Green shoots emerging on Zimbabwe’s economic landscape

The major economic indicators point to a brighter future ahead for Zimbabwe, although the major debate would be on how bright things are going to be. GDP growth rate, having contracted by another 14% in 2008, is set rise this year on the back of tangible reforms. The disastrous impact of excessive money printing, illogical price controls and fixed exchange rate that characterized the foundations of the chaotic policy making framework of yesteryear have silently been replaced by silent and steadfast dollarized economy that is self-regulating, in the process taking away the rent-seeking behavior that emanated from seignorage revenue.

The stock market, in itself a barometer of confidence in an economy that has no other known measures of business confidence, has been bullish of late. This bullish trend, although nothing when compared to the mad bulls that characterized 2007 and 2008 on the back of excessive broad money supply growth from a currency that has since died a natural death, is a believable measure of confidence. Between 2004 and early 2009, the Zimbabwe Stock exchange surged and contracted on the whims of market liquidity conditions. These excessive liquidity conditions emanated from surplus positions on the money market from the so called ‘sanctions bursting activities’, ASPEF, BACOSSI facilities and other laxative sterilization strategies of the RBZ that drove the stock market to new records daily, which records were meaningless when converted to real value creation.

That era has passed, and with little doubt, the government and RBZ have little influence in determining the direction of the ZSE on a daily basis as before. Liquidity conditions today definitely play a major role as before, with more flows into the economy translating into share prices gravitating towards their realistic values. The major difference however is that today’s liquidity inflows are emanating from real economic activities compared to irrational explosion of monetary exuberance of the past. All major sources of liquidity inflows into the economy are showing a positive trajectory, from donor funds via exports to external lines of credit flowing in. These are the sources of liquidity that will be more important in oiling the operations of the stock market from the primary trading perspective, whilst constructive impact of these flows on the real economy through increasing productive capacity and bolstering purchasing power reinforces the secondary value perception of listed companies.

Zimbabwe’s productive capacity remains very low below 20% in many extractive and manufacturing industries, whilst the savings rate that has fallen into negative territory due to a decade of hyperinflation is not making the comeback on the real demand side any easier. As the world today warily looks for signs of ‘green shoots’ in the global economy that might signal the beginning of the end to the recession, the return of the majority of the Zimbabwean civil service to work, albeit on $100 per month, is in itself a sign of the first green shoots in the economy that need constant watering until the new plants develop deep roots to weather the dry winters of tomorrow on their own. Notwithstanding the unemployment rate still very high above 80% , whilst the average monthly wages that have improved slightly to around $100 from its lowest of about $40 in 2008, the turning wheels of change in the economy that are seeing pricing predictability are encouraging signs of a positive future. Embracing these positive developments, the industrial index is up 144% from 16 March, whilst the mining index has jumped by a staggering 242% over the same period.

The temptations of fiscal indiscipline that drove budget deficits to above 80% and 100% of GDP in 2007 and 2008 respectively (taking into account unbudgeted RBZ quasi-fiscal activities) and swept the foundations of the economy into a big mess are now in the rear-mirror as the central government cannot print USD and would have to rely on cash budgeting going forward. Bilateral and Multi-lateral support will be low and slower due to the challenges in the global economy, but the official flows that are now reported above US$1 billion are positive signs of part of the global players acknowledging the existence of potential and the need to alleviate suffering in a nation with a bright future.

Notwithstanding the positive signs of progress emanating from dollarisation, arbitrage opportunities continue to present themselves in one form or the other, in the process reflecting the deep scarcity of capital to kick-start the recovery process. Reflecting the huge scarcity of cash for working capital purposes, the cost of borrowing on the USD has risen to as high as 79.5% annualised as lending is now done between 2% to anything up to 5% flat on 30-day cycles. This is far pricey compared to the dollar base rate in African around 10% per annum. Whatever happens however, the banks in Zimbabwe today are not losing capital in buying Treasury Bills (TBs) as they have done over the last decade, and Kenyan banks buying the negative yielding TBs from the Central Bank of Kenya may need to learn from the tragedy of Zimbabwean banks before it is too late. As capital positions of banks strengthen gradually, whilst more inflows from abroad bolster their lending capacity, the cost of capital will surely begin to soften and bring relief to many Zimbabwean producers who are battling with competitiveness against producers in South Africa who are now enjoying favorable borrowing costs and more abundant working capital. The recovery of the Zimbabwean economy without sufficient capital, skills, and favorable commodity prices, will take 5 years and longer, but the positive side is that the recovery has started and what is key is to manage the process and not let loose.