• The Zimbabwe National Statistics Agency has rebased its data for key economic indicators from base year 2009 to 2012. The new methodology includes the informal sector in its calculations for the first time leading to an increase in annual GDP from USD18 billion to USD25.8 billion, an increase of more than 40% in the nominal size of the economy.
• The detailed analysis of the new rebased figures, including also the new methodology for including the informal sector in GDP, suggests that the manufacturing sector has seen the largest adjustment among all sectors.
• Zimbabwe's newly appointed finance minister has reaffirmed the government's commitment to reform by working closely with the international community and has announced fiscal policy amendments such as taxing electronic payments and reducing the public-sector wage bill.

Zimbabwean Finance Minister Mthuli Ncube announced during a media briefing in Harare on 5 October that the aim of the rebasing of some of the key economic statistics is to provide an updated and more accurate picture of the economy's size. In addition, during his talk to media representatives, Ncube announced plans to cut spending in Zimbabwe's civil service and privatize more firms, while promising to foreign lenders to repay part of Zimbabwe's arrears. Additionally, Ncube announced a 2% tax on money transfer transactions was to be introduced.

With the new methodology, the manufacturing sector overtakes the agricultural sector in size and contribution to GDP

While previously manufacturing output stood in 2017 at USD1,199 million, with the new adjustment, output reached USD2,134 million last year. The GDP of the agriculture, hunting and fishing, and forestry sector reached USD1,654 million in 2017, and previously was USD1,480 million. According to previous statements by the country's central bank, the Reserve Bank of Zimbabwe, Zimbabwe's agricultural sector is expected to grow by 10.7% in 2018. Furthermore, agricultural output is expected to benefit greatly from a projected increase in tobacco output that is forecast to reach 200 million kilograms in 2018. Besides wholesale and retail trade, the agriculture sector prior the adoption of the new methodology was the largest sector in terms of contribution to Zimbabwe's total gross production, accounting for 9.9% of GDP and growing at 11% in 2017. With the new methodology, the manufacturing sector overtakes the agricultural sector in size and contribution to GDP with 12.1% of GDP, while previously under the old methodology contributing 8.5% to GDP. During the rule of former president Robert Mugabe, Zimbabwe's manufacturing sector's capacity-utilization rates dropped drastically due to a poor performance in the engineering and plastics sub-sectors. Frequent electricity outages, a squeeze on working capital availability, limited value addition, and prohibitive labor laws added to the sector's despairs. Generally, ageing capital stock, combined with low foreign direct investment, stringent labor laws, ailing railway and road infrastructure, and unreliable electricity supply have led to high costs and deteriorating quality of local products. All these structural issues require assistance from the international community and a return of foreign direct investment. Sectors with little scope of informal activity such as finance and the mining sector have seen minor adjustments amid the rebasing effect. Mining and quarrying output under the new methodology stood at USD1,242 million in 2017, which is down from USD1,267 million prior to the rebasing. Finance and insurance activity during the same year when rebased reached USD1,052 million, which is only moderately up from USD1,018 million.

Reform momentum signals Zimbabwe's effort to reengage with the international community

Overall, IHS Markit welcomes the government's expressed efforts to address finances in the civil service and address and re-schedule domestic and external public-debt obligations, which are consistent with agreements with lenders and creditors. Previously proposed government employment costs are still too high to address the country's fiscal imbalances, hence further adjustments in cutting finances in Zimbabwe's civil service are much needed. Zimbabwean President Emmerson Mnangagwa, announced a new cabinet on 7 September, including Ncube's appointment to the finance portfolio, which appears to reinforce the "Zimbabwe is Open for Business" message that President Mnangagwa is sending to get the economy back on track. The new cabinet appointments, such as that of Ncube, most probably affirm Mnangagwa's commitment to structural and economic reforms, including dealing with debt arrears, tackling corruption, and enacting pro-business reforms under a new investment law.

Outlook and implications

Including informal activities in national accounts provides a more comprehensive assessment of Zimbabwe's wealth, which is important in framing policy responses. Measurement of GDP and employment can be grossly underestimated if informal activities are not taken into consideration. The latest move in changing the methodology and rebasing Zimbabwe's GDP certainly led to an increase of the size of the nominal economy; but it does not change our narrative that Zimbabwe still continues to face large structural imbalances. Furthermore, while the manufacturing sector has now gained more prominence in adding output to total productivity, Zimbabwe requires a domestic demand boost following the country's severe difficulties over the past couple of years. Zimbabwe's liquidity crisis has been most evident in the services sector, in which output growth fell 60% in 2016 thanks to the country's severe cash shortages, which are ongoing. The move to increase the tax base for electronic transactions amid capturing the informal sector's contribution to economic growth can pose a risk to growth in the services sector and in overall domestic demand.

Posted 22 October 2018 by Alisa Strobel, Principal Economist, Global Economics SSA, S&P Global Market Intelligence