OVER-production in the world oil industry, partly due to the shale oil revolution at a time of weak demand, has pushed prices to a new five-year low, which should be good for world economic growth. But the hoped-for one percent to 1,5 percent boost to global growth in 2015 will be diluted because demand, not just for oil, but across the board is weak. Even if it does, it will soon be countered by more restrictive monetary policies, first in the United States and then in Europe, which will undermine the lower oil price momentum.
For Zimbabwe, lower oil prices will knock at least seven percent — probably more, dependent on how prices evolve during 2015 — off the country’s import bill. Bizarrely, the government reckons that the country’s fuel import will still increase in 2015 but that along with some of the other budget projections, appears to be wide off the mark. The real downside for Zimbabwe is the close correlation between oil and other commodity prices, including precious metals.
Some of the balance-of-payments gains from weak oil could be wiped out by depressed prices for gold, diamonds, tobacco, platinum, nickel and ferrochrome. The official 3,2 percent growth forecast for 2015 as presented by Finance Minister, Patrick Chinamasa, in his 2015 National Budget (after 3.1 percent in 2014) does not look unreasonable at this stage, though some analysts argue that indicators such as dwindling government tax revenues and retail sales suggest that the economy actually declined in 2014 and this will continue in 2015.
They may be right but indicators that do not fully record the informal economy have proved misleading in the past. That at least must be what government is hoping. However, the discrepancy between published corporate turnover numbers and VAT receipts on the one hand and the officially-estimated 3.9 percent growth in the distribution sector needs to be explained. Growth in 2014 was driven by the 23 percent rebound in agricultural production following a poor season in 2012/13 when farm output declined 2,6 percent.
In 2014, manufacturing was hardest hit with a fall of almost five percent while mining output fell slightly (two percent).
2015 forecasts suggest a small recovery in manufacturing (+1,7 percent) and mining (3,1 percent), though this is difficult to believe given the weakness of commodity prices. Even harder to believe is the prediction of 4,7 percent growth in the distribution sector. With a New Zealand Meteorological Institute warning of a 75 percent chance of an El Nino drought in 2015, growth of three percent in agriculture looks problematic especially given the divergence of opinion about tobacco prospects.
The official forecast is for a tiny increase in the crop from 216 million to 222 million kilogrammes, but some in the growing industry and the tobacco trade reckon output could fall below 200 million kg, partly due to some reduction in the number of contracted growers. There is also a reported overhang of 30 million kg of unsold tobacco leaf that has been purchased but not exported which is likely to depress the price.
With the exception of the lower oil price, most of the forward indicators are to the downside suggesting that the three percent growth forecast could well turn out to be optimistic, especially since investment continues to be depressed and there is no reason to anticipate an early improvement in the domestic liquidity situation. The official forecast for negligible inflation (0,2 percent) in 2015 as the economy hovers on the brink of deflation also underlines the fragility of the growth forecast. In Zimbabwe’s current circumstances, there is little that policy-makers can do to kick-start growth, as is evident from the 2015 budget- crammed with details of public spending programmes but depressingly short of new ideas for financing them.
The real budget deficit, to be funded by foreign aid and proposed offshore borrowing, exceeds US$1 billion or seven percent of Gross Domestic Product (GDP). While the budget itself is fully funded, the US$1 billion in off-budget spending increases government’s share of GDP from the budget figure of 28 percent to 35 percent. In one respect this is a reprise of the early 2000s when finance ministers dutifully presented budgets with small deficits but with large, growing amounts of off-budget expenditures. Then, this spending was funded by quasi-fiscal activities financed by domestic and offshore borrowing as well as printing money.
This time, printing money is not an option, and there is precious little scope for domestic borrowing. But off-budget borrowing is still at work — witness the US$100 million to recapitalise the Reserve Bank of Zimbabwe, the US$40 million for coins and up to US$500 million for Zimbabwe Asset Management Corporation (Pvt) Ltd (ZAMCO), the special purpose vehicle to take over the bad loans of banks not to mention numerous other projects whose financing is yet to be “mobilised.” Some US$550 million will have to be borrowed offshore further worsening the already unsustainable foreign debt and balance-of-payments profiles.
Some of planned infrastructure spending will come from the “own resources” of financially-distressed parastatals, thereby raising doubts over their viability since it is unlikely that these entities will be able to borrow even under government guarantees.
On current trends, by the end of 2015 foreign debt will exceed 100 percent of GDP as a result of which GDP growth will slow further suggesting that the International Monetary Fund’s medium-term forecast to 2019 of average annual growth of four percent is realistic. There are however, some in the “tipping point” or “endgame” school who believe that economic conditions will force a change of policy direction well before then, possibly as early as 2015. For these analysts the key indicator is the state’s ability to pay civil service wages and pensions that will absorb over 80 percent of total revenues in 2015.
But in the light of recent budgets that prioritise such spending and actually reduce capital investment and operational budgets, this is unlikely to tip the scales in the manner some predict. In any event, anyone who thinks back to the hyperinflationary period knows just how difficult it was then to predict precisely when dollarisation would force the authorities to change course. In 2008/9 there were two routes out of the crisis — autonomous dollarisation by market players, not the authorities, and a government-in-waiting in the form of the MDC.
In 2015, neither of these two options remains on the table — there is no alternative government and no viable way of reversing dollarisation. So the policymakers are stuck in Dickensian Micawberism — Waiting for something to turn up. Precisely what form that something will take remains to be seen. Policymakers have put their faith in foreign investment and offshore borrowing, but the debt overhang weighs heavily on the latter option while modern FDI is driven by market size and/or proximity to major markets and access to rich natural resources.
Zimbabwe qualifies to some extent for natural resource availability, but sadly investment in the global mining industry has turned down in the face of sluggish demand, lower prices and excess capacity for some minerals. The Zimbabwe Agenda for Sustainable Socio-Economic Transformation(Zim-Asset) will only translate into a turnaround strategy with a massive increase in funding. Zimbabwe requires at least US$27 billion over five years to fund Zim-Asset with the bulk of the money earmarked for infrastructure projects.
But in the budget proper, there is a mere $341 million in investment spending to be “leveraged” with aid and foreign borrowing of a further US$1 billion. This leaves 95 percent of Zim-Asset to be funded in other “creative” ways in just four years. It’s a safe bet that is not going to happen and that Zim-Asset project targets as well as the six percent annual GDP growth projection will not be met.
In a recent report, labour NGO Ledriz estimated that Zimbabwe needs to create 140 000 new formal jobs a year. That is equivalent to an increase of more than 10 percent in employment which on past trends means a GDP growth rate of 20 percent, which is not on the cards. With the closure of over 4600 firms since 2011 and the loss of 55 000 formal jobs non-farm employment is no higher today than it was 30 years ago.
In 2012, it was officially estimated that two thirds of the population lived in poverty. Three years later this ratio must have risen while the proportion of the workforce without formal employment must be at least 75 percent. Between them, these two numbers illustrate the severe socio-economic crisis in the country. Because Zimbabwe over-consumes, under-saves and under-invests,it is forced to rely on foreigners and the Diaspora to stump up almost a quarter of GDP each year to keep the show on the road. This is not a viable long-run strategy and cannot continue for very much longer. — The Chartered Accountant/Tony Hawkins