Zimbabwe Economic Update
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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ACRONYMS AND ABBREVIATIONS ARDA Agricultural and Rural Development Authority GDP Gross Domestic Product GMB Grain Marketing Board LAs Local Authorities MoFED Ministry of Finance and Economic Development NSSA National Social Security Authority OPC Office of the President and Cabinet RBZ Reserve Bank of Zimbabwe SEPs State-owned Enterprises and Parastatals SOEs State Owned Enterprises ZAMCO Zimbabwe Asset Management Company ZESA Zimbabwe Electricity Supply Authority ZETDC Zimbabwe Electricity Transmission and Distribution Company ZIMSTAT Zimbabwe National Statistics Agency ZIMVAC Zimbabwe Vulnerability Assessment Committee ZINWA Zimbabwe National Water Authority ZPC Zimbabwe Power Company i PREFACE The Zimbabwe Economic Update (ZEU) offers a World Bank perspective on recent economic developments in Zimbabwe and also undertakes evidence-based analysis on key areas of the Zimbabwean economy. This second edition explores the Zimbabwean public sector: local authorities and state-owned enterprises and parastatals and has significantly benefited from authorities’ input. Both in the preparation and review. The ZEU is intended to enhance ongoing policy debates to foster the country’s goals to increase growth, reduce poverty and lessen inequality. I would therefore like to thank the Government of Zimbabwe for their considerable input into this publication. Since the last ZEU, growth prospects have noticeably dimmed. Recent large public financing requirements have placed considerable pressure on the financial sector leading to liquidity shortages. Large areas of the economy have been affected, particularly, services and industry, although the ending of the drought has improved prospects of agriculture. Clearly, urgent reform of the public sector is essential to bring overall public finances on a sustainable footing. However, its size and rigidity makes this a difficult task. The problem is compounded by a large public debt burden, which has substantially raised the cost of credit. Tackling these twin issues requires a deep and extensive reform program. This could enable a rapid increase in capital and investment flows into the country. And rejuvenate the economy. In this regard, I strongly support initial Government actions to bring finances under control. In particular, implementing measures to rationalize the public sector wage bill, and reduce public expenditure pressures. A key next step would be to consolidate the fiscal accounts and strengthen oversight of state-owned enterprises. Sustaining this reform program will require broad multi-stakeholder consensus and steady political will. This is essential if we are to unlock Zimbabwe’s long-term growth potential, alleviate poverty, and expand economic opportunities for the country’s diverse and well-educated workforce. I look forward to engaging on these issues with the Government of Zimbabwe, the private sector, civil society, and the country’s other international development partners. Paul Noumba Um Country Director for Botswana, Lesotho, Namibia, South Africa, Swaziland, Zambia and Zimbabwe ii Contents Acronyms and Abbreviations i Preface ii Contents iii Acknowledgements vi Executive Summary vii Outlook and Challenges ix Chapter 1 Recent Economic Developments 1 1.1 Growth and Poverty 1 Agriculture 2 Mining 2 Manufacturing 3 Services 3 Poverty 3 1.2 Fiscal Policy 4 1.3 Monetary and Financial Sector Policy 6 1.4 The Balance of Payments 8 Outlook and Challenges 9 Chapter 2 Local Authorities 14 2.1 Local Government 14 2.1.1 Legal and Institutional Context 15 2.2 LA Revenues and Expenditures 16 2.2.1 Revenues 16 2.2.2 Local Government Spending 20 2.3 Fiscal Challenges 22 iii 2.4 Policy Options 24 Chapter 3 State-Owned Enterprises 26 3.1 Introduction 26 3.2 The Role of the SEPs in the Zimbabwean Economy 27 3.3 SEP Financial Performance 29 3.4 Fiscal Contributions and Risks from SEPs 31 3.5 SEP Governance 33 3.6 Policy Options 35 Figures Figure 1 Growth Rates and Investment-to-GDP Ratios, Zimbabwe and Selected Comparators, 2012-16 1 Figure 2 Growth of the Mining Sector 3 Figure 3 Growth and Poverty Rates, 2011-2016 (%) 4 Figure 4 Total Public Debt Stock 5 Figure 5 Key Fiscal Indicators, 2011-16 6 Figure 6 Financial Sector Indicators, 2011-2016 7 Figure 7 Balance of Payments 8 Figure 8 Trends in LA Revenue by Source, 2011-2014 (US$ millions) 16 Figure 9 Disaggregated Local Government Revenues (US$ millions) 18 Figure 10 Cost Recovery among Water Utilities and Water-Service Coverage, All Urban Local Authorities, 2012-2015 Average 20 Figure 11 Aggregate Budget of Selected Local Authorities by Expenditure Area, 2011-15 Total 20 Figure 12 Revenue and Expenditure Trends among Local Authorities, 2011-14 (US$ millions) 21 Figure 13 Local Authorities’ Fiscal Deficit 21 Figure 14 Debts Across Local Authorities 23 Figure 15 Salary Arrears, 2015 (US$ millions) 24 Figure 16 SEPs Contribution to GDP by Sector (Average 2012-2014) 28 Figure 17 SEPs Employment by Sector 28 Figure 18 Aggregate SEPs Financial Balance 30 Figure 19 SEPs Employment and Compensation 30 Figure 20 Current Assets and Liabilities 31 Figure 21 SEPs Net Contribution to the Treasury (Average 2011-2015) 32 Figure 22 Explicit Contingent Liabilities by Sector 32 Figure 23 Executive Compensation by Sector 34 iv Tables Table 1 Selected Macroeconomic Indicators, Estimated and Projected, 2014-2019 12 Table 2 Distribution of Budget to Service Delivery Areas, (Selected Local Authorities % total) 22 Boxes Box 1 A Consolidated Public Sector? 13 Box 2 SOE Performance in the Electricity Sector 29 Annexes Annex A Commercial SOEs included in the analysis in Chapter 3 36 Annex B Jointly prepared by the Government of Zimbabwe and the World Bank (www.worldbank.org), Executive Summary 37 Annex C 46 v ACKNOWLEDGEMENTS This edition of the Zimbabwe Economic Update (ZEU) was prepared by a World Bank team led by Johannes “Han” Herderschee (Senior Country Economist), with contributions from Jason Hayman (Consultant), Marko Kwaramba (Economist) and Nyasha Munditi (Consultant). The team benefited from the valuable support provided by Camille Nuamah (Country Manager), Sebastien Dessus (Lead Economist and Program Leader) and Ivailo Izvorski (Acting Practice Manager). Paul Noumba Um (Country Director) provided overall guidance. The team is grateful for the comments received from peer reviewers Cecile Valadier (Senior Economist), Smriti Seth (Economist), and Kjetil Hansen (Senior Public Sector Specialist). Finally, the team would like to express its gratitude to Bruno Bonansea (Cartographer), who designed the map on the cover, Sean Lothrop (Consultant) who edited the report, Cybil Maradza (Consultant), who formatted the draft and prepared it for publication, and Farai Sekeramayi-Noble (Program Assistant), who supervised the finalization of the report. Chapters 2 and 3 of the ZEU summarize and elaborate on information first reported in Volumes 2 and 3 of the Zimbabwe Public Expenditure Review (PER) jointly prepared by the Government of Zimbabwe and World Bank staff. Mr. Z.R. Churu supervised the preparation of the PER series at the Ministry of Finance and Economic Development, while Senior Economists Johannes Herderschee and Leif Jensen led the World Bank team. Volume 2, “Local Government Service Delivery,” was prepared by a team consisting of Mr. Tatenda Mandeya and Mr. Alpha Nhamo (both Ministry of Local Government, Public Works and National Housing), Janine Mans (Consultant), Ngoni Mudege (Senior Water and Sanitation Specialist), and Marko Kwaramba (Economist). Volume 3 “State Enterprises and Parastatals” was prepared by a team consisting of Samuel Phiri (Ministry of Finance and Economic Development), Marko Kwaramba (Economist), and Consultants Nikeisha Russell, Sonny Mabheju, Norman Mukwakwami, Tawana Nyabeze, and Peter Rundell. The PER was completed in October 2016, and its macroeconomic indicators were updated on March 6, 2017. All volumes of the PER are available at the World Bank website (www.worldbank.org). The information in the ZEU is current as of June 1, 2017. vi Executive Summary Zimbabwe faces complex fiscal and macroeconomic challenges, and well-designed policies will be vital to accelerate growth and poverty reduction. Government debt to the banking sector increased dramatically since 2015 and contributed to a protracted financial crisis that severely limited credit to the economy, negatively affecting the private sector. Meanwhile, the drought experienced during the 2015/16 agricultural season reduced agricultural output and exacerbated rural poverty. However, favorable rains received in 2016/17 are projected to boost growth of the agricultural sector in 2017 and per capita output is projected to increase this year. The GDP growth rate fell from 1.4 percent in 2015 to just 0.7 percent in 2016, continuing negative per capita income growth. Severe credit constraints have caused a significant contraction in private demand. Per capita consumption fell by some 5 percent and the investment-to-GDP ratio shrunk from a level that was already well below the average for Sub-Saharan Africa. A fiscal expansion and an increase in net exports partially offset the contraction in private demand. While a drought caused a drop in agricultural production and hydroelectricity generation in 2016, mining grew strongly and output in the manufacturing, and services sectors increased modestly. Consequently, economic growth remained positive on balance.