Zimbabwe’s GDP to shrink by 15.5pct in 2020: EIU

By Almot Maqolo

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Zimbabwe’s GDP will contract by 15.5 percent in 2020 due to policy inconsistency and foreign currency shortages which continues to weigh on economy, the Economic Intelligence Unit (EIU) said. Previously, it forecasted a decline of 10.5 percent.

EIU is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.

According to its Country Report Zimbabwe 3th Quarter, generated on 13 July 2020, EIU said: “We forecast that real GDP will contract by 15.5 percent in 2020 (following an estimated decline of 8.1 percent in 2019) as the foreign-currency shortage, limited investment, company shutdowns, extended power cuts, soaring inflation and lockdown measures to stem the domestic coronavirus outbreak weigh on economic activity”.

“The ongoing drought will continue to undermine agriculture output, and to constrain energy production, which relies on a hydropower plant as ageing coal plants produce little power.” In 2021 the country’s real GDP is projected to fall by 4.9 percent.

“The mining sector will continue to be hamstrung by the policy environment and by extensive power cuts; agricultural output will remain weak as the sector recovers from the drought and as low tobacco prices deter activity,” EIU stated.

However, in 2022-24 real GDP will rebound gradually, with growth averaging 4.5 percent a year as better weather conditions facilitate growth in agriculture and a resurgence in domestic hydropower production, allowing mining activity to pick up. “Industrial sectors will register growth, albeit from a low base due to poor capacity utilisation, as monetary conditions improve later in the forecast period,” it said.

“Despite reformist rhetoric from the government, we expect limited progress in addressing structural bottlenecks and improving the poor business climate.” But, EIU said mining and energy infrastructure is likely to continue to attract some investment to boost capacity utilisation, predominantly from those connected to ZANU-PF.

“Investor appetite will remain weak in 2020-21 as global economic conditions deteriorate owing to the coronavirus, but will pick up modestly thereafter, with many underdeveloped sites providing potential for investment.” Inflation is expected to average 498.3 percent in 2020, after averaging an estimated 232 percent in 2019.

“Rapid inflation has been driven by huge growth in the money supply base as the RBZ finances fiscal deficits, combined with sustained currency weakness (particularly on the parallel market), foreign exchange shortages and the ongoing drought, which has reduced agricultural and hydropower production severely,” EIU said.

However, inflation is forecasted to fall sharply in 2021, to 108.3 percent, owing to moderation in the growth of the money supply base combined with a slowdown in currency depreciation. In 2022-24, inflation is poised to moderate further, to an annual average of 6.5 percent, as the RBZ’s quasi-financing activity ceases and domestic confidence in the currency is rebuilt gradually.

Zimbabwe’s currency is expected to depreciate to Z32:US$1 in 2021 and to Z$41:US$1 by 2024 as the current account remains in deficit and as investment inflows stay low, reducing the RBZ’s ability to defend the currency. Exports are projected to contract in 2020 as domestic output remains constrained by drought, limited access to foreign exchange for imported inputs and extended power outages. Imports will decline in 2020 as oil prices plummet and global trade wanes.

Also, EIU expects President Emmerson Mnangagwa to remain in power throughout the forecast period as “he cements his power base, with proposed constitutional amendments granting the executive more authority and critics within ZANU-PF being pushed out.”

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