Economy faces collapse

Economy faces collapse

A LEADING economic think tank this week warned that Zimbabwe’s economy may collapse if urgent steps were not taken to halt its fast paced deceleration, saying recent waves of upheavals had dampened growth prospects.

In the event that it survives blowbacks from serious policy missteps, Zimbabwe’s domestic product (GDP) would expand at a much slower pace than official projections, according to Africa Economic Development Strategies (AEDS).

“Retrenchments and insolvency amongst firms, which include banks, may result in economic collapse,” said Gift Mugano executive director at the think tank.

“Disparities between the official exchange rate and black-market rate pose serious risks of instability if not urgently addressed,” he said.

Some of the measures have now been reversed. But AEDS, which also advises the government and the Parliament of Zimbabwe, placed GDP growth at 2% this year, down from the 5,5% projected by the government in November.

Last month, the International Monetary Fund (IMF) placed Zim’s 2022 GDP growth at 3,5%. Mugano said the outlook was gloomy, with black market forex exchange rates set to hit US$1:ZW$1 500 by December, while the local unit will suffer huge setbacks on the official market.

The Zimbabwe dollar was this week trading at US$1:ZW$445 on the black market.

In a research paper titled: Unpacking the currency and exchange rate dynamics in Zimbabwe and future outlook’ Mugano, an Economics professor at several top regional universities including the University of Zimbabwe, said geopolitical tensions would also have a huge say on how Zimbabweans will live.

“In view of the foregoing, the 2022 economic outlook is gloomy,” Mugano said.

“Already the fuel price per barrel has risen to US$139 from US$90 and this has already been transmitted into the Zimbabwe economy. Russia controls over 70% of global fertilisers. Any disruption in the supply chain of fertilisers will be felt globally as well as in Zimbabwe since the country is a net importer,” he said.

“Food prices are expected to rise sharply because Russia is the biggest producer of wheat. For Zimbabwe, since the country is experiencing drought, this will feed into imported inflation,” he added.

Mugano said the 2021/2022 farming season had demonstrated that economic prospects were gloomy.

At least 40% of the agricultural output would be wiped out, he said.

He added that the new measures posed serious risks, which could manifest into US-dollar price hikes.

He said imports would mop up US dollar stocks, drive up trade deficits and trigger waves of exchange rate volatilities.

“These risks, combined, pose serious risks on the local currency. Put it differently, these risks will result in loss of foreign exchange, which will result in exchange rate spikes and surge in inflation, which will lead to currency erosion,” he said.

He said annual inflation would exceed 100% by June this year. In April, inflation raced to 96,4%, up from 72% the previous month, putting the 35% target forecasted by the central bank governor John Mangudya completely out of line.

“By June 2022, parallel market rates will shoot to above US$1:ZW$500 while official rates (interbank rates) are expected to be around $350 per US$1. Widening disparities between the official exchange rate and parallel market rates and sustained inflationary pressures to mid-2022 will result in the collapse of the auction system and full dollarisation,” he said.

“However, if for some reasons this scenario fails, which is unlikely, the following scenario will prevail: inflation will sustain an upward trend with a month-on-month build-up of around 10% and will close the year with close to 200% annual inflation,” he said.

Mugano said all the policy measures announced by Mnangagwa were not sound.

“They have negative consequences. There are no policy measures aimed at addressing exogenous shocks such as tax waivers on fuel considering the fact that at least 50% of the cost of fuel per litre is a tax burden. These measures will fail dismally and will be abandoned,” he said.

He spoke as the RBZ said a ban of lending imposed on banks had been reversed.