The Sunday Mail
AS I wish fellow Zimbabweans a happy and prosperous new year, I find it necessary to give a prognosis of the economy in 2024 and beyond.
Persistence Gwanyanya
This is especially important considering existential threats from geopolitical factors and the predicted El Niño-induced drought, which are expected to take a toll not only on Zimbabwe, but also the region, threatening the economic progress we have made so far.
Reflecting on the journey we have travelled since we embarked on reforms in October 2018 — under the auspices of Vision 2030, which is being championed by the leadership of President Mnangagwa — it appears we would have done much better as an economy had it not been for exogenous factors, which we have little or no control over.
In a space of five years, we have experienced seven cyclones, including drought in some cases, with Covid-19 and the Russia-Ukraine war taking a toll on the economy in the last three years.
The damage to infrastructure, lives and the economy caused by Cyclone Idai in 2019 cannot be overemphasised.
These external factors happen at a time when the economy is struggling to deal with structural issues, which, with hindsight, policymakers and even the World Bank and the International Monetary Fund (IMF) seem to have underestimated.
Chief among these is the confidence crisis, whose origins can be traced to the hyper-inflationary era in 2008 to subsequent currency reforms that decimated the wealth and savings of both individuals and corporates.
Imagine how hard it is to convince a pensioner who lost their lifetime savings due to hyperinflation to believe in the Zimbabwe dollar again.
The same can be said about those who lost value due to both currency reforms and inflation. It is generally believed that financial crises tend to be more severe and last for a longer time than any other crisis.
For example, about a decade-and-a-half later, the global economy is still struggling to fully recover from 2008-2009 global financial crisis.
Similarly, owing to the hyperinflation experience of 1923, the propensity to hold cash in Germany is still high.
All these cases demonstrate the enormity of the task that lies ahead to remake our economy.
Clearly, it will take time to permanently cure the crisis of confidence.
However, well-communicated policies and a demonstrable will to transform the economy, especially by policymakers and politicians, could make it possible for Zimbabweans to hope and believe again.
Although the economy has grown by 12,3 percent on aggregate since 2018, notwithstanding the adverse impact of exogenous factors, more work is still needed to sustainably stabilise the economy.
Clearly, policymakers need to do more for Zimbabwe to trust and believe again, especially in our currency.
What makes that task even onerous this year are softening commodity prices on the global market, as well as prediction of an El Niño-induced drought.
After investing a lot of effort to restore stability in the second half of 2023, the re-emergence of instability in the last quarter of the year is quite concerning. While every last quarter of the year is traditionally our weakest in terms of stability (of course, due to demand and supply factors), the situation was exacerbated by softening global commodity prices, which affected our foreign currency inflows.
Platinum export receipts, which used to generate US$120 million-US$130 million per month, have fallen to US$70 million-US$80 million.
The World Bank reports that lithium prices declined from US$75 825 per tonne in February to US$23 870 per tonne in October 2023, while nickel prices softened from US$29 346 per tonne in January 2023 to US$18 100 per tonne in October 2023.
The standardisation of export surrender to 25 percent also affected inflows from artisanal and small-scale gold miners at a time gold prices have remained strong.
Unsurprisingly, we experienced the depreciation of our currency in the last quarter of the year. This dispels the commonly held belief that currency depreciation is always a reflection of recklessness with the printing press.
A volatile exchange rate always pushes up demand for US dollars as the market seeks to exit the Zimdollar at every opportunity.
This largely explains increased dollarisation, typified by reduction of the Zimdollar as a share of money supply to less than 20 percent. Policymakers need a deeper understanding of these dynamics going forward.
Mining and electricity generation
The prospects of the mining sector remain key to performance of the economy and stability in 2024 and beyond, as it contributes 85 percent of export revenue and less than 20 percent to the fiscus. The forecast of depressed commodity prices in the next two years means the possible drop in revenues will be counteracted by increased production.
Thankfully, there have been increased investments in the sector in the last five years.
More than US$1,5 billion was invested in mining, especially in platinum and lithium, in 2023 alone.
However, performance in the sector will depend on the electricity situation.
Currently, electricity supply and pricing remain key risks to performance.
But as 600 megawatts (MW) from Hwange Units 7 and 8 begin to be consistently fed to the grid in the first quarter of 2024, total generation is expected to increase to around 1 150MW, as Kariba Power Station continues to generate around 350MW, while Hwange Units 1 to 6 generate around 200MW.
Though power generation is still way below demand, initiatives by most mining companies to generate electricity -— mainly solar — for their own consumption are comforting.
However, these projects are expected to generate power after 2024.
Similarly, the planned refurbishment of Units 1 to 6 is unlikely to contribute to electricity generation this year.
Deserving special mention is the expected completion of the US$1,5 billion Dinson lron and Steel Company plant, which is expected to be the biggest in Africa.
It will be a game changer for Zimbabwe.
This energy-intensive project is commendably going to produce electricity for its own consumption.
Also, its potential to employ thousands of workers and reduce the steel import bill, as well as its contribution to the fiscus, are seen as reviving hopes for a better Zimbabwe.
Given the challenges currently facing the mining sector, any electricity tariff increase, though necessary, may severely affect the targeted growth of 7,6 percent for the sector.
The agriculture sector, whose progress has seen the country achieving food self-sufficiency, is being threatened by the projected El Niño-induced drought.
The weather phenomenon is likely to affect the whole of Southern Africa.
Treasury expects the agriculture sector to contract by 4,9 percent as a result.
A drought would occasion food imports at a time forex inflows are limited.
Going forward, the investment we have made in irrigation infrastructure, including drilling boreholes for the targeted 35 000 villages as well as massive investment on dams, is seen as mitigating against the effects of drought.
However, to guarantee national food security, there is need to expeditiously reach the targeted 350 000ha under irrigation, which would wean the country from rain-fed agriculture.
On the other hand, focus should be towards transforming the Pfumvudza/ Intwasa programme to become commercially viable so as to sustainably guarantee food security at household level.
But there are bright prospects in the buoyant tourism sector, which has been recovering at an encouraging pace. There is also scope to harness revenues from Diaspora remittances.
Infrastructure projects
It is encouraging that funding models for infrastructure projects are being re-evaluated.
As already indicated in the 2024 National Budget, priority is being given to complete projects underway.
Funding infrastructure projects from short-term sources will continue to pose risk to stability in 2024 and beyond.
Treasury has introduced a slew of taxes and hiked some to meet the needs of the economy at a time when revenue is expected to be severely constrained.
But it remains to be seen how Treasury will deal with proposed expenditures after it amended some tax proposals following an outcry from the market.
The wealth tax, for example, has been maintained at 1 percent but it now excludes the primary residence, with the minimum threshold now US$250 000, excluding liabilities.
It is only applicable to property owners below the age of 70 years.
It has also since been capped at US$50 000 per year. Ordinary and emergency passport fees, which were initially increased to US$200 and US$300 from US$120 and US$220, respectively, have now been reviewed to US$150 and US$250 in that order, with an additional fee of US$20 to all categories. This may mean a loss of potential revenue of US$12 million-US$15 million, assuming the number of passports issued per year remain unchanged at between 400 000 and 500 000 copies.
Even the proposed 150-200 percent increase in toll fees has been revised down to 100 percent for premium roads and an average of 50 percent for other roads.
For example, toll fees for light motor vehicles, which were initially expected to increase from US$2 to US$5 and US$4 on premium and other roads, respectively, have now been increased to US$4 and US$3.
Interesting is the sugar content tax of US$0,02/gramme, which is common in the region and the world but new to Zimbabwe.
This, together with increase in Strategic Reserve Levy by US$0,03 and US$0,05 for diesel and petrol, as well as limiting of VAT exemptions to imports, may drive inflation in the short term.
Overall, this shows our heavy dependence on taxes, as 95 percent of the budget is funded by taxes.
This makes the resuscitation of State-owned enterprises extremely urgent.
With Dr John Mangudya eventually assuming the helm at the Mutapa Investment Fund, which will assume shareholding of 20 key State-owned enterprises (SOEs), turnaround of these entities becomes possible.
Remember, Dr Mangudya has dealt with most State enterprises in one way or the other as a Governor of the Reserve Bank of Zimbabwe (RBZ).
SOEs used to contribute more than 40 percent to the fiscus but are now a drain to the same. On the currency front, as Dr John Mushayavanhu assumes the reins at the RBZ in May 2024, we expect continuity.
We, therefore, expect a sound de-dollarisation roadmap, which Dr Mushayavanhu and the monetary policy team are expected to holistically follow.
Dr Mushayavanhu is a principled administrator and his reputation precedes him.
While growth and stability risk remain elevated, there is still scope to steer the economy to the intended destination. There is definitely need to judiciously manage our financial resources. A spirit of hard, honest work and sacrifice will help us ride the tide.
Persistence Gwanyanya is an economist, chartered banker and member of the RBZ Monetary Policy Committee. He is also the founder and managing director of Bullion Group International. For feedback email: [email protected]
