Economic outlook: Key March 2023 highlights

By Zvikomborero Sibanda | Apr. 21, 2023

Salaries must be pegged in US dollars with the larger portion paid in foreign currency .

THE end of March coincides with the end of the first quarter of 2023. Many economic developments with ripple effects on the general welfare of economic agents were witnessed during this period. As such, this week’s column analyses selected key highlights in March 2023 with the sole aim of deducing the likely economic trajectory for months ahead.

Inflation not in sync with realities

In the month under review, Zimbabwe National Statistics Agency (ZimStat) released March 2023 inflation statistics, which show annual inflation cooling down to 87,6% from 92,3% recorded in the previous month. From a month-on-month (MoM) perspective, price inflation gained 1,7 percentage points to settle at 0,1% from -1.6 (deflation) recorded in February 2023.

Before the adoption of blended inflation metrics in February 2023 to account for the dual nature of the economy, authorities were recognising Zimbabwean dollar (ZWL) inflation.

The last reported annual ZWL inflation was measured at 229,8% in January 2023, which is more than double the February and March 2023 blended outturn.

The foregoing shows that blended inflation statistics are masking the real cost of living. According to a survey by ZimStat, 78% of transactions in 2022 were conducted in US dollars showing rapid re-dollarisation of the economy.

As such, the predominance of a stronger US dollar will suppress the weighted average inflation rate thus portraying price stability. But, in reality, formally employed workers, particularly civil servants are largely earning in fragile local currency.

The ZWL lost 84% of its value against the US dollar in 2022 and since the start of 2023 to date, the unit has shed at least 25% of its value in both markets.

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This elevated ZWL depreciation is exerting increased pressure on ZWL prices, a feature completely masked by blended metrics, which are depicting a stable price situation.

Reviewed salaries for civil servants

In March 2023, the Treasury approved a 2023 Remuneration Framework for civil commissions, and the parliament of Zimbabwe, and grant government pensioners as follows: 100% remuneration review to gross ZWL emoluments; Reviewed cushioning and covid allowances from US$200 to US$250; reviewed cushioning and covid allowance for pensioners from US$90 to US$100; payment of US$80 teaching allowance to every teacher per month; free primary school education up to a maximum of three children at government schools, and introducing a government-funded funeral insurance framework.

The review of salaries for public workers was long overdue. The last review was effected in July 2022 upscaling the average salary by 100% to ZW$40 000. But mounting ZWL depreciation and inflation have significantly reduced purchasing power.

Statistics show that from July 2022 to date, the ZWL erased at least 50% of its value against the United States dollar (USD) in both markets while the ZWL price inflation rate hovered above 200%.This plunged civil servants below the poverty datum line.

While the latest 100% ZWL salary increment is lucrative in nominal terms, persisting ZWL deterioration is reducing the real value weekly.

For instance, at the current (April) parallel exchange rate of ZWL/USD 1800, a teacher’s new average salary of ZW$80 000 reduces to a paltry US$44.

The amount is not in sync with basic household demands such as food, clothing, housing, education, health care, transport and retirement savings.

It is, therefore, my view that workers’ salaries must be pegged in US dollars with the larger portion paid in foreign currency in line with the rapidly dollarising economy.

This will increase forex liquidity in the formal channels thereby subduing depreciation pressures emanating particularly from rent-seeking behaviours.

Electricity woes continues

The Zimbabwe Power Company (ZPC) and its Chinese contractors successfully synchronised 300 megawatts (MW) Hwange Unit 7 with the national grid. This is part of the government’s US$1,5 billion Hwange Thermal Expansion Project. The project financed by a loan from China will add 600 MW to the national grid when Unit 8 (300MW), which is reportedly near completion is commissioned as expected in the second half of the year.

The expansion project will upscale ZPC’s installed thermal capacity by 51,7% to 1 760MW from the current 1 160 MW. Adding 1 050MW capacity from Zimbabwe’s sole hydropower plant (Kariba South), ZPC will soon be boasting of an installed capacity of about 2 840MW, which is about 30% above the national average demand of 2 200MW.

However, despite the coming on board of Unit 7 last week, the electricity situation remains precarious as many parts across the country continue to experience prolonged load-shedding hours averaging 15 hours per day.

This is partly attributed to synchronisation procedures for new plants, which require a gradual injection of electricity into the national grid to allow engineers to check for possibilities of leaks or any other technical challenges.

Also, the lack of maintenance and upgrades of the national grid is leading to a huge mismatch between electricity production and demand.The existing aged thermal plants are now uneconomical to operate due to frequent breakdowns. Complete overhauls are overdue as the shortage of hard currency in the official markets is constraining the procurement of key spare parts.

Although the Kariba Dam water level is improving as the rainy season progresses, hydropower production at Kariba South was greatly constrained by climatic changes (droughts) across the region.

More so, the prevailing high investment risk premium in the energy sector is scaring away private investment. Many variables including policy inconsistency, corruption, vandalism, brain drain, stringent exchange controls, uneconomic tariffs, tariff collection inefficiencies, and excessive ZWL volatility among others are increasing the investment risk.

As such, the government must address these electricity challenges,which are ballooning business operating costs and deteriorating living standards through the cost-of-living crisis.

Widening trade deficit

Latest ZimStat statistics show merchandise exports increasing by 1,6% in February 2023 to US$435,67 million from US$428,9 achieved in January 2023. Merchandise imports came in at US$596,83, down 0,5% from US$599,75 million realised in the previous month.

This means that in February 2023, Zimbabwe experienced a US$161,16 million trade deficit which is 16,1% below the US$192,17 million deficit attained for the same period in 2022.

Although the current account is largely positive since 2019 largely owing to a weak local currency and ballooning remittances, the trade deficit is worrisomely rising. In 2022, it increased by 31,2% from US$1,54 billion in 2021 to US$2,02 billion.

In the first two months of 2023, the deficit has already crossed the US$300 million mark. This unmasks the impacts of the Russia-Ukraine war, particularly on global prices of fuels, food, and fertiliser.

Also, helping to widen the trade deficit is the ongoing rapid re-dollarisation of the economy, which makes foreign-produced goods cheaper in the eyes of locals while making domestically-produced goods expensive in the eyes of foreigners.

Porous ports of entry

The nation is still in complete and utter shock after Al Jazeera released four-episode docuseries allegedly describing how public institutions are conniving with connected syndicates to prejudice the state.

It is alleged that gold smugglers are working hand in glove with authorities. In defence of these allegations, the beneficiaries of illicit deals revealed that the government is using the politically exposed persons to facilitate gold dealings on its behalf as a sanctions-busting strategy.

Nevertheless, the Reserve Bank of Zimbabwe had previously issued a statement declaring that Zimbabwean imports and exports including gold proceeds are not under any Western sanctions.

As the custodian of all gold and the financial system, the RBZ must be regarded as a credible source of information – a trustworthy organisation free from bias and with evidence to back up whatever it feeds into the public domain. So, if this holds then it means that Zimbabwean gold and other minerals are being traded freely in international markets via official channels.

This, therefore, discredits the sanctions-bursting rhetoric to justify illicit flows which are enriching the pockets of the few at the expense of the majority, particularly mining host communities.

Due to illegal gold mining activities, the environment is being degraded, there is an encroachment on critical public infrastructure like highways and schools, families are forcefully displaced from their land, water sources are polluted with dangerous chemicals like cyanide and mercury, and air quality is severely compromised.

Recently, at least 18 innocent school-going children pursuing their dreams were injured when a classroom block collapsed into an illegal mining shaft in Kwekwe.

The government itself admits that ports of entry are porous as it estimates the country is losing at least US$100 million per month to gold smuggling.

As such, there is a need to undertake serious investigations including setting up an independent commission of inquiry to promote transparency, build investor confidence, and protect and maintain the reputation of public institutions like the RBZ.

There is also a need to increase transparency in mining including the use of an electronic cadastre system, formalisation of the ASM sector, capacitation of RBZ’s Fidelity Gold Refiners (FGR), the establishment of gold buying centres in remote areas, and government accountability in the utilisation of mining revenues among others.