Back to Index

Zim should brace for the worst
Dumisani Ndlela, Financial Gazette (Zimbabwe)
December 06, 2007

http://www.fingaz.co.zw/story.aspx?stid=1782

ZIMBABWEANS should next year brace for the worst crisis despite projections of an economic turnaround underpinned by a projected bumper harvest, analysts warned this week.

Indicating that the recession, now in its eighth year, had not yet bottomed out, analysts said the country should prepare for the worst experience in years as inflationary pressure was likely to intensify, further straining the defenceless domestic currency whose battering has been compounded by acute foreign currency shortages in the country.

Although the Central Statistical Office has not yet released inflation figures for October, reports indicate that year-on-year inflation for the month jumped to an all-time high of over 14 000 percent, and was likely to escalate further to end the year at nearly 20 000 percent.

Finance Minister Samuel Mumbengegwi last week indicated that the economy, which has contracted by a cumulative 40 percent since 2000, would grow by four percent in 2008 on anticipated growth in the agricultural sector, improved industrial performance and economic programmes by the grassroots, including the hard-pressed small and medium enterprises.

"This implies a nominal gross domestic product of $16 000 trillion and a decline in the end period inflation of 1 978 percent for 2008," Mumbengegwi said.

But analysts and economists discounted Mumbengegwi's optimistic projections, saying history had proved that despite huge cash injections for farming projects in the past, new farmers were doing very little on the land, instead diverting cheap funding from the central bank into speculative activities.

"Fundamentally, we're faced with a mammoth task in terms of turning around the economy," said economist, David Mupamhadzi, indicating that there were a number of structural constraints that hampered companies from increasing productivity.

The central bank unveiled a raft of measures, among them a foreign currency package to compel farmers into the fields, as well as cheap cash under the Agricultural Support and Productivity Enhancement Fund.

Banking on forecasts of a favourable rain season, the Reserve Bank governor Gideon Gono, who has complemented the financial packages with the distribution of high-tech farming machinery and implements, has dubbed the current farming season "the mother of all agricultural seasons".

But indications are that very little is being done on the ground, and the effect of a poor agricultural season will translate into poor productivity in industry.

Industry stopped producing last July after a government blitz that forced prices down by at least 50 percent, resulting in many manufacturing, distribution and retail companies picking up significant losses.

Gono recently unveiled another financial package to revive industrial operations and boost productivity, but nothing has so far come out of that bailout facility.

There have been reports that the cheap funds for both agricultural and industrial production have been diverted to the stock market, which has experienced a phenomenal rally over the past few months. Apparently, the country would need huge foreign currency amounts to bolster industrial production.

Manufacturers say even with cheap funding from the central bank, they are unable to do much because critical raw materials would still need to be imported.

Productivity has suffered immeasurably from foreign currency shortages, which have hampered the importation of raw materials, spares and energy supplies.

The failure by manufacturers to source scarce foreign currency from the official market has driven them to the parallel market, where the exchange rate for the Zimbabwe dollar is significantly depreciated.

Indeed production costs have been regularly going up, mainly due to the diminishing value of the domestic currency, which has weakened against international currencies, as well as demand for higher wages and salaries. But companies have been unable to pass the higher production costs to consumers because of a rigid government pricing policy, resulting in a marked reluctance to produce.

"The key challenge has been the pricing framework. We need to create an environment that allows companies to produce," said Mupamhadzi.

Yet demand for almost all basic and non-basic commodities in the country remains very strong, but companies have scaled down production and are operating below capacity.

Inevitably, this effectively means people have to pay higher prices to get what they want because they are competing for few goods.

Should the demand-supply imbalances persist, Mupamhadzi warns, inflationary pressures will intensify. So far, nothing appears to be in place to level the scale.

Please credit www.kubatana.net if you make use of material from this website. This work is licensed under a Creative Commons License unless stated otherwise.

TOP