Wednesday, January 12, 2011

From John Robertson

Zimbabwe’s Economy 2011

Zimbabwe has started 2011 faced by a number of domestic uncertainties that are likely to complicate the planning process, mainly because they will continue to limit investor commitment and access to longer-term finance.

In political terms, the population does not know whether a revised and acceptable constitution will be ready in time for a referendum before the elections, whether, if it is, it will be accepted by the electorate, whether the far from united Government of National Unity will force an election on the electorate without first offering a revised constitution, whether this would be a presidential election only, or one for parliament as well, or whether a new voters’ roll will be completed in time for either the referendum or the elections.

To these imponderables must be added those that have their origins beyond Zimbabwe’s borders. Exchange rates are mostly firming against the US dollar, commodity prices are mostly rising, demand is being held back by concerns about disposable incomes, low interest rates are failing to stimulate demand for investment capital and rates of recovery are hesitant in most Western countries.

Zimbabwe, as a commodity-exporting country, would be in a good position to earn more from its exports of minerals and agricultural commodities if only it had not compromised its ability to produce them. The most damaging of the policy choices started when the country forfeited the bulk of its agricultural export earnings by forcing the closure of large-scale commercial farms.

One of the consequences of this political move was that the country was forced to become dependent on food imports. Another was that the lost revenues made impossible the continuing investment and maintenance of the services infrastructure.

The combined effects of lost agricultural earnings and failing deliveries of electricity and transport services, plus the disappearance of the nation’s savings, generated problems for every other sector. In mining, they forced mineral production volumes to falter or fail and much more would have been invested in gold and platinum mining if external finance had been more readily available. Manufacturing output also declined dramatically and apart from lost foreign revenues, the many other knock-on effects included shortages, job losses and much lower tax revenues for government.

All of these are now impacting on Zimbabwe’s ability to take advantage of the higher prices being offered for the commodities it exports. However, those it imports are now costing more. Crude oil prices have increased by about 20% in the past six months and basic foods have increased by about 30% in the same period.

Zimbabwe’s essential imported requirements are now even more sharply depleting the funds needed to do maintenance on the power stations, the railway and telecommunications networks or to restore capacity in Air Zimbabwe. However, the policies that inflicted damage on the country’s capacity to produce export revenues are not being addressed. Instead, government appears to have deliberately tried to make the country less attractive to the investors whose knowledge and funds might have helped.

Most of Zimbabwe’s exports are paid for in US dollars, but a high percentage of consumer goods imports are priced in rand. The stronger rand has increased the number of US dollars needed to pay for the imports.

With fuel and food prices now increasing, the strengthening rand is adding further to Zimbabwe’s procurement costs and therefore causing some concern on the inflation front.

The relative strength of the rand has become evident even against the euro and the pound, as this graph shows. Its origins appear to be related mainly to the strong capital account flows to South Africa in response to the higher interest rates being offered as well as the perceived economic stability of the country. If interest rates were to rise in Europe or the United States, some of these funds might be moved away from South Africa and cause the rand to weaken. However, given the depth of the recession affecting western countries, there is little prospect of significant change in the first half of 2011.

Inflation in Zimbabwe is likely to react to the higher fuel prices, but this is thought to become a serious issue only if consumers are affected by fuel shortages. Labour cost increases appear to be a more serious threat as many manufacturers will be trying to pass onto consumers the higher production costs that result from excessive wage awards.

However, as shoppers now have the choice of many imported consumer goods, local manufacturers who add rising labour costs to their prices might find retailers no longer offering to carry their lines. For all local producers, the higher wages being demanded will be affordable only if productivity and efficiency levels improve.

Before May 2010, the year-on-year Consumer Price Index trends were affected by the steep falls in prices in the first half of 2009, and these caused the year-on-year gaps to become temporarily exaggerated. The July to November figures saw the figures reach levels more appropriate to Zimbabwe’s use of a relatively hard currency.

In this graph, the annual rates of change are shown as the gaps between the monthly CPI figures in 2010 and the figures for the same months in 2009. The dips seen against September and November 2009 caused the year-on-year figures for September and November 2010 to rise to 4,2%.

The yet to be released year-on-year figure for December 2010 seems likely to be close to 4% and in the forecast shown in the following table, inflation estimates have been based on monthly price increased of between 0,2% and 0,5% a month through 2011. If averages of this order are achieved, the annual figures will decline to figures below 3% during the first half of this year, but would trend above 4% in the second half of 2011.

If the rates shown in the table are achieved, only by the end of 2011 is the index expected to reach its re-based starting point of December 2008=100.

However, the forecast shown could easily be affected by uncertainties that relate mainly to local production costs and to the exchange rate of the rand against the US dollar.

However, the rising costs of locally produced goods might not move the Consumer Price Index very much as shoppers can now so easily choose to buy imported goods. For this reason, current demands for higher wages are directly threatening the viability of local suppliers.

Pay awards already negotiated, some back-dated, have placed many local manufacturers at a disadvantage in their efforts to compete against South African and Far Eastern suppliers, and decisions to reduce the import duties on many imported goods, particularly clothing and footwear, have further undermined many companies’ prospects of survival.

Employers accept that, while low labour productivity makes the higher wage levels even more unaffordable, in many cases the disappointing productivity is not the fault of the employees. Frequent power cuts severely reduce efficiency and skills shortages cause time losses and the wastage of materials. These can add considerably to production costs, but when employers also have to contend with outdated manufacturing processes and the need to import industrial materials and packaging that used to be produced locally, their prospects of regaining ground lost to foreign suppliers are further affected.

However, other handicaps are also contributing to local producers’ problems, many of which relate to very high finance charges and limited access to loan capital. Borrowings are often confined to short-term industrial material purchases and working capital, when long-term capital is needed.

Most equity or longer-term development capital inflows have to be sourced from abroad, but remain beyond the reach of many companies because of the severely discouraging effect of the indigenisation laws on their ability to attract investor interest.

Recent international currency market developments, the main feature of which has been a fall in the value of the US dollar against most of the rest, have kept the rand exchange rate strong enough for it to be a source of speculation on whether South African Reserve Bank intervention might result.

So far, the South African Reserve Bank has remained adamant that the rand rate should be totally market related and this appears to have increased the attractiveness of the South African capital market.

In the year from September 2009, the rand remained close to an average of R7,50 to the US dollar, but by the end of September it had moved to R6,96 to the US dollar. By January 4 2011, it had strengthened to R6,64.

Zimbabwe’s use of relatively stable currencies in place of the collapsing Zimbabwe dollar is the factor most often cited in the descriptions of the country’s improved circumstances since early 2009. The subsequent period of reasonably stable prices, plus the removal of price controls and most exchange controls, certainly assisted the commercial sector to respond enthusiastically and brought an end to shortages, black market prices and a wide range of informal trading activities.

On the political front, the signing of an agreement to form the Government of National Unity further encouraged the population. Hopes were expressed that the unity accord would lead to inflows of investment funds as well as budget and balance of payments support from abroad. However, progress has been slow, in political as well as economic terms, even though the steps needed to place the country onto a more rapid economic recovery would not have been difficult to take.

Given its well-educated population and its resource base, Zimbabwe’s economic potential remained remarkable, but the reasons why the needed steps were not taken are very much more political than economic.

Zimbabwe’s past performance and the resilience of its population amount to convincing proof that if the political barriers could be overcome, the adoption and implementation of effective economic policies would quickly transform the business outlook. The policy changes needed would have only had to target some of the more damaging effects of recent political choices and very nearly all of the needed revisions would have involved nothing more complicated than applied common sense. At the start of 2011, they remain eagerly awaited.

If Zimbabwe were to choose forward-looking policies that showed commitment to rebuilding an attractive investment climate and to restoring the services infrastructure, experts could be invited to make estimates of the time and funding that would be needed to rebuild capacity in each of the essential public utilities and services. The same forward-looking policies would then bring within Zimbabwe’s reach the necessary funding and make contracting companies keen to compete for contracts to carry out the work.

The following percentage contributions, US dollar production values and growth rates are derived from Gross Domestic Product figures reported in the Minister of Finance’s 2011 Budget documentation.

Agriculture was able to show a few improved output levels in 2010, particularly for tobacco, but food production volumes have remained so low that a large proportion of the rural population is currently in need of assistance from the World Food Programme and other aid agencies. However, new ventures include extensions to sugar production and plantations of jatropha trees, both of which are to assist with the production of bio-fuels.

Funding constraints affected the level of commitment from most of the resettlement farmers who were allocated land following upon the Land Reform Programme. As a result, most of this land has remained unproductive since it was taken from large-scale commercial farmers. Proposals to redraft lease agreements to make leases on the land tradable in the market and to make the documentation acceptable as bank collateral are expected to transform this sector in the coming years. The sector’s initial challenges are to restore Zimbabwe’s former food-sufficiency and to again become the country’s major earner of export revenue.

Mining has become Zimbabwe’s most rapidly developing productive sector. Substantial investment capital has been attracted into recently established platinum mines and several new gold mines are being opened. Also, a substantial coal-bed methane discovery is soon to be developed. With the recovery of existing gold mines and contributions from recent discoveries of diamonds, plus increasing platinum-group metal output, mining is set to become the origin of a significantly higher percentage of total GDP. The growth projections in the tables reflect this optimistic outlook.

Manufacturing in Zimbabwe is dominated by businesses established to add value to basic agricultural and mining commodities. Some of the more important agriculturally-based enterprises produce cotton lint, textiles, clothing, footwear, shredded and blended tobacco, while others produce timber products, refined sugar, milled cereals, edible oils, dairy products, canned foods, bakery products and confectionery.

If improvements in deliveries of basic commodities and other essential inputs are achieved, manufacturing is certain to respond, but the table shows a delayed recovery to allow for the time needed to overcome power limitations.

On the value-adding processing of minerals, Zimbabwe has capacity to manufacture ferrochrome, steel, nickel cathodes, cement and other building materials, phosphate fertilisers, coal-tar, glass and pottery products. The country produces for export black granite blocks, semi-processed graphite, magnesite and lithium. Also, the Reserve Bank runs a gold refinery. Depending on improvements to electricity supplies, all of these are poised for recovery and expansion.

Current manufacturing development projects include new sugar refining capacity and an ethanol plant. Future prospects include a base metal refinery to extract nickel, copper and cobalt from the smelter matte produced by the platinum mines. A separate precious metals refinery for the platinum group metals and gold is also to be built when the expanding volumes of concentrates makes the venture economically viable.

With the recovery of agriculture, many manufacturers who have lacked the dependable flows of inputs for their processing plants are expected to regain their positions in the local market. The shrinkages of raw material supplies in recent years forced most domestic consumers to source consumer goods from foreign suppliers, but Zimbabwe’s recovery of food self-sufficiency will restore local production and permit the country to save many hundreds of millions of dollars now being spent on imports.

Among those who were affected by policy changes were producers of textiles, clothing, footwear and many household goods, for whom supplies of inputs such as cotton, leather and timber came under threat. Further uncertainties came from rising local production costs and more aggressive foreign competition, all of which kept local producers at a disadvantage until Zimbabwe’s adoption of the US dollar.

This dollarisation placed cost calculations onto a firmer footing that helped some local producers of finished consumer goods to recover some of the ground lost to South Africa and the Far East. Further progress will be made as soon as local raw material suppliers fully restore production volumes and help rebuild the manufacturers’ chances of producing equally attractive goods at competitive prices. The more successful of these will be able to return to export markets, but all of them will contribute significantly to employment growth.

Despite the difficulties Zimbabwean producers have experienced, many productive enterprises have survived. However, most businesses are in need of recapitalisation and investor commitment, both of which are dependent on the emergence of more agreeable policies that will enhance business prospects and improve the country’s access to capital.

Government has only to adopt acceptable conditions to achieve the full re-engagement of the skills and resourcefulness of thousands of Zimbabweans and to place the country onto a sound recovery path.

Electricity and water constraints are receiving some attention, but the full recovery of all productive sectors is conditional upon funding being found for the substantial repairs and maintenance needed by Zimbabwe’s thermal and hydroelectric power stations and by its mainly municipal water treatment facilities. Equally urgent challenges are to build the additional capacity that is already needed for both electricity and water.

Construction activity in Zimbabwe has been the victim of financial constraints as well as confidence in the past decade. As inflation combined with negative interest rates to erode the value of savings and as the authorities gained control over the use of pension fund contributions, the sums needed could no longer be accumulated to fund property developments. Work on most of the projects already started came to a halt.

As a result, Zimbabwe now has a severe shortage of residential and commercial accommodation. However, uncertainties and imbalances in the market have held the market prices of existing premises at figures below current construction costs. This, together with the shortage of longer-term finance, has so far prevented a resurgence of construction activity.

However, on the first indications that political stability is being rebuilt, demand for the services of the larger contracting companies is expected to start gathering momentum as fast as plans can be completed and the municipalities’ planning departments can grant approvals. Reasonably high growth rates are expected to flow from the adoption of supportive policies and improving access to longer-term finance.

Finance and insurance bore the brunt of government’s need to capture funds to meet rising budget deficits while tax revenues were falling. Hyperinflation became an automatic consequence of government having to resort to printing money to cover its costs, but by legalising the adoption of the US dollar at the end of 2008, government was forced to accept the disciplines imposed on it by revenue and liquidity shortages.

With almost no access to local borrowings and very limited, highly conditional support from donor countries, government has been constrained by the cash budgeting limitations imposed by the country’s greatly reduced taxable incomes. While these limitations have been politically painful, they have helped overcome inflation and they have dramatically reduced government’s ability to involve itself in subsidy-dependent economic activities.

During the early 1990s, government made the decision to grant banking licences to a large number of local applicants. Many new commercial banks, merchant banks, discount houses and building societies were started, leading to vigorous growth in the sector and considerable competition for limited skills.

As the economy, at that time, was enjoying an upturn because of the improved access to capital that accompanied an IMF-funded Economic Structural Adjustment Programme, most of the new banks made reasonable progress in their first years and a number of them were able to easily meet their capital adequacy requirements after successful flotations on the Zimbabwe Stock Exchange.

When the economy began to shrink, the effects on the banks were at first disguised by the rising inflation that was a natural consequence of lost of export revenues and the lengthening list of shortages affecting the economy. However, more banking licences were granted even after the economy’s difficulties had become obvious, so it was inevitable that many would soon face difficulties.

By June 2004, Zimbabwe had 16 commercial banks, six merchant banks, five building societies, nine discount houses and five finance houses. But by then, of the total of 41 institutions, five were under curatorship, two under liquidation and four were in receipt of assistance from the Reserve Bank’s Troubled Bank Fund.

By June 2010, the count was 15 commercial banks, five merchant banks, four building societies, no discount houses and no finance houses. Of the total of 24 surviving institutions, only 17 were in compliance with the prescribed minimum paid-up capital requirements. They had until December 31 2010 to raise the necessary funds. The hopes are that several mergers will bring the total number to a figure more in line with the size of the Zimbabwe economy, but growth rates for this sector are expected to remain modest in the immediate future. The outcome of this exercise has yet to be published.

However, the financial sector has a critically important part to play in Zimbabwe’s efforts to achieve a recovery. In response to improving conditions, the various business sectors could be relied upon to make their own plans to rebuild productive capacity, but as all of these would also need finance, a major part of the challenge facing Zimbabwe is the need to commit authorities as well as investors to the task of rebuilding confidence among local and foreign investors, funding institutions and international bankers.

Distribution, hotels and restaurant activity saw the most startling of the improvements when hyperinflation, price and exchange controls gave way to the use of US dollars and the abandoning of most controls. The restocking of shops throughout the country transformed the wholesale and retail environment and as improving supplies led to fierce competition among retailers, prices came down and black markets disappeared.

Revenues improved for all of the service industries and tourists numbers started to recover. This Zimbabwe Tourism Authority table shows that almost all the 2009 tourism statistics were improvements on the 2008 figures.

In the GDP table, projections of modest growth are shown for these areas as the principal limiting influences will remain the pace of recovery in disposable incomes and employment.

Transport and communication services suffered a serious loss of local business as a result of the declines recorded in agricultural, mining and manufacturing production, but the forecast improvements in all of these, plus the recovery of business from competing South African carriers, suggests the possibility of above average growth rates for this sector.

With regard to the state-run enterprises, Air Zimbabwe and National Railways of Zimbabwe, major recapitalisation challenges confront the authorities and the required funding will best be arranged on the strength of evidence derived from improved investment policies.

Education and health services have shown considerable improvements during the period since the formation of the Government of National Unity. Hospitals, clinics, schools and universities have all received increased funding and progress has been made in recovering from the loss of trained staff as many migrants have returned to the country.

Expenditures in social services have been more actively supported by aid agencies and donor countries than have other sectors. This assistance is expected to continue, particularly if Constitutional changes help Zimbabwe qualify to be taken more seriously.

In more general terms, business responses to improving conditions can all be relied upon to quickly translate into plans that will rebuild productive capacity.

As all of these will need access to reasonably priced finance, a major part of the challenge facing Zimbabwe is to rebuild the confidence needed among local and foreign investors, funding institutions and international bankers.

To be considered to be deserving of investor confidence as well as the assistance of the major banks, Zimbabwe has only to accept the need to make entirely appropriate and logical policy changes.

As successful measures would soon lead to improving export revenues, and to savings on imports as food security improves, any progress would increase the country’s prospects of honouring debt obligations and would therefore improve its chances of floating syndicated long-term loan stock issues on international capital markets.

Support for these fund-raising efforts should quickly gather momentum once the first signs of success have become evident. As some of the challenges might best be dealt with by arranging for the privatisation of certain parastatal organisations, this success would enhance the acceptability of correctly drafted prospectuses and Zimbabwe’s recovery plans would soon benefit from much more receptive market responses.

While many projects might require work to be put out to international tender to meet the requirements of funding organisations or donor countries, for other challenges the main concern might be to simply attract back to the country the skilled personnel who have left. They too will respond more willingly once evidence of improvements has begun to emerge.

Plans that covered this ground would no doubt leave further political problems in need of solutions. Government should hold to its commitment to give all of these the special attention they deserve. However, by ring-fencing the reconstruction efforts, Zimbabwe should adopt strategies that will keep the separate and distinct requirements for a recovery on track.

It could best achieve this by ensuring that the selected solutions, most of which relate to historical imbalances, would be forward-looking and carefully structured to provide for the rapidly expanding needs of Zimbabwe’s growing population and its even faster growing aspirations.

Today, Zimbabwe’s challenge is to restore the market mechanisms – financial and institutional as well as infrastructural – that will permit the acceleration of local development and attract the inflows of new technologies that will keep Zimbabwe abreast of the world’s rapidly changing markets.

And today, most Zimbabweans are more than ready to accept that the contributions of the business sectors should be nurtured and cultivated in ways that will help its business sectors to keep pace in the same demanding and competitive world markets.

These contributions from business, whether in the form of jobs, incomes, products, exports and tax revenues, or whether as the basis of training, career development plans and social stability, are now better understood and appreciated than at any time in the country’s history.
John Robertson

1 comment: