How to fix the economy in Zimbabwe

Some economic commentators took pain in accepting the published 2014 economic growth rate of 3,1 percent: They believe growth was overstated.

Ray Chipendo

Their doubt is understandable. Attempting to reconcile a 3,1 percent growth rate with obvious weakening household spending should be disquieting. Using data made available, we believe private consumption weakened or at least stagnated in 2014.

An improvement in trade balance and government spending must have done the heavy lifting to avert an economic contraction in 2014.

Accounting for the four-legged economic gross domestic product (GDP): Private consumption; trade balance; government spending and capital formation (investment), Zimbabwe is losing balance. In the last six years, contribution of private consumption to overall GDP averaged 98 percent.

We think this is disproportionate. South Africa’s consumption contribution to GDP is estimated to be 63 percent and South Korea, 62 percent.

With the exception of 2010 when it jumped 100 percent, from US$950 million to US$2 billion, capital investment as a component of GDP was flat until 2013 before it dipped by 16 percent. We think this downward trend extended into 2014.

In the period (2010-2013) when capital investment levelled, private consumption was growing at 17 percent per year and the trade balance was erratic.

Fuelled by credit and a subsequent rise in asset prices (stocks and property), growth between 2010 and 2013 was largely consumption driven. And while the economy was recording growth rates above eight percent, job creation was lagging behind.

To a great extent, economic growth in that period was jobless in nature. For the few additional jobs created, it is little wonder that as soon as consumption started weakening in 2013, such jobs evaporated and unemployment spiked again.

Our conclusion is that Zimbabwe requires “capital investment” driven growth. Apart from creating permanent jobs, such a growth model has an enduring and positive multiplier effect on the economy.

That takes us to the question economists and policy makers alike, battle with — how do we stimulate capital formation?

The African Development Bank research suggests that infrastructure bottlenecks alone are believed to cut growth in sub-Saharan Africa by two percentage points a year. The effect is more severe in Zimbabwe where previously existing infrastructure has either fallen apart or is now constrained.

In South Africa where there has been milder load shedding compared to Zimbabwe, economists are forecasting a one percentage point discount off 2015 GDP growth.

Based on subdued demand levels, the economy of Zimbabwe faces a 36 percent power deficit. Businesses are now trying to fill up that energy gap with a more expensive source, diesel. Local diesel prices are at least 30 percent more expensive than that for neighbouring South Africa.

As a result, industries such as manufacturing, chemicals and mining which are energy intensive are pushed up the cost curve thereby undermining productivity. We believe this loss in competitiveness has been the pretext for disinvestment, company closures and job cuts.

A dilapidated transport infrastructure is compounding the hardships companies face. Compared to South Africa, most of our internal rail routes take double the time to move goods. The state of the country’s roads also makes movement of goods longer and expensive. Ultimately, doing business in Zimbabwe become more costly and onerous.

An unresolved infrastructure deficit will most likely lead to a more adverse economic situation than just the loss of jobs. We worry that falling productivity in companies might trigger long-term structural weaknesses that take generations to repair.

Such faults could possibly slip the economy into extended periods of stagnation which cannot be undone even by abundant capital. On this note, we share Finance Minister (Patrick Chinamasa) and central bank governor (John Mangudya)’s concerns over labour productivity.

The notion of Zimbabweans being a productive people may no longer be relevant — at least relative to nation-peers.

Globally, the growth story has ceased to be the key driver of foreign direct investment and portfolio flows. Rather, a nation’s reform agenda is becoming the defining driver for capital movements. Economies that have been given a vote of confidence by investors are all associated with a reform agenda followed through by actions —Indonesia, India and Rwanda are just examples.

On the contrary, economies such as Brazil where reforms are hardly complimented by actions, capital outflows and disinvestment are threatening a recession.

Policy makers are rightly confronted with questions of labour policy flexibility; a commitment to rein in fiscal deficits; openness of investment policy (indigenisation law) and tax policy fairness.

In a fast globalising economy where more than 50 countries on the continent are competing for capital, policy rigidness is self-hurting.

As outlined, we believe that closing the infrastructure deficit and setting a robust reform agenda should top the priority list of policy makers. Just as private telecommunication players have proven how surrendering infrastructure into private hands can advance the economy, we think policy makers should be courageous in letting go transport and energy infrastructure into private hands again.

Fears of losing toll fees and electricity tariffs may be overwhelming. But our research suggests the cumulative benefit of letting private hands manage infrastructure — which is accrued via tax receipts from unlocked productivity and production — will far outweigh what government will forgo in toll fees and tariffs. Financial Gazette

Ray Chipendo is head of research at Emergent Research. He is reachable on ray@emergent-research.com

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