep Zimbabwe in debt distress. The country’s external position remains precarious with large and increasing external arrears. The current account deficit is projected to remain above 10 percent of GDP and is largely financed by capital inflows in the form of short and long-term loans. The economy is exposed to declines in commodity prices and strengthening of the US dollar, which has worsened the country’s competitiveness relative to its main trading partner, South Africa and regional neighbours.
Weak institutions and an unfavourable business environment undermine Zimbabwe’s competitiveness. Zimbabwe’s international survey based competitiveness ranking remains low as Zimbabwe has attained in the World Economic Forum (WEF)’s Global Competitiveness Index at 132 out of 144 countries in 2012-2013; 131 out of 148 in 2013-2014; 124 out of 144 in 2014-2015 and 125 out of 140 in 2015-2016. Because of the perceived country risk and the uncompetitive environment that Zimbabwe is seen to be, even domestic and foreign direct inflows mirror this pathetic position economically. Both domestic and foreign investment have also remained depressed, averaging 16 percent during the period 1980-1989, rising to an average of 19 percent during 1990-1999, before falling to 7,3 percent over the period 2000-2008, and averaging 15,9 percent during the period 2009-2014. For both savings and investment ratios, levels above 25 percent are considered optimum.
Foreign Direct Investment (FDI) has remained depressed over the years. Zimbabwe’s FDI inflows amounted to US$1,7 billion over the period 1980 to 2013, compared to US$7,7 billion for Zambia and US$15,8 billion for Mozambique. Of the total of US$25,2 billion received between the three countries since 1980, Zimbabwe has accounted for only seven percent. According to the RBZ, average FDI for Zimbabwe was US$88 million compared to US$800 million for Zambia, US$586 million for Mozambique and US$486 million for Botswana during 2002-2012. FDI inflows were estimated at US$591 million in 2015, compared to annual averages of US$6 billion for South Africa, US$2 billion for Zambia, and US$1,8 billion for Botswana.
What domestic conditions have hampered infrastructure development in Zimbabwe?
Zimbabwe has exclusively relied on domestic resource mobilisation, mainly taxation. Over time, company closures and the informalisation of the economy resulted in low revenue collection. Cumulative revenues from January to October 2016 stood at US$2,876 billion, against a target of US$3,158 billion, 1,5 percent below 2015 and 9,8 percent lower than budgeted estimates. In 2017, only moderate growth of revenue is projected at US$3,7 billion. While revenues are severely strained and have been progressively declining, expenditures have remained high and have grown to levels inconsistent with revenue collection. Cumulative expenditures for the period January-October 2016 at US$3,84 billion, against a target of US$3,32 billion, resulted in a variance of US$520 million.
Drought Relief, debt servicing and civil service wage bill and bonuses
For 2016, unbudgeted expenditures associated with drought related grain importation took away US$253,5 million, December 2015 salary payment arrears, at US$119,4 million; and debt servicing, at US$100,9 million resulted in expenditure overruns. Coupled with bonus payments for 2015 of US$177,8 million, employment costs at US$2,63 billion for the period January-October 2016 consumed 91 percent of total revenues. The cost of such high employment costs, taking up the highest percentage of revenues in Africa, can only be measured in terms of foregone capital expenditures. As highlighted in the 2016 Budget Statement, the increase in the size of the Public Service from 203,362 in February 2009 to 276,163 by December 2014, a 35,8 percent growth rate, despite a policy of a general freeze on recruitment introduced by Government in 2011, contributed substantially to this unsustainable expenditure mix.
Against the original 2016 Budget targeted deficit of US$150 million, one percent of GDP, a financing gap of US$1,18 billion, which represents growth from three percent of GDP in 2015 to an unsustainable eight percent of GDP, emerged in 2016. Domestic debt has risen sharply from around US$250 million in 2013 to US$3,7 billion by October 2016. The Government increasingly resorted to domestic borrowing to finance this gap to the extent that treasury bills have become a form of surrogate currency used to settle Government expenditure. There is therefore a need to revert to cash budgeting to contain expenditures, especially employment costs, and refocus fiscal expenditures towards social services and capital expenditures.
Meanwhile, total domestic and external debt stood at US$11,2 billion (79 percent of GDP) as at 31 October 2016, beyond the recommended sustainability level of 60 percent, indicating that the country is in debt distress. The agreement to settle arrears as part of the overall arrears clearance and debt resolution strategy agreed between Zimbabwe and the international financial institutions in Lima, Peru, in October 2015 is now dead in the water, with the agreed timeline of clearing the arrears of US$1,8 billion by 31 April 2016 having been missed, as well as the extension to October 2016. Of the US$7,5 billion external debt (53 percent of GDP), US$5,2 billion (69,3 percent) is in arrears.
However, as part of the Arrears Clearance Strategy agreed with creditors in Lima in October 2015, Zimbabwe settled its overdue obligations to the International Monetary Fund (IMF) (US$107,9 million) on 20 October 2016. While the plan was to settle early in 2017 arrears to the other multilateral creditors, the AfDB-US$610 million; the World Bank-US$1,16 billion; the European Investment Bank — US$212 million; and others as well as bilateral official creditors, the liquidity crunch and the deteriorating fiscal position made this near impossible and up to now the country has failed to clear its debt arrears further denting its chances to get any concessional funding for infrastructure and other capital projects. In light of the doors by IFIs being shut on the country we remain in a catch 22 situation.
-Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on [email protected]
