The Sunday Mail
Professor Mthuli Ncube
THE economy is on a growth trajectory with Gross Domestic Product (GDP) projected to grow by 7,8 percent in 2021, attributed to a favourable rainfall season, higher international mineral commodity prices and a stable macro-economic environment.
We are witnessing strong performance in the external sector driven by exports and remittances.
The country exported goods worth US$2,2 billion during the first half of 2021 compared to US$1,9 billion exported in 2020 same period.
The strong external sector performance, coupled with a healthy fiscal position, as well as the relatively stable exchange rate and inflation, are evidence of the existence of strong macro-economic fundamentals.
This is buttressed by availability of foreign currency through the Auction System, notwithstanding the existing backlog, which the authorities are working flat-out to clear.
However, the exchange rate and inflation have become volatile lately. Nonetheless, authorities are aware of the factors causing the volatility, and are in the process of making policy adjustments in order to fix them.
Inflation developments
and outlook
Inflation has been generally declining since August 2020, underpinned by both tight fiscal and monetary stance, through conservative monetary reserve targeting and the introduction of the foreign exchange auction system which managed to stem money supply growth.
Year-on-year inflation for the month of October slightly increased to 54,5 percent from 51, 6 percent recorded in September, and 362, 6 percent recorded in January 2021.
The inflationary pressures are emanating from trade in foreign currency and its associated twin evil; that of parallel market benchmarking or indexation of prices of goods and services at parallel market exchange rates.
Exchange rate developments
The introduction of the foreign exchange auction in June 2020 has managed to stabilise the exchange rate, which, in turn, anchored inflation expectations.
Recently, we have noticed market activities which have caused widening of the premium. Both fiscal and monetary authorities working closely with key private sector players are putting measures to restore stability in the market.
The RBZ has since held meetings with business leaders and reached a number of concessions to deal with exchange rate instability on the black market and its potential negative effect on pricing and the welfare of the general citizenry. Notwithstanding the recent volatility, sound economic fundamentals are in place to support a stable exchange rate:
Strong foreign currency receipts, with more than US$6 billion having been received this year up to end of September, compared to US$4,4 billion received during the same period last year. Strong foreign currency receipts are reflected in the current account surplus of US$1 billion expected this year and FCA deposits around US$ 1,7 billion.
Money supply has remained under control with liquid financial assets in local currency equivalent to US$1 billion against foreign currency holdings of about US$ $4,5 billion, comprising: US$1,2 billion reserves under RBZ; US$1,7 billion FCA deposits in the banking sector; and an estimated US$1,5 billion circulating in the economy.
Manufacturing sector performance
Growth of the manufacturing sector was slightly reviewed downwards from initially projected 7 percent to 6,2 percent in 2021 following the Covid-19 national lockdown measures instituted towards the end of the second quarter to curtail the third wave, which led to production disruptions in the sector.
The sector is, however, benefiting from increased consumer disposable incomes as economic activity picks up driven by growth in agricultural output, infrastructure spending, and increased mining activity. Volume recoveries across most sub-sectors that include foodstuffs, drinks and tobacco and beverages and non-metallic mineral products have been realised so far, supported by a fairly stable economic environment as well as localisation of value chains. In 2022, the sector is projected to increase by 5,5 percent on account of ongoing investments and import substitution.
Manufacturing capacity utilisation is estimated to have increased from 47 percent in 2020 to around 56 percent by end of first half of 2021 and expected to end the year at 61 percent.
Auction system
The auction system has greatly helped the productive sector retool and source key raw materials. Over US$2 billion has been dispensed since the launch of the auction system in 2020, with most of the resources channelled towards raw materials, machinery and equipment.
However, there are delays in disbursements of foreign currency allotted at the auction system and this continues to affect the manufacturing sector. The Government is working on reducing the backlog.
Driving industrial transformation
GDP growth in recent years has been driven mainly by primary sectors, particularly agriculture and mining. Trade and wholesale took centre stage, but with minimum job creation opportunities.
Naturally, primary sectors do not offer decent jobs while mining is more capital intensive and uses less labour. Hence, there is a need to rethink growth by diversifying the economy and industrial transformation so as to achieve inclusive and sustainable growth.
The time for industrial transformation is now and industrialists are strategic partners in this development thrust through innovation, digital transformation of manufacturing/production, jobs and skills development and value creation processes.
The NDS1 prioritises moving the economy up the Value Chains and Structural Transformation, emphasising on: improving value addition of the whole economy: expanding the manufacturing base; increasing value of our exports; and improving value of minerals before exporting.
Secondary and tertiary industries create decent jobs and higher incomes hence the need to graduate our economy from primary industry to higher levels of productivity.
The Government believes in a private sector driven economy to the extent that the envisaged structural transformation of the economy should be led by private players. The Government’s role is to provide a conducive environment.
On the fiscal side, we are committed to manage public finances in a prudent manner so as not to destabilise the economy.
The Government is improving the doing business environment by eliminating unnecessary bureaucracy and providing necessary infrastructure to make local products competitive on the international market. Improving access to finance is key to the country’s re-industrialisation agenda.
The Government is doing this in a number of ways such as re-modelling the financial system so that it becomes more responsive and resilient (re-introduction of missing institutions), strengthening the banking sector through both regulation and support, deepening the capital markets (Victoria Falls Commodities Exchange will improve access to global capital for Zimbabwean and regional economic players).
Engagement and re-engagement — global investor road shows
We are creating a system of fiscal and monetary incentives anchored on driving new investment as well as increased production from current investment and actively promoting local as well as foreign direct investment. On the fiscal side, we are committed to manage public finances in a prudent manner so as not to de-stabilise the economy.
The Government has adopted a renewed focus on the Zimbabwe diaspora not just as a source of remittances, but we now acknowledge the role of the Zimbabwean diaspora in mobilising financial, material, as well as human capital resources which can be leveraged for sustained growth even beyond 2030.
Through fiscal discipline and smart partnerships, the Government is strengthening its capacity to invest in economic enablers plugging previously porous borders which impact both revenue collection and competitiveness of local industries.
Public Finances
The 2021 National Budget projected revenues of $390,8 billion, however, indications are that it will reach $495,01 billion (16,6 percent of GDP) by year-end.
The increase in revenue is largely on account of the performance of the following specific revenue heads: Corporate Income Tax; Tobacco Levy; Excise Duty; Value Added Tax; Intermediated Money Transfer Tax (IMTT) and Non-tax Revenue Expenditure.
The 2021 National Budget was premised on expenditures of $421,6 billion. However, to year-end, expenditures are now projected to reach $508,99 billion, taking account of employment costs, Covid-19 related expenditures, social benefits, grain procurement as well as infrastructure projects.
Fiscal balance
Fiscal balance to September stood at a deficit of $25,30 billion against a target of $23,57 billion.
To year-end, budget deficit is projected at $13, 96 billion (0, 5 percent of GDP).
Update on Covid-19
The country was not spared from this unprecedented world health emergence of our time. The impact of Covid-19 together with other macro-economic challenges has resulted in a decline in economic growth in 2020. However, the economy is now on a recovery path benefiting from the good 2020/21 farming season and vaccination programmes.
The drop in daily cases is encouraging, and the Government continues to campaign for adherence to the WHO guidelines as the vaccination programme is being rolled out, with a view to flatten the curve.
Brief on IMF Special
Drawing Rights
A general allocation to member states of Special Drawing Rights (SDRs) by the IMF equivalent to about US$650 billion became effective on August 23, 2021. In this regard, the country has received SDR 677,4 million from its quota, which is equivalent to US$960 million and is a huge stimulus to our economy.
The country has already developed a detailed plan on the usage of the SDRs, and the resources will be utilised over a span of three years.
Zimbabwe will prioritise the following expenditure areas: Social sectors (health and education), Agriculture (floriculture, blueberries, macadamia nuts, small-holder irrigation), Industry (cotton value addition, leather processing; pharmaceuticals; and other agro-processing), Infrastructure development (road construction, housing development, gold value addition centres) and Contingency (international reserves).
Conclusion
Despite the pandemic related disturbances, implementation of the NDS1 remains on course, following a favourable farming season, recovery in manufacturing sector and firming international commodity prices.
The Covid-19 response measures, coupled with the vaccination exercise currently underway globally and domestically, continue to give hope in sustaining the economic recovery.
SDR Allocation provides the economy a useful shot in the arm, and will help kick start a number of useful initiatives that will benefit industry.
Prof Ncube is the Minister of Finance and Economic Development. This write-up was drawn from extracts of a presentation he made at the Confederation of Zimbabwe Industries Congress in Harare on Thursday (CZI).
