Unpacking the Mid-Term Fiscal Policy Review

As we forge ahead with the reform agenda, the economy continues to exhibit resilience to global and domestic shocks. However, faced with deep-seated structural challenges and limited access to international capital markets, achieving both growth and stability under our dual-currency regime is proving to be a mammoth task.

The performance of the real and monetary sectors of the economy in the first half of the year is instructive.

After a strong rebound of 6,5 percent in 2022, growth is expected to moderate at 5,3 and 6 percent in 2023 and 2024, respectively.

Reading from the first-half real sector performance, it appears we are on track to achieving projected growth of 5,3 percent this year.

Our agriculture sector is transforming at an encouraging pace and has evidently done well this season to warrant a revision in projected growth, from 4 percent initially forecast to 9,7 percent.

Cereals, mainly maize and wheat, continue to be the key driver of agricultural production, with 2,6 million tonnes estimated to have been produced this season, excluding winter wheat.

At 2,6 million tonnes, cereal output is 40 percent more than last year, guaranteeing food security until the next agricultural season.

Going forward, investment in irrigation infrastructure and continued implementation of climate-proofing agriculture methods under the Pfumvudza/lntwasa programme will continue to drive the agriculture sector to its pre-eminent status in the region.

Benefiting from the improved performance in agriculture and expected exchange rate and price stability in the second half of the year, the manufacturing sector is projected to grow by 2,2 percent this year, which is in line with the Industrial Development Policy target of 2 percent per annum.

However, it remains doubtful whether this growth target is enough to drive the re-industrialisation aspirations of the National Development Strategy 1. The country aspires to more than double the manufacturing sector’s share of gross domestic product (GDP) to 30 percent by 2025. Achieving this may mean there is need to attract more than the targeted annual investment of 3 percent under the Industrial Development Policy. As such, the need to improve the business operating environment cannot be overemphasised.

Stability remains key to attracting the much-needed investment in the manufacturing sector.

Supporting value addition and beneficiation imperatives of successful re-industrialisation is the improvement in power generation, as Hwange Units 7 and 8, which came on board in the first half of the year, added 600 megawatts to the national grid.

Importantly, for improved manufacturing sector competitiveness, the country should climb up the technology ladder.

That way, the manufacturing sector will effectively transform the economy through the creation of quality jobs and growth in value-added exports. It is comforting that what initially appeared to be an over-ambitious target of US$12 billion mining sector economy by 2023 is fast becoming a reality. The progress in the last five years has seen a remarkable increase in the share of the mining sector-to-GDP to 13,2 percent in 2022, up from 9 percent in 2019, on account of increased production and strong international prices of minerals.

Concomitantly, mining has overtaken agriculture and manufacturing as the second-largest sector in the economy.

The mining sector growth of 4,8 percent this year is expected to be driven by the performance of lithium, coal, chrome, diamonds and platinum group of metals (PGMs).

The lithium sub-sector is seen as a game changer, as the world progresses towards electric-powered vehicles. Zimbabwe, which is ranked among top lithium producers in the world, has so far set up five beneficiation plants.

Many others are being planned, which is commendable. The increased investment in the mining sector is encouraging.

The Zimbabwe Investment and Development Agency (ZIDA) reports that the bulk of the US$1,5 billion foreign direct investment targeted for this year has so far been towards mining sector investment.

As indicated earlier, the improvement in power supply, as well as a projected increase in supplies from independent power producers, is seen as further supporting mining sector growth. The post-Covid-19 era has seen strong growth in accommodation and food services.

The robust growth of 23,7 percent recorded in 2022 is expected to extend into 2023, with projected growth of 20,5 percent on account of increased investment and marketing initiatives such as VisitZim and ZimBHO.

Infrastructure development at potential tourism sites such as Kanyemba, Masuwe (Vic Falls) and Tugwi-Mukosi, as well as increased flights to tourist attraction centres such as Victoria Falls, will definitely support growth in this sector.

The construction and real estate sectors deserve mentioning, as we are witnessing a resurgence in construction activities throughout the country.

Interesting is the phenomenal increase in the number of shopping malls of international standard, as well as a boom in

housing construction throughout the country.

Growth in the construction sector of 4 percent in 2023 also reflects the aggressive infrastructure development programme, as the country embarks on phase 2 of the Emergency Road Rehabilitation Programme.

There are other Government infrastructure projects going on. They include dam construction, installation of irrigation equipment and construction of airports. But lump-sum payments to contractors have had their downside as they partly contributed to volatility in financial markets.

The aggression in infrastructure development complicated our stability. Commendably, Treasury is now paying a significant chunk — up to 80 percent — of major contractors’ invoices in foreign currency. This has contributed to the recent restoration of stability. No wonder exclusive demand of the Zimdollar for taxes and duties may not be an easy option at the moment. Currently, revenue collection by Treasury is 50:50 for foreign currency and the Zimdollar. However, the ratio is expected to increase in favour of the Zimdollar as Treasury seeks to underwrite the local currency.

While notable progress continues to be registered on rebalancing the fiscus, economic instability continues to weigh down on budget performance.

While the reduction in the budget deficit to 1,5 percent in 2023 from more than 10 percent of GDP prior to the implementation of economic reforms in October 2018 is comforting, incidences of over-expenditure, which have occasioned the need for supplementary budgets, are concerning. By the first half of the year, the country had expended $3,7 trillion out of the full-year budget of $4,5 trillion due to currency and price instability. As such, a supplementary budget is unavoidable, which underscores the need to prioritise stabilisation measures.

The fact that the budget was based on the exchange rate of US$1:$980, which peaked to US$1:$6 926 in June 2023, demonstrates why instability is a key threat to economic performance, even after elections.

Importantly, the conduct and credibility of the elections are seen as key determinants of growth and stability post-elections. So far, the calm environment is pointing to a peaceful election process.

While some analysts see loosening of the tight monetary policy stance after the elections, I choose to take a different view. If Government can afford to tighten the monetary policy ahead of an election, there is surely nothing that will stop it from continuing with the fiscal and monetary prudence after the polls, when the election-related pressure subsides.

Importantly, the fallout from climate change-related weather conditions over the next three seasons is seen as a huge threat to agricultural performance in particular and the economy in general. The increased irrigation capacity and increased reliance on climate-proofing agriculture methods are seen as mitigating against the risk of drought.

The softening international mineral prices are seen as a risk to the performance of the mining sector, with the potential effect of tipping the balance of payment position to negative. The country projects the current account balance of US$274,5 million in 2023 (2022: US$300,5 million). The performance of the external sector so far is encouraging, with US$5,56 billion foreign receipts having been recorded in the first half of the year, against US$5,4 billion the same period last year. We will only better understand our economic prospects as we approach year-end given the risk factors that confront us as an economy today and beyond.