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In its recent World Economic Outlook (WEO) report dubbed, “Too Slow for Too Long”, the IMF bemoaned the weak economic recovery from the global financial crises. The biggest worry at the moment is that, as previously predicted by Pimco, a US hedge fund, this trend may persist for a long time into the future. The WEO forecasts a slower global growth of 3,2 percent for 2016, which is a 0,2 percent downward revision from its previous forecast.Growth in advanced economies is projected to remain modest at about 2 percent. While emerging markets and developing economies will still account for the lion’s share of world growth in 2016, their growth is projected to increase modestly — relative to 2015 — to 4,1 percent this year.

Diminished growth prospects are forecast in many African and low-income nations due to the unfavourable global environment. Sub Saharan Africa is projected to grow at a slower pace of 3 percent. Weaker global economic outlook coupled with deep seated structural challenges characterising our economy will undoubtedly pose serious downside risk to economic recovery in Zimbabwe.

There is therefore need for policy makers and the generality of Zimbabweans alike to be honest about the challenges we face as a nation and confront them head-on so as to deliver our economy from the shackles of economic decay.

Slower global economic recovery, especially the modest growth of the Chinese economy, has had negative ramifications on the commodity dependent Zimbabwe economy. Global demand for commodities is going to remain depressed as China, which is the world’s largest consumer of commodities,slows down on account of economic rebalancing.

Rebalancing of the Chinese economy will take the form of reduced reliance on investment and exports towards increased reliance on domestic demand. This is going to hurt the demand for commodities and thus create an environment of depressed global commodities prices.

With more than 80 percent of the country’s exports contributed by five commodities namely tobacco, gold, platinum, ferrochrome and diamonds, Zimbabwe economy is more susceptible to global commodities price volatilities. This, coupled with structural weaknesses in the economy typified with domestic and external imbalances will weigh down on economic recovery in Zimbabwe.

With consumption levels of more than 80 percent of GDP against historic low production levels, the country is unhealthily dependent on imports. The contractionary effects of these imbalances will continue to take toll on the economy in the short to medium term.

This coupled with the financial sector turbulence in the first half of the year and the debilitating effects of drought pose serious risk to economic recovery. Growth is most probably going to be lower than the projected level of 1,5 percent in 2016. A growth rate of 1,1 percent or slightly lower is most likely.

Brexit impact . . .

At the moment it is difficult to quantify the overall macroeconomic impact of Brexit on Britain, Europe and the whole world as there are a number of both political and economic factors at play that need to be fully understood before more accurate projections can be made. It seems what is most politically beneficial for Britain, in terms of policy independence, is also most damaging economically.

The impact of Brexit will certainly depend, to a greater extend, on Britain’s relationship with the European Union. However, in the short run, we shall see the both the money and stock markets react to Brexit given the European Union’s economic influence.

A number of emerging market currencies, which largely trade with the European Union, have started witnessing some route in their currencies. Even the global stock markets have started to react. Zimbabwe will definitely feel the short run impact of Brexit due to its huge dependence with external World and due to dollarisation.

Nod from Bretton

Woods . . .

Despite all the challenges that our economy is facing, it is encouraging to note that the IMF has commended Zimbabwe on its progress towards meeting the economic and structural benchmarks under the Staff Monitored Programme (SMP),together with its arrear clearance strategy to International Financial Institutions (IFIs) under the Lima agreement.

This progress will set the stage for sustainable economic growth, while also making the economy more resilient to economic shocks. However, the journey towards economic transformation will be painful and involves a lot of sacrifice. The case of China who started undertaking economic reforms in the late 70s but only began to realise meaningful benefits from this transformation in the early 90s is telling.

For instance, under the IMF staff monitored programme the Government needs to reduce its wage bill from the current percent to 40 percent so that a meaningful amount of budget is devoted towards capital expenditures.

However, the Government has limited options to meaningfully reduce its wage bill without considering unpopular route of retrenching.

Suffice to mention that retrenchments are unpalatable with the high level of unemployment and the informal sector in Zimbabwe. That is why the Government is not comfortable with laying off its labour force.

. . . despite bloated Civil Service Bill

Given the budget constraints in Zimbabwe, payment of civil servants wages will continue to be a big source of headache to the Government at least in the short to medium term. Civil servants would have to contend with delays in wage payments or even wage cuts.

Also, the blitz on tax payers, which has been sustaining the Government, may no longer remain a viable approach due to its proverbial effect of killing the goose that lays the eggs. Very soon we shall see the tax man intensifying his tax collection efforts into the informal sector where an estimated $7 billion is circulating.

Informal sector blues

But the informal sector may not be a sustainable source of tax revenue as a number of players in this sector are heavily depended on imports of non-essential commodities, which rank low on the foreign payments priority list that was recently introduced as one of monetary policy measures to deal with cash shortages in the country.

This together with the imposition of the maximum amount of money that can be carried out of the country of US$1 000 per trip will make it very difficult for a number informal sector players to continue doing business in Zimbabwe.

Welcome back black market

Given size of the informal sector in Zimbabwe, we are likely to see growth of the black market for cash and foreign payments as most informal sector players try to minimise the severity of the impact of cash rationalisation and other monetary policy measures to deal with cash shortages in their businesses.

A number of businesses who now find it difficult to access cash due cash withdrawal limit and those who find it difficult to import products because they rank low on the foreign payments priority list may end up going into the black market otherwise they may be forced to unwind their business.

There is already a black market for foreign payments involving payments for goods and services from foreign countries in exchange for local payments at a price as high as 10 percent depending on whether it is cash or rtgs payments. The same applies to the black market for cash where it is being sold at a price as high as 10 percent.

This means for one to get a telegraphic transfer of say $100 000 done from a foreign country for importation of goods and services he needs to make a local payment of $110 000 under the rtgs system or an additional $5 000 (5 percent) if he is paying cash. Whilst there is a significant amount of foreign currency externalised into the offshore market, which can be used to support these black market activities, they may not last for a long time as the demand side may fail to cope with the cost involved in these transactions. There is no country that will survive on burning the US dollar. That was only possible with the Zim dollar and may not last in this dollarisation era. Never!! There is therefore need for Zimbabweans to move away from the Zim dollar quick bucks mentality sooner rather than later.

Economic Rebalance

If businesses try to increase prices of their products to cater for additional cost of importing the same, they are likely to face resistance from the already struggling market. In the end a number of informal sector businesses will die a natural death. This means reduced influx of non-essential commodities in the country which will temporarily relieve pressure on foreign payments. Going forward there will be serious need to rebalance the economy towards more production and exports by reducing consumption and imports of mainly non-essential products. This economic rebalance will take time due to limited financial resources needed to kick start serious production as the country is currently dis-saving and also due to constrained flow of foreign capital of all forms mainly FDI. This is why we should be honest about the challenges we face and confront them head on.

Plastic Money – the saviour?

In the projected economic environment there will be increased use of plastic money despite some earlier resistance from a number of economic players including farmers, retailers, doctors and medical aid societies. Businesses should seriously consider investing in plastic money as they risk losing money to competition by insisting on cash. RBZ should also seriously consider infrastructure sharing by directing banks to pull their resources together and invest in efficient infrastructure which support the use of plastic money mainly Point Of Sale (POS) machines. However, whilst acknowledging that infrastructure sharing is the way to go, there is little precious action taken in this regard. A number of banks are still running with their individual projects on POS machines and other attendant infrastructure.

With increased use of plastic money we shall see a significant reduction in demand for physical cash and there may not even be need to introduce the bond notes. We will wait to hear on this issue from the Minister of Finance when he announces his mid-term term fiscal policy statement recently.

Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can use my email address [email protected] or WhatsApp me on +263 773 030 691.