Zimbabwe economy under stress

The government needs to urgently implement productive and proactive policy reforms in order to attract foreign direct investment as the economy is buckling under ‘increasing stress,’ a securities firm has said.

“Policy clarity, transparency and key structural reforms must be made in order to enhance the business climate to attract FDI, boost productivity and competitiveness, and build confidence,” a local financial services firm, Inter-Horizon Group (IH Group) said in its February report.

The economy is being weighed down by depressed aggregate demand, high unemployment, pervasive structural issues linked to poor funding and weak commodity prices in key sectors, mining and agriculture and a persistent current account deficit, it added.

Zimbabwe’s current account deficit constitutes about 24 percent of GDP compared to under nine percent among regional peers.

“It is now imperative that government implements productive and proactive policy reforms to attract the much needed FDI and restore the country’s external position as a prerequisite for accessing external financing,” said IHG.

The firm singled out  policy inertia as the largest impediment to growth and lack of a compromise solution to the indigenisation policy.

“A recent softening in the political rhetoric and pronouncements around the indigenisation policy has not been accompanied by key improvements in subsequent implementation,” said the firm.

“We believe that 2015 will see government becoming compelled to take a more moderate approach to indigenisation, with the focus shifting towards creating a more conducive environment for much needed investment.”

Relations between the country and the West have also improved and the European Union last November resumed direct funding to government, 12 years after imposing restrictions imposed after allegations of rights abuses by President Robert Mugabe’s administration, citing improvements in the political environment after the adoption of a new constitution and peaceful, if disputed polls, in 2013.

The institution also forecast that the deflationary pressures witnessed in last year were likely to persist this year.

“Whilst deflation will naturally exert downward pressure on pricing of goods particularly impacting corporates that are highly leveraged, we believe that lower oil prices and reduced prices of inputs (SA based goods a large component) will assist in helping margin protection,” said IHG.

Government has forecast a gross domestic product  growth of 3.2 percent for 2015, on the back of moderate growth across all sectors particularly mining, agriculture, information and communication technology and tourism

But IHG said the growth was likely to be closer to  two percent due to weakness in most of the commodities that Zimbabwe is a net exporter of, including sugar, gold and platinum.

“Subdued commodity prices will likely have a negative impact on the levels of production in the affected sectors, as funding and access to capital will remain depressed, and will also thin export earnings and put further downward pressure on the current account,” it said.

“As long as hard commodity prices remain low and cost structures high, we do not expect any significant capital injections into the mining sector in the short to medium term.”- The Source

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