Alarm bells: Somalia has more diversified economy than Zim

WHEN Kurai Matsheza, the Confederation of Zimbabwe Industries (CZI) president, told delegates attending this year’s ZimTrade Exporters’ Conference that famine-hit Somalia fared better than the southern African nation in terms of export diversification, many were left in awe.

BERNARD MPOFU

Just to bring that into perspective, according to the World Bank, in the early 2000s, Zimbabwe used to introduce 600 new products in the export basket. The rate of discovery (exports of previously un-exported products), however, has been declining and in 2019 it dropped to just five.

Immediately, Zimbabwe’s quest to transition into an upper middle-income economy by 2030 was brought into sharp focus and questions were asked as to how feasible this ambitious project is without a robust export-driven development plan.

For decades, economic diversification has been a policy priority for low- and middle-income economies.

Unfortunately, this goal continues to elude many African countries. In simple terms, economic diversification is when a country moves to a more diverse production and trade structure. It involves transitioning away from dependence on one or a few commodities such as crude oil, minerals, and agricultural production toward a broader range of sources of production, trade and revenues.

Experts say the main constraints to Zimbabwe’s export and economic diversification include the reliance on primary production, macroeconomic instability, skills availability to drive diversification, entrepreneurship development and constraints on key enablers such as energy.

Zimbabwe, which at Independence had one of the most diversified economies on the continent, has often been cited as a case study on the efficacy of sanctions.

During the 1965 Universal Declaration of Independence era under former late prime minister Ian Smith, Rhodesia, a British territory in southern Africa that had governed itself since 1923, now regarded itself as an independent sovereign state. It was slapped with sanctions, but emerged stronger.

Through a combination of inward looking policies and an aggressive industrialisation drive, Rhodesia, which later became Zimbabwe at Independence in 1980, managed to build a solid manufacturing sector with forward and backward linkages and its core infrastructure continues to stand to this day.

Matsheza said industrialisation is  key in expanding the economy.

“There is a need to diversify, obviously, our production processes. Mining and services are coming up but more than 70% of our exports are mineral-based,” Matsheza said.

“In terms of the export diversification index, Zimbabwe is about 2.5, which is even lower than  countries such as Somalia. The higher the number, the less diversified you are. So, the ideal situation is to move closer to zero…Only 18% of products exported by Zimbabwe have shown some competitive advantage,” Matsheza told a national exporters’ conference last week.

He said limited developments in the energy sector also continued to hamper growth of key economic sectors and this would ultimately make local firms less competitive.

“Unless we do something as a country on power, it is going to be very difficult to make our economy go forward. Yes, there are 600 megawatts being expected later on, but still that will not be able to take us forward, there is still a lot that needs to be invested in that sector,” he said.

According to the World Bank, while merchandise exports have recently improved, only a handful of products, mainly primary goods, represent more than 90% of total exports, reflecting limited diversification in merchandise exports.

Official figures show that in 2020, gold, tobacco, and other metals and minerals accounted for more than 90% of total exports. These exports are also increasingly concentrated in just a few destination markets.

Exports of services remain concentrated on tourism and transport. The lack of diversity of exports, the World Bank says, is primarily due to macroeconomic instability, coupled with a difficult business environment, particularly distortions that limit competitiveness.

As competition intensifies, experts say the implementation of Zimbabwe’s National Export Strategy by the authorities, which aims to support the development and promotion of exports of goods and services, should be strengthened and have an explicit productivity lens aligned with African Continental Free Trade Area (AfCFTA) implementation.

“However, Zimbabwe’s exports of goods and services have been under-performing over the past two decades, falling from an average of 33% of GDP between 2002 and 2009 to 25% of GDP a decade later (2010–19). Merchandise exports have been improving since 2017, owing to rising commodity prices, as well as changes in legislation on artisanal gold mining that have improved gold deliveries and production,” the World Bank says in its Country Economic Memorandum on Zimbabwe.

Zimbabwe is aiming to build comparative advantage in the manufacturing sector, but only primary sectors such as metals, minerals and foodstuffs (tobacco) contributed positively to export growth between 2015 and 2020. The World Bank contends that there is little evidence that Zimbabwe’s comparative advantage in the manufacturing sector is growing, and this may be a result of across-the-board distortions that are limiting competitiveness in the formal sector.

“However, so far, the country has struggled to reach its full economic potential, partly because of high economic volatility. Economic growth averaged 0.1% per year in the two decades between 2000 and 2021, but this increased to 2.3% per year over the past decade. Considerable economic volatility over this prolonged period, including two major recessions with high inflation and multiple exchange rates, significantly set back economic progress. This volatility was primarily driven by a mixture of policy missteps, climate shocks, and limited structural transformation,” the World Bank says.

“So, until we can engage on industrial transformation, it will be very difficult to drive diversification. Investment in industrial transformation is key and we talk of the three stages of  industrialisation for us to achieve the 2030 Vision.”

Allan Majuru, the ZimTrade chief executive, said innovation would be key to achieving this goal.

“As we increase value addition, we also need  to come up with new products that address current global changing consumer behaviour. For  example, consumers are now after organic and  natural products,” Majuru said.

With limited diversification, Zimbabwe could be literally putting all its eggs in one basket and faces enormously risks when the prices of commodities plunge on the global market.
Already, Finance minister Mthuli Ncube has warned that an imminent global recession will hurt the country’s growth prospects.

“The spectre of global recession is real. I have just come back from the IMF/World Bank meetings in Washington DC and this was the topic and that’s the take away,” Ncube told delegates attending the exporters’ conference.

“So we have to redouble our efforts to promote our exports to ensure that we can compete effectively in a shrinking global market. I hope that it’s temporary at least for the next 12 to 18 months and then the economy will recover again.”