Zimbabwe Economic Briefing

Global Economic Prospects Global economic growth is projected at 3.2 percent in 2014, supported by some uptick in high income countries. Recovery in Europe continues to build momentum with an expected 1.5 percent growth, but deflation and unemployment concerns continue to persist. In the US, growth has begun to soften in the first quarter of 2014, on the back of extreme weather conditions. In developing countries, 2014 growth is expected at 5.3 percent, benefiting from strengthening demand from some high income countries, gradual improvement in sentiment and stronger domestic demand. In Sub-Saharan Africa, robust growth of 5.4 percent is supported by strong domestic demand especially in the resource sectors, infrastructure investments and the recovery in Europe. However, growth may be upset by the slowdown in China and Brazil. Capital flows to developing countries tumbled in February 2014, reflecting increased risk aversion, heightened stock market volatility and continued tapering of the US Fed monetary policy. Oil prices spiked while global stock markets declined in February and March in the wake of Russia-Ukraine tensions. Precious metal prices made mild upturns in February as demand picked up on the back of increased volatility in equity markets and depreciation of emerging market economies currencies. The global environment may affect the Zimbabwean economy through stronger US dollar, lower global demand for key exports,

April, 2014 weaker commodity prices and reduced capital inflows to developing countries.
Growth and commodity prices outlook
2012 Growth World High income countries Developing countries Sub- Saharan Africa Zimbabwe South Africa China Botswana Zambia Commodity prices Platinum ($/oz) Gold ($/oz) Maize ($/mt) Tobacco ($/mt) Cotton (c/kg) 2.5 1.5 4.8 3.5 4.4 2.5 7.7 4.3 7.3 1551 1670 298 4302 197 2013 2.4 1.3 4.8 4.7 3.0 1.9 7.7 4.6 6.0 1487 1412 259 4650 199 2014f 3.2 2.2 5.3 5.3 4.2 2.7 7.7 5.0 6.5 1400 1220 225 4600 195 2015f 3.4 2.4 5.5 5.4 4.3 3.4 7.5 5.2 6.0 1350 1200 235 4400 200 2016f 3.5 2.4 5.7 5.5 4.5 3.5 7.5 5.2 5.8 1340 1190 235 4374 203

Source: World Bank, Development Prospects Group

Economic Performance in 2013 2013 growth has decelerated to an estimated 1.8 percent, with a strong slowdown in the last quarter, well below initial projections. Growth performance was weakened by the slowdown of key sectors of the economy and depressed investment in the election year. Agriculture has contracted by 1.3 percent in 2013, weakened by the strong decline in maize (-7.5 percent) and cotton (-67 percent), following the drought season. The tobacco sector has remained buoyant, as production increased by 20 percent, and exports reached US$877.5 million, supported by good prices in 2013. Recovery in the mining sector was stymied by lower international prices, subdued investment and rising production costs. Gold production dropped by 5 percent, to register 14 065 kg while platinum recovered by 24 percent in 2013. Diamonds reached an estimated 10.5 million carats in 2013. Zimbabwe successfully

Produced by the World Bank, Poverty Reduction and Economic Management Team - Zimbabwe

auctioned its two consignments of diamonds in Antwerp in December 2013 and February 2014 and another auction in Dubai in March 2014. Held under improved transparency conditions, diamonds fetched an average price of USD73-78/carat, which compares favorably to average past prices of USD53/carat. The manufacturing sector grew at an estimated 1.5 percent in 2013, stunted by persistent subdued investment, declining competitiveness and binding credit constraints. 2014 Projections Growth in 2014 is expected at 3 percent, dragged by the headwinds from the global economy, low investment and weak growth of the mining sector. The carry over effects of the 2013 slowdown are also likely to weigh down on 2014 growth. After a very weak 2012-2013 seasons, agriculture is expected to rebound by 7.3 percent in 2014, largely supported by recovery in maize (to 1.2 million tons). The first crop assessment estimates that 1.4 million hectares was planted to maize (18 percent increase from the previous season). Tobacco production should confirm the positive results of the past season, although the increase in area planted is likely to be muted by weaker prices. Despite a reduction in hectarage, the cotton production is expected to register an improvement in 2014, benefiting from improved yields and favourable rains. Recovery in the mining sector remain muted, with expected 3.3 percent growth in
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2014, saddled by still lower international prices and subdued investment. Gold production recovered by 0.6 percent to reach 2168 kg in the first 2 months of 2014. Platinum production dropped by 7 percent, reaching 2058kg, while nickel surged to 3117 tonnes, buoyed by scaled up production by Bindura Nickel Corporation. Diamonds production is expected to reach 10 million carats in 2014-2015. The manufacturing sector will remain in lackluster performance, at 1.4 percent in 2014, stifled by low investment, declining competitiveness pressures, and further tightening of credit conditions.
GDP growth rates and shares of GDP : 2012-2014
Growth rates (%) 2013e 2014f Supply of GDP (fc) Agriculture Industry Services Demand of GDP (mp) Domestic Absorption Consumption Investment External Absorption Exports Imports 1.8 -1.3 2.1 2.8 -6.6 33.7 11.7 14.1 -2.7 2.8 3.0 7.3 1.9 3.4 -0.2 2.1 0.8 12.4 4.9 7.5 Shares of GDP % 2013e 100.0 12.4 31.3 56.3 100 129 117 12 35. 59

Source: World Bank, Staff Estimates - 2014: Preliminary

2014 growth projections will be sensitive to; the pace at which the government moves to address macro-economic vulnerabilities and structural impediments to investment, international prices and the coherency of policy responses. The outlook remain further clouded by downside risks, emanating from lower international prices of minerals, vulnerabilities in the banking sector, policy inconsistences affecting investment, deflationary pressures, fiscal slippages and the unbalanced external position.

2013 Fiscal developments: Government revenue fell 3.1 percent short of the target, to reach US$3.74 billion in 2013, following unexpected revenue contraction in the last quarter. The lower revenue inflows were driven by underperformance of taxes. Diamond dividends remain low, with US$18.2 million received by Treasury in 2013. Non-tax revenues presented a temporary hike in 2013, reaching US$327 million, due to a one off licence fees from the telecommunications sector. Government expenditure remained high at US$4 billion, with employment costs absorbing US$2.3 billion (67 percent of current expenditure and 63 percent of total revenue), crowding out capital and social expenditures. As such, the government ran a budget deficit of 1.9 percent of GDP in 2013, which was largely financed by the issuance of Treasury Bills.
Fiscal Performance: JanuaryDecember 2013 (US$ Millions)
Actual Total Revenue Tax Revenue Non-Tax Revenue Total Expenditure Current Expenditure Employment costs Travel Costs Capital Expenditure Deficit 3,741 3,414 327 3,987 3,520 2,344 74 396 -246 Target 3,860 3,646 214 3,860 3,295 2,255 59 496 Variance -119 -232 113 127 225 89 15 -100 Varian ce (%) -3.1 -6.4 53 3.3 6.8 3.9 25 -20

percent below target to reach US$56 million. This revenue slide largely reflects economic slowdown and visible deflationary pressures.
400 350 300 250 200 150 100 50 0
Feb-13 Sep-13 Mar-13 Feb-14 Jan-13 Jan-14 May-13 Mar-14 Nov-13 Aug-13 Dec-13 Jul-13 Apr-13 Oct-13 Jun-13

Revenue collection: January 2013-March 2014 (US$ Millions)

Income Tax Value Added Tax

Customs duties Other Taxes

Excise duties Non-tax Revenue

Source: Ministry of Finance

Source: Ministry of Finance

2014 Outturn Total revenue continues to underperform as it amounted to US$805 million, falling 8 percent short of target in the first 3 months of 2014. Tax revenue fell 7.5 percent below expectations, sapped by underperformance of major taxes: income taxes (-6 percent especially companies), customs duties (-26 percent), excise duties (-9 percent), VAT (-19 percent). Non-tax revenue fell 11
3

Expenditure totaled US$767 million, and is increasingly skewed towards employment costs, which gobbled US$551million (68 percent of total revenue, 73 percent of tax revenue and 76 percent of current expenditure) in the first 3 months. Travel expenditure absorbed 1 percent of total revenue, while capital expenditure continues to bear the brunt of the unbalanced expenditure pattern, at 2.9 percent of total revenue. The ambitious 2014 budget will feel the pressure of upcoming wage increases (14 percent) and recapitalization of RBZ against declining revenue performance. External Position: The external position remains under pressure. Following the 2.8 percent slip in exports in 2013, 2014 opened on a depressed note as exports further slumped by 16 percent to reach US$471 million in the first 2 months. Mineral exports and tobacco however remain the key drivers of exports. Imports which increased by 2.7 percent in 2013, dropped by 14

percent in the first 2 months of 2014, reaching US$966 million. The current account deficit is expected at 26 percent in 2014 and largely financed by short term capital flows. International reserves are low, at 0.2 months of import cover.
Exports, Imports and Current Account Balance (US$ millions)

10000

Consumer prices: Strong easing of prices of tradables is leading deflationary pressures, while the prices of domestic nontradables further strengthened, amidst falling aggregate demand and weakening of the Rand. CPI inflation closed 2013 at 0.3 and continued on a downward trend, turning negative (-0.5 percent) in February and slid further to -0.9 percent in March 2014.
110 105

5000

CPI Index 2009-2014 - Monthly (December 2012 =100)

0
2009 2010 2011 2012 2013E 2014F

100 95

-5000
Exports Imports Current Account Current Account Deficit and Financing (percent of GDP)

90 85 80

40 30 20 10 0

CPI

Food and non alcoholic beverages

Non food

2009
-10 -20 -30 -40

2010

2011

2012

2013E

2014F

10.0

Headline, Traded and Non-Traded Inflation

8.0

6.0

FDI and Portifolio Investments Short Term Capital Flows Errors and Ommisions

Long Term Capital Flows External Payments Arrears Current Account

4.0

2.0

Source: Reserve Bank of Zimbabwe Mineral Exports 2009-2014 ( US$ Millions)

3,000
(2.0) -

2,500 2,000 1,500 1,000 500 Gold PGMS

(4.0)

Headline Inflation Non-Traded Inflation

Traded Inflation

Source: ZIMSTAT

2009

Diamonds

2010

Nickel

2011

Coal

2012

Ferro Alloys

2013

Other Minerals

2014

Sources: Ministry of Finance, Reserve Bank of Zimbabwe, Chamber of Mines and Kimberly Process Statistics

Banking Sector: Vulnerabilities remains high in the banking sector, exacerbated by macro-economic inconsistencies and low levels of confidence. Non-performing loans are high at 15.9 percent, while liquidity
4

conditions remain tight at 27.8 percent as at December 2013. Solvency concerns especially in smaller banks also remain a drag in the periphery, making the RBZ to intensify the monitoring of troubled banks. The RBZ floated treasury bills worth US$103 million in March 2014 to clear part of the US$1.35 billion RBZ debt taken over by government. The treasury bills will facilitate interbank lending, as they will be used as security. Growth in annual broad money edged up by 5.5 percent to reach US$4 billion in February 2014. Private sector credit growth inched up 1.5 percent, reaching US$3.6 billion, while loan to deposit ratio remains elevated at 90 percent in the first 2 months.
Deposits, Loans and loans to deposit ratio
4.5 4.0 100 3.5 3.0 80 60 40 20 0.5 0 120

50 40 30

Non-performing loans and liquidity ratio in the banking sector

20 15 10

20 10 0
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

5 0

Liquid Ratio (left)

Non Performing Loans (right)

Source: Reserve Bank of Zimbabwe

2.5 2.0 1.5 1.0

Stock Market: Despite closing 2013 on a recovery path, the stock market indices opened 2014 on a bearish mode. The industrial index backslided by an average 3 percent over the JanuaryMarch 2014 period, possibly reflecting both the recent tapering off of the US Federal Reserve Bank monetary policy stance and the slowdown of the Zimbabwean economy. The mining index also lost an average 9 percent during this period. Market capitalization decreased by 4.3 percent over January-March 2014, to reach US$4.5 billion in March 2014.
ZSE Peformance (Jan 2012-March 2014)
250 200 150 100 50 0

US$ Billions

Deposits

Loans

Loans to Deposit Ratio (right)

Percent

Industrial Index

Mining Index

Source: Zimbabwe Stock Exchange