Not all gloom and doom post Covid-19

24 May, 2020 - 00:05 0 Views
Not all gloom and doom post Covid-19

The Sunday Mail

Cornelius Dube

THE coronavirus pandemic has affected lifestyles and daily routines, hence needs no introduction anymore.

However, what is not quite apparent is the implication it has on the world economy. Zimbabwe has been equally affected, being part of the global value and supply chains.

While economies worldwide have been hit hard and will continue to be affected, the level of impact will differ from country to country, depending on the level of localisation of production and consumption in the overall global supply and value chains.

Thus, the extent to which its impact on the Zimbabwean economy can be minimised will depend on the speed of transformation towards self-dependency during the pandemic.

Impact of Covid-19

The negative impact that the Covid-19 crisis is going to have on the economy has been constantly discussed on various platforms in Zimbabwe since March 2020 or even earlier.

However, what will remain the subject of speculation is an estimate of the actual level by which the economy is expected to contract.

First, the country’s Gross Domestic Product (GDP) is a reflection of aggregate demand in the economy, for which consumption is the greatest component.

Given that the Zimbabwean economy is highly informalised and the informal sector has been “locked down” for a long time, there will be suppressed demand for products due to reduced income flows.

The lockdowns in the diaspora also limit the inflow of remittances, which are a substantial determinant of aggregate demand.

This means that even if industry were to increase production, the dwindling income is likely to cause a shift in demand and spending patterns towards essentials and basic commodities compared to non-essentials.

Secondly, the level of GDP is a reflection of the performance of different sectors of the economy.

These sectors do not contribute equally to GDP, as some sectors have a higher weight than others, meaning that a shock in some sectors would have a higher effect on GDP than others.

The weighting is based on regular national surveys by ZimStat (Zimbabwe National Statistics Agency).

For example, the largest weight by sector is the distribution, hotels and restaurants, with a weight of 17,9 percent, followed by manufacturing (14,1 percent); agriculture, hunting and fishing (8,1 percent); transport and communication (7,9 percent); education (7,8 percent); public administration (7,5 percent); finance and insurance (6,6 percent), and mining and quarrying (6,3 percent).

However, there are also inter-sectoral dependences, for instance, the agriculture sector output probably drives the distribution, hotels and restaurants as well as manufacturing sectors.

Thus, by taking into account the multipliers, some sectors end up contributing more. However, about three-quarters of the local economy can be explained by the developments taking place in these eight economic segments.

The sector with the highest weight has been directly affected by the Covid-19, with hotels virtually closed and many operating at zero bed occupancy.

In addition, conferencing, which is a significant income earner for hotels, is also off now, with virtual methods now being used.

The distribution sector and restaurants are also affected by the slow businesses. Transport has been seriously affected, with the passenger transport business, including road, rail and air, being severely affected by restrictions in movements of people.

The communication sector is probably not as greatly affected as others given that working from home has increased traffic for all critical aspects of communication.

Manufacturing was already struggling before the advent of the pandemic and is expected to further decline as supply chains have been disrupted, while the reduced aggregate demand means that production of non-essentials has to be curtailed.

Agriculture was adversely affected by limited rainfall patterns in the 2019/20 season, thus can only recover in 2021 if a good rainfall season is realised.

Mining is only going to be affected by reduced activities in value-adding industries, which will also have an impact on the mineral prices.

However, the impact on the mining industry is likely to be lower compared to other sectors of the economy.

What this means, therefore, is that the sectors that contribute more to GDP are affected more while those whose contribution is lower such as mining, finance and insurance are less affected.

Thus, unless there is a quick restart of economic activities across the world, the real GDP for Zimbabwe is likely to fall by about 20,8 percent.

The high inflationary environment will still give a higher nominal value of GDP than in 2019, although the decline will still be very pronounced in real GDP or in US dollar denominated GDP terms.

Is the $18 billion stimulus package enough?

Cognisant of the impact of the Covid-19 pandemic on the economy, Government unveiled an $18 billion stimulus package on May 1, 2020 to provide relief to individuals and businesses in the face of lockdown-induced effects of the pandemic.

There have been a lot of discussions concerning the adequacy of the package.

Contrary to popular belief, this package has not been, and will not be, “given” to businesses, but it will be a loan which business has to demonstrate a business case before getting.

There have been cases before where packages of this nature were given either to less viable business ideas or based on misrepresentations aimed at diverting the resources to other luxuries.

One argument that banks have been making is that there is no shortage of loanable funds in Zimbabwe, but what is in short supply are bankable projects.

In other words, banks have always been ready to lend out money provided business comes up with bankable ideas.

Thus, until this package has been exhausted, I will remain convinced that it is more than adequate to meet creditworthy applications that have been adequately screened to ensure that resources are not just thrown down the drain.

It is not likely though that there will be adequate capacity to absorb the entire package, unless the approach used does not take into account risk factors.

Stimulating business

post-pandemic

It is, however, not all gloom and doom.

There are still a lot of opportunities to ensure that business bounces back stronger after the pandemic.

What is critical is identifying opportunities, especially for agriculture and manufacturing.

The tourism sector can exploit its natural advantages, taking comfort in that all competing markets are currently closed.

Once the lockdown is ended, Zimbabwe has adequate marketing platforms and institutions to ensure that all tourist destinations in the country compete equally for patronage.

However, it is the agriculture and manufacturing sectors that need to strategise carefully and close gaps left by reduced imports.

A few examples might help, using ZimStat imports data for 2018 and 2019.

A total of about US$36 million left the country in return for milk and milk products (cheese, curd, cream etcetera).

About US$9 million crossed the border in exchange for potatoes while US$7 million went out of the country in search of groundnuts.

In addition, demand for leguminous vegetables (peas, beans etcetera) to the tune of about US$10 million had to be satisfied from beyond the border.

About US$159 million was enjoyed by producers of wheat that are outside our borders, and growers of soyabean outside our borders were happy to pocket about US$16 million from Zimbabwe.

Despite being a livestock producing country, we could not prevent about US$3 million going outside the border to look for hides, skins and leather.

This, therefore, means that we have more than enough opportunities for import substitution, and the Government’s stimulus package that is biased towards the agriculture sector can be the avenue to exploit these advantages.

The same opportunities for import substitution are also awash in the manufacturing sector.

Government availed resources to the tune of $2,5 billion as a working capital fund, which the manufacturing sector can tap into.

It should be a worry that some businesses outside the border enjoyed about US$3,9 million from Zimbabwe just because they extracted saps and other materials from vegetables.

Some producers of solid sugars, sugar syrups, artificial honey and caramel out there were able to take US$8,5 million from this economy.

Suppliers of various wood and wood products, including plywood, fibreboard, pallets and packing cases outside our borders were also able to take foreign currency to the tune of about US$41 million from this economy.

Now, under this lockdown, Zimbabwe’s industry should seriously consider upping its game to pocket all these resources that are leaving our borders.

All eyes should now be on import substitution.

The low-hanging fruits are the products which are sapping foreign currency but can be manufactured locally, including by the informal sector.

The disadvantage the country had was a disorganised informal sector whose main focus appeared to be more on illegalities (avoiding taxes and smuggling products) than visibility and growth.

Thus, priority going forward should be on ensuring that the informal sector becomes part of the value and supply chain linkages.

This will ensure the informal sector grows as its share in value created expands.

 

Cornelius Dube is an economist. He holds a Masters degree in Economics and has more than 16 years experience in economic policy research and analysis.

 

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