The Sunday News
Dr Bongani Ngwenya
ZIMBABWE’S economy is reeling under continued deflationary pressures that started manifesting itself during the last quarter of 2015 to date. The ZimStat statistical data released so far indicates that the country’s month on month inflation has been on the negative for too long.
For example, the 12 months from August 2015 to July 2016 (August, -2,77; September, -3,11; October, -3,29; November, -2,46; December, -2,47; January, -2,19; February, -2,22; March, -2,31; April, -1,64; May, -1,69; June, -1,37 and July, -1,60) depict a phenomenon, that of an economy in doldrums. The country’s annual inflation has shed an average of 0,24 percentage points to -1,6 percent as at July 2016 mainly due to continued deflationary pressures particularly in the food, gas and liquid fuels category of consumer goods according to ZimStat.
Data released by ZimStat to date shows that, prices as measured by the all items Consumer Price Index (CPI) decreased by an average of -1,60 percentage points between July 2015 and July 2016. This decline in overall inflation further consolidates a pattern that set in, in mid-2013 and continues to date due to reduced Government spending (aggregate demand), as priority is mostly being given to civil servants’ salaries (recurrent expenditure) and servicing treasury bills maturities, albeit a tight liquidity situation. There is also a general weak demand in the economy as the liquidity crunch continues.
The effects of the firming of the US dollar during the last 12 months, against the regional currencies has also taken its toll on our weak economy.
The underlying structural basis for continued deflationary pressures in the Zimbabwe economy
After abandoning the Zimbabwe dollar following the hyper inflationary era the country’s total import bill both month on month and annual basis ran on an average of double the total export earnings. This phenomenon has prevailed from 2009 to date putting a lot of pressure on the balance of trade deficit in the economy, accounting from heavy dependence on commodities export earnings that became vulnerable and susceptible to price volatility and adverse weather conditions of drought for example. The industry had grounded to a halt during the hyper inflation period to 2008.
It is unfortunate that there is very little of economic recovery from the hyper inflation era that can be attributable to the marginal drop on the total import bill that Zimbabwe has experienced so far. The ZimStat indicates that the total import bill has dropped by 20,34 percent in the seven months to July 2016. This decline is attributable to a number of factors that have continued to weigh down the import bill, such as troubles in the external payment systems, import restrictions placed on selected products by Government, and weak industry demand for raw materials.
The weakening of the South African rand, whose country is Zimbabwe’s biggest trading partner in the Sadc, has also contributed, with the rand trading around 12,45 on the dollar last year against last month’s 13,9. Most of our retail shops in the country were beginning to refuse to accept the rand for payment of goods for example. Data from ZimStat shows that imports fell to $2,89 billion from $3,62 billion same period last year. Month on month, July imports fell 8,09 percent to $394,83 million from June’s bill of $429,58 million as foreign payments continue to face delays.
The greatest effect has been payments to countries out of Africa where supplier terms are stricter. In the period, monthly imports from Singapore fell 31,55 percent to $71,14 million in July from $103,94 million in June and United States dropped 46,7 percent to $4,83 million from $9,08 million in the same period. However, the full impact of Statutory Instrument 64 of 2016 is expected to kick in from August going forward according to ZimStat. The Statutory Instrument 64 has just been effected, as a result its impact is not yet felt, notwithstanding the marginal increase in the prices of some locally produced products that could be correlated to the timing of the introduction of the Statutory Instrument.
According to ZimStat imports from China totalled $214,5 million but South Africa remained dominant at $1,14 billion. There was an increase month on month on South African imports of 4,58 percent to $176,37 million from $168,64 million as the rand began to firm from the all time drop of 15 rand to the US dollar. However, South Africa has been the most outspoken of all Zimbabwe’s trading partners about the recent measures by Government to control the imports of selected products. This has necessitated the issue to be discussed at the ongoing Southern African Development Community Summit preparatory meetings in Swaziland, where Industry Minister Mike Bimha suggested that the issue of the Statutory Instrument was to be dealt with under South Africa-Zimbabwe bilateral engagements.
These engagements and discussions also included the tariff phasedown of 112 products proposed by South Africa. As Zimbabwe we need to understand that there has to be a trade-off and win-win situation here, that is, between Zimbabwe and South Africa.
The other critical structural base for this continued deflationary pressures is the weak foreign direct investment inflows that Zimbabwe has been reeling under. The Zimbabwe Investment Authority (ZIA) Chairperson, Nigel Chanakira in his appearance before the Parliament Committee on Youth Empowerment and Indigenisation revealed that potential investors are still seeking clarity on the indigenisation policy such as clarity on the use of empowerment credits for compliance. He also revealed that, for example investments in the mining sector remained subdued as investors want to see the conclusion of the consolidation of Zimbabwe’s diamond sector.
The following is the actual quote from the Chairperson of ZIA.
“On the mining side we observed some caution and slow down with investors waiting to see what would happen with the diamond sector, that seemed to set tremors in the mining sector and as a result we are 70 percent down in terms of the value of investment that we would normally have”.
This is a serious knock on our export earnings capacity, as the mining sector continues to gain ground as the leading export earnings generator for the Zimbabwean economy. According to the chairperson of ZIA, investment approvals in the first half of 2016 reached $305,58 million from 84 projects compared to the 67 that were approved same period last year. According to the chairperson, last year Zimbabwe received a record $3,1 billion of investment applications but only $421 million of those materialised to real investment inflows.
There is something fundamentally not right here. This seriously reflects on the issue of investor confidence that is continuing to elude Zimbabwe. Not much has been done so far towards building up investor confidence. Commenting on business reforms, Chanakira said the country is aiming to make it in the top 100 in the Global rankings on the ease of doing business.
Last year the country was ranked number 151 on the World Bank ease of doing business report, and Chanakira said several reforms have been undertaken and an improved position is expected in September when the report is released. He said the reforms have resulted in the number of days required to start a business reducing from 90 to 15 days while construction sector registration now takes 120 days compared to 448.
Property registration now takes 14 days from 36 and time taken to pay taxes reduced from 242 hrs to 160 hrs. Chanakira also added that up to eight laws, including the Companies and Deeds Registry Act, Small Claims Act and Insolvency Act, are being amended to facilitate faster processing of investment applications. There is much more to be done in these areas and the pace is rather too slow bearing in mind the continued deterioration of the economy and liquidity problem.
Need for aggregate demand and production capacity boosting
The general price (inflation) decline in goods and services may be good for consumers, however, a persistent negative decline (deflation) is a latent evil and depressor of the economy. This is the kind of a phenomenon Zimbabwe has been reeling under for the past 12 months. Zimbabwe now needs policies that stimulate aggregate demand and boost domestic production capacity in order to improve the liquidity situation to be implemented.
There is very little room and space for monetary policy measures to work in order to improve the liquidity situation in our economy because of the monetary policy sovereignty that we ceded by adopting the multi-currency regime. History and literature has it that deflationary periods are often synonymous with periods of rising populist backlash, as consumers are thrown into the deepening ends of poverty. It is very clear that consumer spending remains week in this country despite the continued drop in the general prices of goods and services as a result of competition mainly in the retail sector. Domestic production capacity has to be boosted so that Zimbabwe begins to experience locally induced inflation as a result of increased domestic product growth, as compared to the current largely imported inflation.
The Government has to start shifting its expenditure patterns away from recurrent expenditure towards productive and economic infrastructural development expenditure to stimulate aggregate demand back into the economy. The current infrastructural development expenditure taking place or to still to take place in Zimbabwe is funded by the few deals that Zimbabwe has managed to clinch with China in particular. These deals are in the form of loans mind you. Because of their nature, there is very little impact they can bring or do towards stimulation of aggregate demand.
In conclusion, this continued deflationary pressures has to be tamed, if we are serious about coming out of the current economic crisis and begin talking about economic growth like any other country in the region and the global world.
Dr Bongani Ngwenya is a Bulawayo based economist and senior lecturer at Solusi University’s Post Graduate School of Business
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