Zimbabwe’s economy deteriorates: Analysts
OLD Mutual Securities (OMSEC) has indicated that the country’s economy continues to slide due to weak aggregate demand caused by increasing joblessness, low disposable incomes, tight liquidity conditions and an overregulated business environment.
The situation was such that there was very little prospect of recovery.
In its latest report released last week, OMSEC, part of Zimbabwe’s leading financial services group, Old Mutual, a unit of the London Stock Exchange-listed global conglomerate, Old Mutual Plc, also highlighted that the economy remained subdued due to policy uncertainty and inconsistency, poor export competitiveness, high production and borrowing costs, corruption and poor institutional integrity.
OMSEC said: “We maintain our view that in order for Zimbabwe to improve its economic fortunes, a number of excessive legislation governing business operations and red tape needs to be simplified.”
Zimbabwe is experiencing a surge in joblessness, which has forced many people to resort to the informal sector.
At least 94,5 percent of Zimbabweans are said to be informally employed.
This has resulted in government’s revenue base dwindling, eroded largely by a shrinking economy battered by company closures and job losses.
The majority of companies still in operation are on the verge of collapse.
A significant number of companies have closed — largely because of bankruptcies — rendering thousands of workers jobless and adversely affecting revenue collection.
The revenue collection situation is now so dire that government is no longer able to guarantee consistent public service salary dates.
It is currently struggling to pay monthly salaries for nearly 300 000 of its workforce.
Salary costs currently account for more than 80 percent of government expenditure, meaning that very little remains for crucial infrastructure development projects critical in turning around the economy.
The manufacturing sector, which contributed about 26,9 percent to the economy annually at its peak in 1992, is now a shadow of its former self, with contributions averaging 11,7 percent between 2009 and 2014.
Although industrial capacity utilisation, which had shrunk to less than 10 percent during the hyperinflationary crisis in 2008, had improved to 33 percent in 2009, 43,7 percent in 2010 and 57,2 percent in 2011, it started climbing down in 2012 to 44,2 percent, and has since maintained a downward trajectory, hitting 39,6 percent in 2013, 36,3 percent in 2014 and 34,3 percent last year.
This demonstrates the failure of the cash-strapped government and private sector efforts to arrest de-industrialisation, mainly due to the absence of affordable funding to bailout struggling companies.
Zimbabwe is one country out of many that has been devastated by corruption and OMSEC said more needed to be done to fight the scourge of corruption, which has taken a toll on the economy.
“Audit reports that were published by the auditor general, Mildred Chiri, have shown corporate failures and abuse of State funds in a number of key parastatals but with no high profile official yet to be convicted.
OMSEC said Zimbabwe also needed to address the issue of capital flight, apparently caused by poor investment policies and policy inconsistencies, and start aggressively encouraging foreign direct investment (FDI).
The country has been unable to access offshore funding due to arrears to multilateral financial institutions and other lenders.
Finance Minister, Patrick Chinamasa, is currently involved in efforts to clear the arrears with international financial institutions, and has recently travelled to Europe to persuade Western countries to rethink their punitive measures against Zimbabwe.
He is desperate to woo new capital and access cheap lines of credit from offshore sources to kick-start economic revival efforts.
The country last year tabled proposals to clear US$1,8 billion in arrears to the World Bank (WB), International Monetary Fund (IMF) and the African Development Bank (AfDB), to pave way for new funding.
The arrears clearance plan entailed Zimbabwe clearing arrears to the IMF amounting to US$110 million, WB (US$1,15 billion) and AfDB (US$601 million) by the end of April this year.
But OMSEC said it feared any new funding that could come out of current efforts could be used for recurring expenditure by government, a situation that would result in failure to turnaround the economy.
“We are concerned with the potential for the funding to be used for recurring government expenditure related to salaries and operating expenses which are currently more than the government’s tax receipts as shown by the government’s inability to pay civil servants on time,” OMSEC said in the report.
The report also highlighted that the harsh economic conditions had resulted in listed companies continuing to maintain lacklustre performance.
The operating environment had also remained difficult, with most sectors on the local bourse experiencing shrinking revenue, thinner margins and poorer profitability.
Despite the industrial index recovering 3,5 percent during the second quarter of this year, OMSEC said it remained in the negative territory.
The recovery was largely underpinned by beverages giant, Delta, which recovered 19,1 percent during the period under review, “notwithstanding poorer revenue and profit performance from its latest results”.
“The Zimbabwe Stock Exchange (ZSE)’s main industrial index recovered 3,5 percent during the second quarter of the year but remains in the negative return territory over the last 12 months as it declined by 31,9 percent,” said OMSEC.
“The mining index added 26,5 percent during the quarter but is down 44,2 percent during the last 12 months.”
Underpinning the positive return during the second quarter of the year was the resources group RioZim’s share price growth in response to the mining company ramping up production through the re-opening of its gold mining unit, Cam and Motor in Kadoma, 50 years after the mine ceased operations; re-negotiating expensive borrowings and narrowing its losses significantly.
The report also revealed that the total value of shares traded on the ZSE in the second quarter of this year was at US$46 million compared to US$67 million traded in the second quarter of 2015.
During the first quarter of 2015, foreign investors were net buyers but were net sellers during the second quarter as they disinvested a total of US$7 million.
Economist, Christopher Mugaga, who is also the chief executive officer of the Zimbabwe National Chamber of Commerce, said the country’s economic fortunes were worsening.
He said this could eventually plunge the country into contraction, worsening the country’s economic woes.
Speaking at the Institute of Chartered Accountants of Zimbabwe’s Winter School held in the resort town of Victoria Falls last week, Mugaga told the Financial Gazette: “Zimbabwe’s current economic crisis is the second worst since independence after the hyperinflationary meltdown (during the decade to 2008).
“We have seen per capita incomes declining in 2015 and (they) will likely fall further this year. More importantly is the yawning gap between the never-realistic Zim-Asset projections and those in the budget strategy paper. Even the public statements of Minister Chinamasa could turn out to be overly optimistic, as the slide suggests.
“Zimbabwe is headed in the reverse direction, as we have structural regression in the form of de-industrialisation and the shift from modern formal economy to an increasingly low-technology productivity and informal one.
He said the one common threat to the country’s growth was the use of the firming United States dollar.
“Other than the US dollar you look at politics which is quite damaging to business. We see pronouncements which leave the market jittery, resulting in investors taking long-term positions to avoid this market. We also see a central bank involving itself in quasi fiscal activities. This is going to dent the economy’s recovery. You also look at corruption which costs the country between US$2,5 billion and US$3 billion annually on average; this is also quite damaging,” said Mugaga.
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