Economy facing collapse – The Zimbabwe Independent
A leading economic think tank warned this week that Zimbabwe’s economy could collapse unless urgent action is taken to halt its rapid deceleration, saying recent waves of turmoil had clouded growth prospects.
Should it survive the fallout from serious policy mistakes, Zimbabwe’s domestic product (GDP) would grow at a much slower pace than official projections, according to Africa Economic Development Strategies (AEDS).
“Layoffs and insolvency of businesses, including banks, can lead to economic collapse,” said Gift Mugano, executive director of the think tank.
“Disparities between the official exchange rate and the black market rate pose serious risks of instability if not urgently addressed,” he said.
Faced with headwinds ranging from a battered currency to sharp surges in inflation, the government announced unprecedented monetary policy changes, banning bank lending and tightening the screws on stock trading at supermarkets.
Some of the measures have now been reversed. But AEDS, which also advises Zimbabwe’s government and parliament, put 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 GDP growth in 2022 at 3.5%. Mugano said the outlook was bleak, with black market exchange rates expected to reach US$1 to ZW$1,500 by December, while the local unit will suffer huge setbacks in the official market.
The Zimbabwean dollar was trading this week at US$1 for ZW$445 on the black market.
In a research paper titled ‘Unpacking the currency and exchange rate dynamics in Zimbabwe and future outlook’, Mugano, a professor of economics at several leading regional universities, including the University of Zimbabwe, said geopolitical tensions would also have a huge impact on how Zimbabweans will live.
“Given the above, the economic outlook for 2022 is bleak,” Mugano said.
“Already, the price of fuel per barrel has gone from $90 to $139 and that has already trickled down to Zimbabwe’s economy. Russia controls over 70% of the world’s fertilizers. Any disruption in the supply chain in fertilizer 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 as Russia is the biggest wheat producer. For Zimbabwe, since the country is experiencing a drought, this will fuel imported inflation,” he added.
Mugano said the 2021/2022 agricultural season demonstrated that the economic outlook was bleak.
At least 40% of agricultural production would be wiped out, he said.
He added that the new measures posed serious risks, which could translate into price increases in US dollars.
He said imports would wipe out US dollar stocks, widen trade deficits and trigger waves of exchange rate volatility.
“These risks, combined, pose serious risks to the local currency. In other words, these risks will lead to a loss of currency, which will lead to exchange rate spikes and a spike in inflation, which will lead to monetary erosion,” he said.
He said annual inflation would exceed 100% by June this year. In April, inflation soared to 96.4% from 72% the previous month, completely exceeding the 35% target forecast by central bank governor John Mangudya.
“By June 2022, parallel market rates will reach over $1:$500 ZW, while official rates (interbank rates) are expected to be around $350 to $1. Widening disparities between the rate official exchange rates and parallel market rates and sustained inflationary pressures through mid-2022 will lead to the collapse of the auction system and full dollarization,” he said.
“However, if for some reason this scenario fails, which is unlikely, the following scenario will prevail: inflation will maintain an upward trend with a monthly accumulation of around 10% and end the year with almost 200% annual inflation,” he said.
Mugano said all the policy measures announced by Mnangagwa were misguided.
“They have negative consequences. There are no policy measures to deal with exogenous shocks such as fuel tax exemptions as at least 50% of fuel cost per liter is a tax burden. These measures will fail miserably and be abandoned,” he said.
He spoke as the RBZ said a lending ban on banks had been overturned.