With half the year firmly down it gives us an opportune moment to look at how our economy has faired in 2021. To do this effectively we will need to look at developments in terms of Gross Domestic Product, Inflation, exchange rate and trade. We will preface these elements with a quick recap of where we are coming from in the form of a look back at 2019 and 2020. Finally, we will briefly look at the impact of the Covid-19 pandemic and lockdowns instituted to curb its spread and how they have impacted our economy and will be expected to impact our economy going forward.
2019 was a very difficult year for the Zimbabwean economy. Reality set in that the Zimbabwean RTGS dollars and US dollars were not in fact the same thing. This set the exchange rate between the US dollar and the local unit soaring, fuelled by money supply growth at levels ways above any expectations. Inflation also soared to a post dollarisation peak of 837% year on year. The ultimate result was a 13.27% decline in Gross Domestic Product. 2020 Started with expectations of recovery, as lofty as 7% at some points but as time progressed these expectations were revised downward and then Covid-19 hit and nothing was the same. The ultimate result was a contraction of 0.99% according to the World Bank.
On the Gross Domestic Product front, Finance Minister Professor Mthuli Ncube expects the economy to grow by 7.4%. This would put the GDP within touching distance of the 2012 to 2018 range. The IMF upgraded its previously more sombre 3.1% GDP growth forecast to a comparable 6% on the 17th of June 2021. The goal on the inflation front is to have inflation down to single digits, therefore below 10%, by year-end. This was expected to be underpinned by containment of money supply growth to below 25% per quarter. Also expected to be kept modest was the exchange rate picture with both the official auction market and the parallel market achieving some form of stability.
Gross Domestic Product
Simply looking at things the GDP growth that was forecast for 2021 was not unreasonable. The economy dropped only a little in 2020 in the face of the Covid-19 pandemic which locked down, no pun intended, the informal sector which Zimbabwe happens to have a very large one. There are a few more revisions by the World Bank and others though and this is important. Up until about a week ago, estimates by the World Bank had been for economic growth in Zimbabwe in 2020. This would’ve meant the economy starting from a higher base for 2021 and therefore the growth would’ve been lower. What actually changed was the base the nation is starting from rather than the GDP outlook of the nation.
The inflation picture perhaps reads the most interesting. Inflation in Zimbabwe peaked at 837.37% in July 2020 and had been brought nearly halfway down to 348.59% by December 2020. The targets the Finance Minister set were 55% by July 2020 and single digits by year-end. To that end, year on year inflation stood at 106.6% in June 2021. Assuming the decline has been linear we should expect to miss both the July and year-end targets. Stranger things have happened but it looks out of reach. How people in authority wish they had not rubbished Professor Steve Hanke when his Purchasing Power Parity based inflation painted an unfavourable picture as it currently puts Zimbabwe’s year on inflation for June at 60%, just shy of the promised land for the July target. Great strides have been made on the inflationary front in 2021.
The exchange rate picture is a bit more confusing. On the one hand, the official market auction-rate has found stability. Trading at 84.52 on the 30th of June 2021 having closed 2020 at 81.7866. A depreciation of 3.3% Parallel market rates have on the other been much more volatile. Firstly the rates have gone as high as 150 for sellers and 140 for buyers. Secondly, the spread has also grown quite wide in the market with sellers getting as little as 140 and buyers forking out as low as 120 Zimbabwean dollars per US dollar. Using the conservative 120 and comparing it to the 2020 closing figure of 111 by most counts the depreciation is 8.1%. Modest given where we’ve been. Our latest money supply update shows a 57.5% growth in Money supply (Reserve Money) in 2021. This happens to be closer to the exchange rate depreciation on the higher end of the spread. With the impending introduction of the $50 note, this is likely to be spurred a little more.
It would be very unfair to look at the economic state of the nation without considering the effect that Covid-19 had and continues to have on our economy. It is not a one-sided impact either. Covid-19 caused the closure of formal businesses but it also closed a lot of informal businesses. One good example of this is the cross border trade which was shut down completely thus alleviating the demand for foreign currency. Also, consider that the reduction in informal imports created opportunities for local manufacturers to increase capacity utilisation. The impact is not one-sided but it certainly slowed down economic activity.