Economic of Zimbabwe - Case Study Example

Economic Report of Zimbabwe Your name: Institution name: Overview Zimbabwe’s economy has been growing despite continuing political uncertainty. Following many years of contraction from 1997 to 2009, the country’s economy was reported to have recorded a real growth of roughly 10 per cent in 2010/2011, before slowing in 2012/2013 due to low diamond revenues and poor crop harvest (Christiano, 2008). Zimbabwe faces numerous difficult economic problems, including regulatory deficiencies and infrastructure, policy uncertainty, ongoing indigenization pressure, insufficient formal employment, a large external debt burden, and so forth. Until late 2008, Zimbabwe Reserve Bank routinely printed money to fund the budget deficit, causing massive hyperinflation (Christiano, 2008). Dollarization in early 2009 reduced inflation below ten per cent per year and also ended hyperinflation (Wines, 2010), but the Zimbabwe was exposed to structural weakness that has continued to inhibit economic growth. Introduction The Zimbabwe economy shrunk badly after 2000, resulting in a desperate situation for the county, an 80 per cent unemployment rate and widespread poverty (Majaka, 2014). The country participation from 1997 to 2002 in the civil war in the DRC set the stage for this deterioration by draining the public coffer of hundreds of millions of dollars (Croft, 2009). Hyperinflation has been a major problem for the country since 2003, when Zimbabwe suspended its own currency (Christiano, 2008). Zimbabwe’s economy is still in a fragile state, with massive deindustrialization and an unsustainably high external debt and in formalization (Wines, 2010). The country’s average GDP growth rate of 7.5 per cent during the economic rebound of 2009-2012 is moderating (Majaka, 2014). This economic slowdown has been contributed by the liquidity challenges (such as revenue underperformance and so forth), structural bottlenecks, outdated technologies, infrastructure deficits, power shortages, corruption and a fragile and volatile global financial environment (Christiano, 2008). This constrained fiscal space has forced Zimbabwe government to adopt a contractinary fiscal policy stance, while the adoption of multi-currency regime has limited the use of monetary policy instruments (Croft, 2009). A lot still remain to be done in Zimbabwe to improve the country’s business environment (Wines, 2010). Key challenges to doing business in Zimbabwe include funding constraints, policy inconsistency, inadequate infrastructure, corruption, and inefficient government bureaucracy. Economic Index Zimbabwe’s economic freedom score is 35.5, making its economy the 176th freest in the 2014 economic index. Zimbabwe economic index score has increased by 6.9 points from year 2013, this reflects a gain in monetary freedom following the end of hyperinflation (Wines, 2010). Zimbabwe has also been ranked last out of 46 states in Africa continent and is the third-least free nation rated in the 2014 economic index score. Over the last two decade of the economic index, the country’s economic freedom has worsen by 13 points, this is the fourth worst score drop (Majaka, 2014). This is a significant declines in eight of the ten economic freedoms include 40 point drops in scores for investment freedom and property rights (Christiano, 2008). Zimbabwe’s regulatory efficiency has also diminished, as it was indicated by considerable economic index score declines in labor freedom and business freedom. Zimbabwe has been consistently been rated a “repressed” economy since 1994, the country remains characterized by policy volatility and economic instability (Wines, 2010). The impacts of many years of hyperinflations have crippled entrepreneurial activity, severely undermining the country’s economic potential. An inefficient and corrupt judicial system and lack of transparency have severely exacerbated the country’s business costs. Figure 1: Country Comparisons Inflation Rate According to the World Bank, Zimbabwe’s inflation; GDP deflator (annual %) was last measured in 2011. Inflation as a measured by the annual growth rate of the Gross domestic Products (GDP) has shows the rate of price change in the a country’s economy as a whole (Majaka, 2014). While the Gross domestic Products (GDP) Implicit deflator is the ratio of Gross domestic Products (GDP) in local currency to Gross domestic Products (GDP) in constant local currency (Christiano, 2008). The inflation rate for the country averaged 53981.70 per cent from 1998 until 2014, there was an all time high of 2660522.20 per cent in July of 2008 and a low of -7.6 per cent in December 2009. Figure 2: Inflation rate Zimbabwe hyperinflation was preceded by several years of mounting public debt and economic decline. The weakening of the country’s economy began in 1999, coinciding with a period of drought that affected the agricultural dependent sector. While, the external debt as a share of Gross Domestic Products (GDP) increased to 120 per cent in 2008 from 10 per cent in1980 (Majaka, 2014). While redistribution of land from white settlers to Africans in 2000 depressed commercial farming output (Croft, 2009). Agricultural output fell by 50 per cent between 2000 and 2008, leading to a decline in the major foreign exchange earner in tobacco, cash crop, which slid 65 per cent in 2008 from 2000 levels (Wines, 2010). Maize production which is a national staple food also dropped 80 per cent in the same year. GDP per Capita GDP per Capita data is the GDP divided by midyear population. These figures are used to generate the World Economic Outlook country group composites for the domestic economy (Croft, 2009). In 2011, Zimbabwe’s GDP per capita (current US$) values was 757.09 dollars. Over the past five decades, the value for GDP per Capita for Zimbabwe fluctuated between 1,084.50 dollars in 1982 and 278.96 dollars in 1962 (Wines, 2010). In 2011, the value for GDP per capita was 757.09. Figure 3: GDP per Capita The subdued growth reflected the challenges that faced the Zimbabwe economy (Wines, 2010), including: uncertainties, limited capital sources and its high cost; uncertainties that arise from the government inconsistencies, especially with respect to indigenization regulations and economic empowerment; obsolete technologies and machinery; dilapidated infrastructure; power and water shortages; frequent breakdown of the existing machinery and so forth (Croft, 2009). These challenges have been compounded further by contestations among the Inclusive Government of Zimbabwe (IG) partners around issues of pending national elections and national referendum. Unemployment Unemployment can be referred to the share of the labor force that is without jobs but available for employment and/or seek employment. Zimbabwe’s unemployment rate has been found to be more than 70 per cent with less than 850,000 people who have been employed out of approximately 13 million populations; this is according to the World Bank Report 2014 (Croft, 2009). The level of employment in the country’s formal sector has dipped from a peak of 1.5 million between 1980 and 2000 to around 950,000 by 2004. At the moment the Zimbabwe government has failed to create new employments (Majaka, 2014). With the collapse of the formal industry, the informal sector has borne the brunt of absorbing the masses of unemployed Zimbabweans. However, most Zimbabweans who are in the informal sector would wish to get a formal employment that has steady stream of steady income. Figure 4: Unemployment rate Balance of Trade The balance of trade is the difference between monetary values of exports and imports of products in a country’s economy over a certain period of time (Croft, 2009). Balance of trade is measured in the currency of that country’s economy. In other words, balance of trade is the relationship between a nation’s exports and imports. According to World Trade Organization, in August 2014, Zimbabwe was reported to have recorded a trade deficit of 228.07 USD Million (Wines, 2010). The balance of trade of the country has been averaged -433.06 USD Million from 1990 until 2004, reaching an all time high of 290 million dollars in December of 2001 and recorded a low of -5037.26 million dollar in December 2012. Figure 5: Zimbabwe Balance of Trade In the past, the country has run trade deficits as a result of a decline in exports. The country is a net importer of capital goods and fuel (Croft, 2009). The country’s main export is tobacco which account for 23 per cent of country’s total exports. Other includes diamonds, nickel and platinum. Interest Rates Interest rate is the rate at which financial institutions can borrow funds from the country’s central bank. The interest rates are usually used by the country’s central banks to shape the monetary policy. Zimbabwe’s interest rate benchmark was last recorded at fourteen per cent. The country’s interest rate has averaged 13.5 per cent from 2011 until 2013, interest rate reached a high of 16.5 per cent in March 2012 and the country recorded a lower interest rate of 9.5 per cent in 2011 (Majaka, 2014). Figure 4: Zimbabwe Interest Rate Credit Rating The country’s Standard and Poors credit stands at B+. While, Moodys rating for the country sovereign debt stands at B1 (Wines, 2010). In general, a credit rating is usually used by pension funds, sovereign wealth funds and other investors to rate the credit worthiness of the country thus having a major effect on the country’s ability to borrow. References Croft, Adrian (September 26, 2009). "Zimbabwe should seek HIPC debt relief, minister says". Reuters. Majaka, Ndakaziva (20 May 2014). "Zimbabwe’s economic collapse alarms business". Daily News Live. Retrieved 21 May 2014. Christiano, Lawrence (February 2008). "Cagan's Model of Hyperinflation Under Rational Expectations". International Economic Review 28 (1) Wines, Michael (7 February 2007). "As Inflation Soars, Zimbabwe Economy Plunges". The New York Times. Retrieved 4 May 2010. Read More