Private consumption in Zimbabwe is likely to weaken going forward in view of the austerity measures that the government authorities have been implementing since the last quarter of 2018.

This is likely to result in constrained demand and slower economic expansion.

The Zimbabwe government is looking to reduce the budget deficit from about 12% of Gross Domestic Product to 5% by the end of this year.

And to achieve this, the authorities have, over the past few months, put in place ‘austerity measures’ to deal with the problem. Some of these include: ending the unsustainable practice of issuing Treasury Bills to finance the deficit; reduction of the public wage bill by cutting salaries of senior government officials by 5% across the board, retiring over 3000 youth officers, and establishing a more modest bonus system for civil servants that saved over $75 million in 2018 alone, and cutting unnecessary expenditure and ‘perks’ for ministers and parliamentarians.

And although some of the outcomes of these measures have been showing positive signs in respect of the government’s targets, analysts at IH Securities say the downside is constrained private consumption.

“Consumption to be highly subdued as bottom-of-the-pyramid disposable incomes are compromised bottom-of-the-pyramid disposable incomes have been compromised following highly inflationary policy reforms and the upward revision of fuel prices.

“We expected consumption to be significantly subdued as a result of a looming El-Nino effect in the 2018/2019 cropping season, sky-high prices of agricultural inputs and fuel for irrigation in 2019 given that informal sector earnings, the greatest contributor to bottom-of-the-pyramid liquidity, largely comprise earnings of small-holder farmers, artisanal miners and informal traders,” said IH Securities in a recent research note.

“Gold output declined severely in 4Q18 as miners failed to access their foreign currency proceeds, this trend may persist into 2019 in the absence of meaningful interventions.

“Mounting inflation and volatile parallel rates will continuously erode disposable incomes in 2019 as significant increases in incomes are not anticipated until the currency ambiguity is clarified.”

Further to this, the most recent monetary and fiscal policies are likely have more contractionary effect on local consumption, and this should pose a major concern for corporates, whose earnings are now on the line.

“Corporate earnings to be highly impacted by austere policy reforms and the 2% IMT tax The 2% IMT tax is expected to have a significant effect on corporate earnings if they do not pass onto their consumers.

“Although monetary and fiscal policy reforms are expected to yield results in the near to medium-term, the new policies have sanctioned the use of parallel rates whilst the government aims to maintain parity between RTGS and USD.

“We expect a significant squeeze in margins as suppliers insist on hard currency to provide a hedge in the volatile economy. If government maintains its commitment to restrict TB issuance, we expect reduced money supply (circa $2bn in TBs issued in 2018) – which will have an impact on liquidity and consumer demand relative to prior year. We expect corporate earnings to experience lower run rates to FY19,” says IH.