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AfDB warns of deep economic downturn

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THE African Development Bank (AfDB) has projected 8,5% economic decline this year as Zimbabwe battles the effects of the Covid-19 pandemic, prolonged drought and a protracted economic crisis despite optimistic predictions by Finance minister Mthuli Ncube who says the country has restored macro-economic stability by tacking fundamentals.

The unrelenting economic problems are set to continue into 2021, with AfDB, like Ncube, pinning hopes of recovery on mining, an improved agricultural season and tourism. 

With the country reeling under a huge debt overhang and no feasible debt repayment strategy in place, the economic haemorrhage is expected to persist as Zimbabwe is unlikely to access fresh funding from multilateral institutions. 

AfDB country officer-in-charge Walter Odero (WO) and policy analyst Eric Mariga spoke toTheNewsHawks(NH) correspondent Nyasha Chingono (NC) on post-Covid-19 economic prospects, Zimbabwe’s debt situation and the bank’s facilities for the private sector. Below are excerpts of the interview:

NC:The AfDB economic outlook for 2020 projects that Zimbabwe’s economy will contract by 4,6%. In the wake of Covid-19, what are your current projections? 

WO:In 2020, given the impact of Covid-19, we could have a contraction of 7,5%, but in the worst-case scenario we could get 8,5%. At the moment, we are in between; we have not seen a lot of economic recovery more or less like last year. The harvest has not been so good, especially in food crops. Recovery also in electricity is not going to be maximum, I know Kariba has not been as good. We expect a further contraction of between 7,5% and 8,5%. 

NC:In your report, you also stated that sustainable growth will depend on reforms and a positive social contract. How has Zimbabwe fared in this regard? 

WO:I think at the moment, during the onset of Covid-19, so many things are on hold. Some parts of our thinking are on hold and you also expect some parts of government behaviour to be on hold. Social contract is about the government promising the people and how it is interpreted. Since the onset of Covid-19, several things have been put on hold or operating in emergency. When you are in emergency mode, even the social contract is put on hold. When you are in an emergency, sometimes some activities are put on hold so that you respond to the emergency and I think we cannot expect the government to meet all the obligations when it is responding to an emergency which is affecting everyone. 

NC:Which sectors of the economy are likely to be drivers of post-Covid-19 growth?

WO:If tourism recovers and if we get things sorted out at Victoria Falls, which is the major tourist destination and in other places like Nyanga, we are likely to experience growth. The second one would be agriculture and tobacco. Zimbabwe is a mining country, so if we get gold, platinum resuming greatly, that could be another major driver. We also expect the soft drivers, if they have stability in the foreign currency, we expect it to drive growth. If the government is able to control inflation, that also would be a major driver. 

NC:The Zimbabwean government has resorted to a foreign currency auction system to allocate in a command economic fashion limited hard currency resources. How has this impacted the economy and is this likely to ensure some sort of stability? 

WO:Already we have seen some sort of stability (in the foreign exchange market and prices), it is not the best, but it’s the best thing the government has done in terms of handling the foreign currency issue at the moment. You remember when we stuck on the dollar 1:1 with the RTGS; we always had inflation rising. Up to the end of last year, we closed at 521%, in December. But since the introduction of the foreign currency auction and for the last three to five auctions, inflation has been stabilising and falling, actually to around 700%. If the gap is maintained between the black market and the auction system, we should have some sort of stability. 

NC:What are some of the reforms that Zimbabwe should seriously implement to turnaround the economy? 

WO:All macro-economic fundamentals in Zimbabwe have to be addressed. 

First, the foreign currency reform, which is already in (operation through the) foreign currency auction, the government has addressed this, which I think is a great thing although not the best. The government should always aspire to have a balanced budget, as low as possible a fiscal deficit. As low as possible fiscal deficit means the government has to strive to raise funds domestically, that is to have domestic resource mobilisation and to make sure expenditure is controlled. Because if you don’t have that stability, you cannot expect to have other fundamentals moving in that direction. If we could have the banking system operating a little more freely, meaning that they could engage in free foreign currency trade, that could go a long in helping to stabilise the economy. If you go to the agriculture sector, having free movement of goods would help. What do I mean by free movement of goods; don’t restrict sales to GMB only in maize. With time as the economy stabilises, we should see the reduction in subsidies so that we have a free market system which is then helpful to the economy. 

NC:AfDB has been leading talks between Zimbabwe and international financial institutions (IFIs) for Harare to come up with a sustainable external arrears settlement plan. Have the parties agreed a clear path on how Zimbabwe can settle its debt?

WO:You know the Lima story of 2015 where there was an agreement to clear the multilateral debts. Under that agreement, the IMF (International Monetary Fund) debt was cleared, while the AfDB and World Bank was to follow. We have had discussion on modalities for clearing. AfDB had US$500 million which was available to help the government clear the debt. That money was available for three countries which were in arrears back then on a first come, first serve basis. That was Somalia, Zimbabwe and Sudan. Since then, Somalia cleared its debt last year, it’s only Sudan and Zimbabwe remaining. We could not use that money to clear Zimbabwe’s debt because of the pari passu principles which means if the AfDB loan was cleared, the World Bank loan should be cleared thereafter.

When the government launched the TSP (Transitional Stabilisation Programme), debt repayment was a major component and we know that the government expected dialogue and the clearing of the debt within the TSP programme. The SMP (Staff-Monitored Programme by the IMF) was also geared towards that aspect. If you read from the Somalia experience, the SMP is a major factor in clearance of the arrears. In the Zimbabwean case you know the SMP collapsed last year, so the government and IMF are now engaging to see if it can be revived. We do not know if it has any timelines. We are hinging our hope on that once the SMP resumes, it will then guide us on arrears clearance. Once we get the SMP back on track, we will have a clear timeline. 

NC:Zimbabwe sought to implement the SMP which entailed a raft of economic and political reforms. Is AfDB satisfied with the pace of reforms?

WO:There were endogenous and exogenous factors. As part of the endogenous factors, there was Cyclone Idai. With the government trying to deal with impacts of Cyclone Idai, it meant that the government could not meet the covenant with IMF so that was the major factor. So, the coming of Cyclone Idai and the drought was a major effect on the macro-economy where the government had to respond to some of the emergencies, including feeding the people. So, given that, the government could not meet the covenant agreed with the IMF. Exogenous factors include issues to do with coordination which I think the government has tried since the collapse of the SMP. 

NC:Another solution that has come under discussion is for Zimbabwe to mortgage part of its vast mineral wealth to offset the debt. Do you think this is a practical plan? 

WO:When you talk about the wealth underground, the first that comes to mind is inter-generational equity. We found these minerals there because the people who came before us left them there. So, our children should also find some benefit from there so that we should not just say in our time, ‘let’s mortgage everything for the benefit of ourselves and we leave those coming after us’. So, I think what the government must consider is the aspect of generational equity. The generations that must come should benefit from the minerals in the same way this generation is enjoying. 

NC:We understand AfDB has an allocation every year to lend to the private sector. How much was utilised this year abd did Zimbabwe benefit?

EM:Last year, we started discussions with Olivine which culminated in a senior corporate loan and the loan was approved beginning of 2020. We signed close to US$80 million. Discussions are still on to finalise the loan agreement. Each and every year Zimbabwean has benefitted. But there are issues that hinder the uptake of the loans, ranging from country risk. We have been receiving numerous inquiries so, hopefully, by the end of the year we can be able to initiate one deal. The challenge is the macro-economic issues where the private sector never gets to prepare a bankable project. 

 

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