Economic issues round-up

TWO issues on our economy will be dissected in this article.

The first issue is that the most current data which shows that the International Monetary Fund (IMF) is projecting Zimbabwe’s real gross domestic product (GDP) to decline by 10,4% for 2021.This stands in sharp contrast to Zimbabwe’s Treasury projection of a real growth of 7,4% for 2021.

The second issue is the fear in the market that there will soon be a price tsunami for tomatoes.

IMF projection extreme

We need to disaggregate the sources of growth our Treasury sees as driving their 7,4% real economic growth. Treasury sees consumption adding 2,6% to real growth, granulated as follows: government consumption to add 1,9% and household consumption to add 2,1% to real growth. Gross capital formation (infrastructure, machinery, etc) is seen by the Treasury as the biggest driver of real economic growth, accounting for 5,8% of real growth.

Government’s gross capital formation is seen as adding 5,1% to real growth, with the private sector (including not-for-profits) adding 0,7% to real growth. From this disaggregation, it is clear that our Treasury hopes that government’s infrastructure expenditure will account for 87,9% of the envisaged real growth.

In fact, overall, the government alone is expected to add 7% to real growth in 2021. This is the case when both its consumptive and infrastructure expenditure are put together. Put differently, the government is expected to drive 94,6% of the real growth for 2021. Non-government sectors (including the private sector) are expected to directly drive real growth of 0,4%.

How an above-normal rainfall season impacts the growth of our economy is key to reconciling the IMF’s negative growth projection and the Treasury’s positive growth projection. On paper, increased inflows of rainfall into our major water bodies, especially Kariba should significantly increase our power-generation capacity.

In theory, this potential increase in power availability should increase the capacity utilisation of producers in all sectors of the economy whose production potential was limited by power availability.

Such an increase does not solely contribute to increased output per worker. Other systemic factors include the availability of foreign currency to import raw materials, availability of affordable working capital, increased demand for goods and services and competitiveness of outputs against substitutes and imports.

Here are the challenges arising from this analysis.

First, availability of affordable capital remains under immense constraints due to lack of progress in the treatment of sovereign debt arrears with respect to the IMF, World Bank, African Development Bank and the Paris Club, owed in excess of US$8 billion and still rising due capitalised unpaid interest.

Government’s insistence on nonconcessionary loan facilities from Afreximbank is a stumbling block to any future debt treatment negotiations with the International Financial Institutions (IFIs). The IFIs have levelled with the government that the non-concessionary loans government is contracting are a potential deal breaker.

The unresolved outstanding sovereign debt with respect to IFIs will continue to be a stumbling block to foreign inflows of capital and will continue to raise the interest rate premiums for the private sector seeking to raise international credit lines.

Capital drought means the private sector cannot upgrade productivity enablers and new production driven by Foreign Direct Investment will be very minimal. This will mean the private sector’s productivity growth will remain in limbo. Government alone cannot sustainably generate new growth in the economy via consumption and infrastructure development without causing long-term harm to future economic growth via increased taxation and generating fiscal deficits.

Second, with the private sector failing to lead in productivity growth, the country’s ability to increase labour workforce will remain severely constrained, suggesting increased risk of generating extremely low growth.

The positive changes in agricultural productivity as a result of adoption of new simple technologies and adoption of private sector funding for large scale commercial agriculture, coupled with above-normal rainfall in the 20202021 cropping season will definitely increase agricultural output at the primary level.

This can potentially increase the availability of raw materials to the secondary industry. There are risks attendant in agriculture such as potential post-harvest losses that if not compensated for properly may make 35% of the primary agriculture output unavailable to the secondary industry.

The plan to handle increased agricultural output is not convincing as it is not based on modern warehouse technology aimed at handling agricultural output. The resurgence of the Covid-19 that has slowed down production and aggregate demand across many product areas for a three-month stretch. Post-Covid recovery may destabilise price and forex exchange stability for at least three months, causing producers to return to survival mode.

At least six months of an environment pulling down growth is expected. That should significantly push down any projections the Treasury had in mind.

On the balance of probabilities, the IMF’s -10,4% real economic growth projection seems unrealistic. Treasury’s 7,4% growth projection was also over-optimistic even without the Covid-19 resurgence as it was based on an unrealistic assumption that the government alone would drive 94,6% of the growth for 2021. We should expect growth for 2021 to be positive but below two percent.

Tomato Tsunami exaggerated

There is fear being stocked in the tomato production horticultural subsector that an imminent collapse in tomato prices will be much deeper than previous years as a result of many new entrants attracted by the high tomato producer prices still persisting.

The current wholesale prices of tomatoes are 75-80 cents per kg. It is my contention that the price drop will follow the usual cycle of prices of tomatoes from past years for several reasons.

We will likely see wholesale prices of tomatoes dropping to 20 cents per kg and as low as 15 cents per kg in the next two months. What may be different from the previous years is that the wholesale tomato prices may hold at about 15 cents per kg for much longer that has been historically been the case. Here are the reasons why I think the wholesale tomato price will not drop below 15 cents per kg even with increased supply.

First, tomatoes are always a big challenge to grow in winter due to the risk of frost. Those first-timers attracted by the current high prices will have to contend with frost. We do not expect a very significant increase of supply of tomato due to the winter challenge.

Second, tomatoes are very expensive in terms of inputs. Just one hectare of tomatoes for many new entrants has capital requirements that are beyond the financial capacity of many wouldbe small scale entrants. Capital is a big entry barrier for many to do tomatoes at scale.

Third, very few entrants can afford putting up protected environments for winter tomato production. Those that can afford will find it difficult to do tomatoes at scale in protected environments.

Fourth, as Covid-19 restrictions are eased, many with financial capacity to undertake tomato production will return to their vocations, creating a big managerial gap. Tomato production requires close attention and supervision. Without the close supervision, costly mistakes are inevitable. Managerial gaps coupled with learning curve costs will likely have a devastating effect on the production started by would-be new entrants.

Fifth, second cycle tomato production from new entrants from last year may be very unsuccessful due to inadequate experience and knowledge to properly manage a second tomato crop.