Zimbabwe Zimbabwe at a Glance: 2003-04

Country Report

Zimbabwe Zimbabwe at a glance: 2003-04

OVERVIEW Despite press reports and persistent rumours that the president, Robert Mugabe, may retire to ensure a smooth transfer of power to a chosen successor, the Economist Intelligence Unit expects the president to continue to cling on to power. During this time, Mr Mugabe will continue to use the security forces and party militias to suppress any form of opposition to his regime, particularly the main opposition party, the Movement for Democratic Change (MDC). Although an organised programme of mass protests, the collapse of the economy and food shortages may signal the start of a political end-game for Mr Mugabe, his control of the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) party and the security forces remains strong and any political manoeuvring to oust him may take years to reach a conclusion. Meanwhile, with little substantive change in economic policy expected over the outlook period, the economy will continue to contract and real GDP is forecast to decline by 8.8% in 2003 and 4.7% in 2004 against the background of triple-digit inflation.

Key changes from last month Political outlook • The MDC organised a successful two-day strike on March 18th and 19th which closed most cities down. This is likely to signal the start of further mass action against the government, which will increase political tension. Economic policy outlook • The minister of finance, Herbert Murerwa, has outlined the main elements of the government’s proposed new economic policy, the National Economic Revival Programme (NERP). Although the NERP involves a partial devaluation of the Zimbabwe dollar, without addressing the key issues of the budget deficit and lack of confidence in the government, the programme will have little impact in turning the economy around. Economic forecast • The introduction of the new exporters’ rate of Z$824:US$1 has led us to revise our GDP conversion exchange rate. This, in turn, has led to a modest increase in our forecasts for GDP in US dollar terms in 2003 and 2004 and a reduction in the current-account deficit as a percentage of GDP to 0.9% in 2002, 1.2% in 2003 and 1.6% in 2004. April 2003

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Outlook for 2003-04

Political outlook

Domestic politics Despite press reports and persistent rumours that the president, Robert Mugabe, may retire to ensure a smooth transfer of power to a chosen successor, the Economist Intelligence Unit expects the president and his Zimbabwe African National Union-Patriotic Front (ZANU-PF) government to continue to cling on to power. During this time, Mr Mugabe will continue to use the security forces and party militias to suppress any form of opposition to his regime, particularly the main opposition party, the Movement for Democratic Change (MDC). The government is also likely to continue with its current economic policies for as long as possible, even though these have caused massive economic decline in Zimbabwe since 1999. During the outlook period, the government’s central political strategy will be to undermine the MDC. It will do this in three ways. First, it will try to reduce the number of parliamentary and local council seats held by the MDC by intimidating opposition candidates and voters and rigging by-elections. Second, the authorities will try to undermine the MDC by arbitrarily arresting MPs and activists on a range of often spurious charges; the most high-profile of these is the ongoing trial of the MDC president, Morgan Tsvangirai, for allegedly planning the murder of Mr Mugabe. Third, the government will use controversial legislation, such as the Public Order and Security Act, to limit the MDC’s ability to organise anti-government protest. In addition to its attempts to undermine the MDC, Mr Mugabe’s government will continue to undermine the independence of the judiciary and intensify its repression of the independent and foreign press, non-governmental civic organisations, trade unions and ethnic minorities. The Mugabe government is taking a calculated gamble that the food shortages and accelerating economic decline will weaken the opposition. It may also hope to force the opposition to become a member of a government of national unity, an option favoured by the South African president, Thabo Mbeki. This strategy seems to have worked so far. Although there is widespread anger against the government and a strong sense that the president should retire, until recently there seems to have been little appetite for mass protests which are likely to be violently suppressed. However, there are early signs that this may be changing. Following the successful national strike in mid-March, the MDC appears to be prepared to oppose the Mugabe government more forcefully through its “Action for National Survival Campaign”. In addition, worsening food and fuel shortages, triple-digit inflation and rising unemployment have made the urban population more desperate. Finally, the MDC is already facing so much repression that the party seems to have decided that it has nothing to lose, even if its attempts to organise mass protests capable of toppling the government are initially met with violent suppression by the security forces. The MDC gave the government an ultimatum to return the country to democracy by March 31st,

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which, if not met, will result in the launch of what the MDC calls “the final onslaught” against the government. In the current climate of increasing discontent and economic collapse, another option that cannot be entirely discounted is that of a “palace coup” in which a faction within ZANU-PF forces Mr Mugabe from power and takes over government. Signs of such activity became evident early this year when it was revealed that the speaker of the house, Emmerson Mnangagwa, and the armed forces’ commander-general, Vitalis Zvinavashe, had attempted to start negotiations with Mr Tsvangirai to form a transitional government. However, although the rapidly deteriorating economic situation and political manoeuvring may signal the start of a political end-game for Mr Mugabe, his control of ZANU-PF and the security forces remains strong and it may take years for the manoeuvring to oust him to force him from power.

International relations To date, Mr Mugabe has managed to play a clever hand on the international front and continues to divide the international community on the best approach to dealing with his regime. The key to Mr Mugabe’s success has been to keep international emphasis on the land redistribution issue. This has successfully divided the international community. He has argued that his land redistribution policy is needed to correct a historical injustice—an argument which receives a sympathetic hearing from leaders in Africa and other developing countries. This shifts the focus away from the conduct of the 2002 presidential election, human-rights abuses and the undermining of the rule of law and democracy in Zimbabwe. Mr Mugabe has also proved adept at offering concessions when needed and then not implementing them when political pressure subsides. The net effect has been a lack of international consensus on how to handle his regime. Although relations with the US and EU will continue to be tense—both have adopted targeted sanctions against senior members of ZANU-PF which limit their ability to travel and freeze financial assets—they will continue to provide food aid on humanitarian grounds. Towards the end of 2002 donors protested that food aid was being used as a political weapon, and the US warned that if this continued it would seek to deliver aid directly to hungry Zimbabweans, against the will of the government. Another possibility is that the UN could directly monitor the distribution of food supplies. This would increase the antagonism between Zimbabwe and food aid donors and, if it can be shown that Mr Mugabe is using food aid for political ends, it would make it more difficult for Zimbabwe’s neighbours in Southern Africa to continue supporting him.

Economic policy outlook

Policy trends In late February, the finance minister, Herbert Murerwa, outlined the key measures of the National Economic Revival Programme (NERP) aimed at addressing the country’s economic crisis. The central element of the plan is the agreement reached at the tripartite negotiating forum (consisting of the government, organised labour and the business community) under which the government will try to reduce the budget deficit to 11% of GDP by the end of

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2003 and partly devalue the exchange rate (already implemented). At the same time, the workforce and business will seek to police price and wage increases to help meet the inflation target of 96% by the end of the year. Although the plan may help to reduce inflation, a target of under 100% is far too ambitious while the budget deficit is likely to remain at around 10-15% of GDP. Moreover, the NERP is unlikely to resolve the growing shortage of foreign exchange, which is driven by the collapse in gold and tobacco exports, or restore confidence in the economy. The other aim of government policy will be to try and resolve the country’s huge food crisis. It is clear that the government will have to continue importing food aid until the maize harvest in March 2004. Meanwhile, it will seek to consolidate its seizures of white-owned commercial farms. Through a combination of providing newly resettled farmers with seeds and fertiliser, or with the finance to purchase them, the government hopes to increase maize production in 2004, which will then drive a more general economic recovery. However, the far-reaching economic damage caused by the dismantling of most of the commercial farming sector will continue to have knock-on effects on the rest of the economy, and any recovery in the agricultural sector will be limited to some sectors, such as maize production.

Fiscal policy The root cause of Zimbabwe’s economic crisis is the government’s unwillingness to reduce the country’s unsustainable fiscal deficit. From data available up to October 2002, we are estimating a deficit of 10.5% of GDP in 2002. Although the government is now committed to keeping the deficit at around this figure in 2003, the need to import food and fuel, while funding newly resettled small-scale farmers, will all prove costly, against a background of weak revenue. We are therefore forecasting a budget deficit of 13.2% of GDP in 2003. Although improved food production in 2004 should reduce the need for government food imports, this will be offset by demands for wage increases. In addition, continued economic decline will reduce revenue growth and the fiscal deficit will remain high at a forecast 12.4% of GDP. The deficit will be financed from domestic sources, and even if inflation continues at the high rate of the past few years, the recent rapid growth of domestic debt at such highly negative real interest rates will place a huge burden on the economy in the medium term.

Monetary policy The Reserve Bank of Zimbabwe (RBZ, the central bank) will continue with its dual interest-rate policy for as long as possible in an attempt to limit government domestic debt repayments. Under this dual policy, interest rates on Treasury bills are kept as low as possible—as inflation is now at over 200% per year, real interest rates on 91-day T-bills are currently around –160%. In addition, the RBZ has created a special fund through which it will lend to export and productive sectors at a heavily subsidised rate. Other interest rates, however, will be partly determined by market forces. It is unclear how long this dual policy can last, but as the RBZ is increasingly the main purchaser of T-bills, it is likely that it will have to raise interest rates on them at some point if it wishes to attract private-sector borrowing. The RBZ will continue to lengthen the

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maturity profile of the government’s debt to reduce its immediate debt- servicing costs.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.1 2.8 3.1 3.8 OECD 0.8 1.6 1.8 2.5 EU 1.4 0.9 1.3 2.1 Exchange rates ¥:US$ 121.5 125.3 120.3 121.5 US$:€ 0.896 0.946 1.115 1.105 SDR:US$ 0.785 0.772 0.719 0.724 Financial indicators € 3-month interbank rate 4.26 3.33 2.44 2.94 US$ 3-month Libor 3.78 1.80 1.36 3.17 Commodity prices Oil (Brent; US$/b) 24.5 25.0 26.6 19.6 Gold (US$/troy oz) 271.1 309.8 316.3 290.0 Food, feedstuffs & beverages (% change in US$ terms) -1.9 13.1 11.5 -3.1 Industrial raw materials (% change in US$ terms) -9.8 2.0 4.0 5.4 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Although the US economy recovered quite quickly in early 2002, the pace of the recovery has slowed sharply since then. Because of this and owing to slow growth in both Japan and the EU—particularly Germany—we are now forecasting that world GDP growth will pick up very slowly over the forecast period, from 2.8% in 2002 to 3.1% in 2003 and 3.8% in 2004. One benefit of the uncertain global economic outlook is that the price of gold is now forecast to average US$316/troy oz in 2003, before falling back marginally to US$290/troy oz in 2004. Although in normal circumstances this would benefit the Zimbabwean economy, because gold production is set to decline over the outlook period, economic developments will be much more strongly influenced by domestic factors than by trends in the world economy.

Economic growth We expect the economy to continue contracting in 2003-04, resulting in six years of declining real GDP. Estimates in the budget indicate that real GDP contracted by 12.1% in 2002. The decline was led by the contraction of the agricultural sector, which we estimate at 21% in 2002, owing to the disruption caused by the fast-track land reform programme, drought and AIDS. Although the decline in agricultural output will slow to 7% in 2003, industry will continue to contract steadily, as the decline in commercial farming feeds through to the rest of the economy. In addition, growing shortages of foreign currency and fuel at a time of price controls, falling purchasing power and triple-digit inflation will push up production costs, creating an extremely difficult economic climate for companies and mines. As a result, most will scale back their operations and shed labour, and we expect real GDP to contract by a further 8.8% in 2003. The economic decline will slow in 2004, because many

firms will already have scaled back their operations substantially. There may also be some limited recovery in food production, as the remaining commercial farmers and small-scale farmers increase maize production. We are therefore forecasting that real GDP will contract by 4.7% in 2004.

Inflation Year-on-year inflation gradually accelerated during the course of 2002 to reach 198.9% in December. The January figures show a continuation of the upward trend, as fiscal and monetary policy are broadly unchanged, food shortages are continuing and foreign exchange is becoming scarcer; thus we are forecasting average inflation of 304.5% in 2003. However, because very few goods are available at official prices, the official rate may well underestimate the rate of inflation for most consumers. We do expect inflation to peak in 2003, as the government’s attempts to limit price and wage increases will have an impact towards the end of the year and the limited recovery in parts of the agricultural sector in 2004 should reduce food shortages. In addition, the very high base of the consumer price index in 2003 will make a decline in inflation more likely in 2004. However, we still expect inflation to remain in triple digits in 2004, averaging 176.8%.

Exchange rates Having held off from devaluing the Zimbabwe dollar since October 2001, the finance minister finally announced at least a partial devaluation in February 2003. Although the official rate of Z$55:U$1 remains in place, Mr Murerwa managed to get the president to agree to allow the RBZ to offer a rate of Z$824:US$1 to all other persons needing foreign currency (but allocated according to the existing categories of priority imports). It remains unclear who will bear the cost of this, because although the RBZ will buy foreign currency from exporters at Z$824:US$1, it will have to sell it to the government at Z$55:US$1. Moreover, it is not clear who will get access to the official rate and for what. It is probably safe to assume that the official rate will be used for food, fuel and electricity, but no doubt official foreign travel and the operational costs of diplomatic missions will be catered for in the process. All other export incentives, such as the gold-floor price and the tobacco subsidy, will be suspended, but the new system should compensate for this. We expect the new exchange-rate regime to stay in place until 2004, or for as long as the government needs to continue with food and fuel imports at the official rate. However, if the need for these imports were to lessen in 2004, it is possible that the government would consider abolishing the special rate for government transactions, or merging the two rates.

External sector Having held up relatively well in 2002, owing to high gold prices and a reasonable tobacco crop, Zimbabwe’s foreign-exchange earnings are expected to decline sharply from US$1.7bn in 2002 to US$1.2bn in 2004, as tobacco exports nearly halve and gold exports decline. Tourism receipts will remain stagnant in 2003-04 and foreign aid inflows will be limited to humanitarian support. Although we estimate that food imports will be boosted in 2002-03 by purchases of maize to offset domestic shortages, the decline in foreign-exchange earnings and the lack of access to most lines of credit will severely limit other types of imports. We are forecasting that imports will contract from US$1.6bn in 2002 to US$1.2bn in 2004. Although the government has stated that it intends

to improve its debt-servicing record in 2003-04, it will have difficulty clearing the arrears accumulated in 2001-02. Official transfers will remain low, owing to the low level of donor support for the country, but private transfers have held up well, as the 2m Zimbabweans who are estimated to live outside the country have continued to send money home. Overall, we forecast that the current- account deficit will remain broadly constant at 1.2% of GDP in 2003, compared with 0.9% of GDP in 2002, and that it will widen marginally to 1.6% of GDP in 2004.

Forecast summary (% unless otherwise indicated) 2001a 2002a 2003b 2004b Real GDP growth -7.3c -12.1 -8.8 -4.7 Manufacturing production growth -6.9d -19.4 -7.1 -3.1 Gross agricultural production growth -12.2 -20.8 -7.0 -3.0 Consumer price inflation (av) 74.5d 134.5d 304.5 176.8 Consumer price inflation (year-end) 112.1d 198.9 350.0 79.6 Short-term interbank rate 38.0d 36.5 65.0 89.9 Government balance (% of GDP) -7.2 -10.5 -13.2 -12.4 Exports of goods fob (US$ bn) 1.7 1.7 1.3 1.2 Imports of goods fob (US$ bn) 1.5 1.6 1.3 1.2 Current-account balance (US$ bn) -0.2 -0.1 -0.1 -0.1 Current-account balance (% of GDP) -4.5 -0.9 -1.2 -1.6 External debt (year-end; US$ bn) 3.8 3.9 3.6 3.1 Exchange rate Z$:US$ (av)e 55.1d 55.0d 55.0 55.0 Exchange rate Z$:¥100 (av) 45.3d 43.9d 45.8 45.3 Exchange rate Z$:€ (year-end) 48.5d 57.8d 61.9 60.0 Exchange rate Z$:US$ (av; parallel market) 55.0d 55.0d 55.0 55.0 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official estimate. d Actual. e In February 2002, the government introduced a dual exchange-rate system. The Z$55:US$1 rate is applicable to a range of official government transactions; all other transactions with the Reserve Bank of Zimbabwe will now be conducted at Z$824:US$1.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: April 1st 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule