World Economy

Liquidity Crunch Could Push Zimbabwe Back Into Recession

Liquidity Crunch Could Push Zimbabwe Back Into RecessionLiquidity Crunch Could Push Zimbabwe Back Into Recession

Zimbabwe’s economy will contract by 1.5% this year on the back of the ongoing liquidity crisis, but rebound in 2019, a leading international research firm has said.

In his 2018 national budget, Finance and Economic Development Minister Patrick Chinamasa projected a growth rate of 4.5% this year, AllAfrica reported.

In the February 2018 Africa Monitor of Southern Africa released this week, BMI Research said the increase in crop yields in the previous season were not enough to support economic growth.

“Zimbabwe’s economy will likely sink back into a recession in 2018, as the ongoing liquidity crisis continues to weigh on production in import-dependent sectors. Although a substantial increase in crop yields will have supported positive real GDP growth over 2017, our agribusiness team does not believe this is sustainable, given it was largely a result of positive base effects after a severe drought crippled harvests in 2016,” the report said.

“While the ouster of long-serving president Robert Mugabe and appointment of the more reform-minded President Emmerson Mnangagwa offers hope of more sustainable economic growth going forward, we do not expect any benefits to fully materialize until 2019.

“Until they do, the lack of monetary liquidity in circulation will continue to weigh on economic activity, informing our forecast for the economy to contract by 1.5% in 2018, before growing by 3% the following year as foreign investment begins flowing into the cash-strapped economy.”

In its 2018, economic outlook, the African Development Bank projected real GDP growth of 1% this year and 1.2% in 2019. It said economic performance would be affected by political changes. It said the economy continues to face structural challenges from high informality, weak domestic demand, high public debt, weak investor confidence, and a challenging political environment.

Since taking over the reins in November, Mnangagwa has received some goodwill from western countries and the international financial institutions, who see him as a reformer unlike his predecessor, Mugabe.

Despite the goodwill, liquidity challenges persist. In 2017, total foreign currency receipts were $5.5 billion, but that amount was mostly gobbled by just imports, which as of November were $4.93 billion.

The foreign currency earned at the end of the year was not enough, as the foreign currency backlog close to the end of the year was nearly $600 million.

“The lack of monetary liquidity in Zimbabwe will continue to undermine prospects for economic growth over 2018. Since dollarizing the economy in 2009, a lack of inward investment has meant years of deep current account deficits have been financed with reserves of hard cash intended for day-to-day domestic transactions,” BMI Research said.

“In this environment, businesses and consumers have found it increasingly difficult to access the hard currency needed to buy goods and services, particularly those imported from abroad, weighing on economic activity.”

BMI Research said without substantial inward investment or a sudden surge in exports, monetary liquidity is unlikely to return to levels needed to support a more robust GDP growth.

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