Zimbabwe Zimbabwe at a Glance: 2004-05

Country Report

Zimbabwe Zimbabwe at a glance: 2004-05

OVERVIEW With little progress being made in negotiations between the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC), it seems likely that the president, Robert Mugabe, will continue to clamp down on the opposition and use the considerable body of repressive legislation at his disposal to ensure that his party has a significant political advantage at the next parliamentary elections, due to be held in March 2005. If Mr Mugabe remains healthy and if he can make sufficient concessions to the international community over the conditions under which the polls are held, yet retain the domestic political advantage, there is a distinct possibility that he will hold on to power and gradually attempt to re-engage with the international community. Although the governor of the Reserve Bank of Zimbabwe (RBZ), Gideon Gono, will increasingly shape economic policy, he is unlikely to be able to introduce major changes that will reverse the country's drastic economic decline. As a result, the Economist Intelligence Unit forecasts that real GDP will contract by 9.2% in 2003 and by a further 3.3% in 2005.

Key changes from last month Political outlook • Mr Mugabe has stepped up his anti-corruption campaign to try to reduce infighting within ZANU-PF over his succession. The most high profile arrest has been that of the new finance minister, Christopher Kuruneri, for breaching foreign exchange regulations. Emmerson Mnangagwa, the parliamentary speaker and marginal favourite to succeed Mr Mugabe has also been named as a potential beneficiary of a gold smuggling operation. While this should restore discipline within the party, divisions could still emerge in a difficult election campaign. Economic policy outlook • The RBZ has published its first quarterly statement on monetary policy in 2004. This has made some minor adjustments to economic policy and forecasts a rapid turnaround in the economy as a result of increased food production. This seems unlikely, however. Economic forecast • There is no major change to our economic forecast from last month. May 2004

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Outlook for 2004-05

Political outlook

Domestic politics Negotiations between the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC) probably remain the best way to achieve a long-term political solution to the current crisis in Zimbabwe. Nevertheless, the president, Robert Mugabe, is showing little sign of deviating from his strategy of ignoring world opinion, continuing to clamp down on the opposition and using the considerable body of repressive legislation at his disposal to ensure his party has a significant political advantage at the next parliamentary elections (due in March 2005). If Mr Mugabe remains in good health, and if he can make sufficient concessions to the international community over the conditions under which the polls are held, yet retain the domestic political advantage, there is a distinct possibility that he will hold on to power and gradually start to re-engage with the international community after the elections. In this scenario, the challenge for the international community and for the South African president, Thabo Mbeki, in particular, will be whether they can convince Mr Mugabe to agree to talks and help to put in place conditions that at least partially level the playing field for the 2005 elections: the most likely basis for this will be the South African Development Community's (SADC) "Norms and Standards for Free and Fair Elections". However, the precedent set by the 2000 parliamentary and 2002 presidential elections shows that ZANU- PF has the ability to manipulate virtually every aspect of the electoral process, from voter registration to actual polling and the announcement of results. Moreover, persuading the president to agree to concessions will be difficult, as Mr Mugabe may well continue to refuse on the grounds that he does not want to weaken his party’s control of the election procedures. However, he is aware that it is in his interest to ensure that the election results are accepted by the international community, even if only with caveats. Even if Mr Mugabe does agree to hold talks over the elections, his commitment to making real compromises is highly suspect and the talks could drag on inconclusively for some time. Meanwhile, the government will continue to use the repressive legislation that it has passed in recent years to keep up the pressure on the MDC in the run-up to the polls. This will seek both to weaken the party as a political force and to dent its bargaining position in any talks. Central to this strategy is the government’s campaign of arbitrary arrests of MDC members of parliament and activists, often on spurious charges, and its willingness to continue to use controversial legislation such as the Public Order and Security Act to suppress any form of opposition to its rule. That this policy has the potential to divide the MDC is already apparent. Although the MDC has now stated that it is preparing for the elections, there are divisions within the leadership as to the best strategy: if it were to boycott the polls it would have no political representation in parliament and would have to wage an alternative political campaign against

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the government; while its participation would confer a legitimacy to the elections, despite the likely electoral manipulation. The rapid economic decline of the last three years and Zimbabwe's continued international isolation has made the situation within ZANU-PF more volatile. Although Mr Mugabe still seems to have a firm grip on the party, constant rumours about his ill-health have caused senior party officials to become increasingly obsessed with the question of who will succeed him as party leader. In an effort to quell the speculation, the president has stepped up his anti-corruption campaign, which has now implicated the speaker of parliament, Emmerson Mnangagwa (considered a possible successor to Mr Mugabe). While the president's capacity to play various factions off against each other should not be underestimated, the potential for the divisions to emerge in public during a difficult election campaign is real, and could undermine the party's electoral chances.

International relations To date, Mr Mugabe has played a clever hand on the international front and, as a result, world opinion is divided as to how best to respond to his regime. He has successfully kept the focus on the issue of land redistribution, thereby shifting attention away from the conduct of the 2002 presidential election, human rights abuses and the undermining of the rule of law and democracy. He has also proved adept at offering concessions, and then failing to implement them when political pressures subside. Another of Mr Mugabe’s tactics has been to neutralise African opinion on Zimbabwe by branding all critics of his regime as white racists or the puppets of racists. Consequently, no African leader has been prepared to take a firm stance against him. Relations with the US and the EU will continue to be tense, as both have adopted targeted sanctions against senior members of ZANU-PF—freezing their assets and limiting their ability to travel. However, both the US and the EU will continue to provide food aid to Zimbabwe on humanitarian grounds, although this is likely to prove controversial since food aid has, in the past, been used as a political weapon (only given to ZANU-PF supporters) and it is likely to be used in such a way again. This means that the main impetus for negotiating an end to the crisis will have to come from other African leaders, led by Mr Mbeki and the Nigerian president, Olusegun Obasanjo. However, it is still unclear whether both presidents will show the high level of commitment needed to ensure that talks move ahead, and whether they will be prepared to apply the political and economic pressures required to ensure that there is at least some progress on the reform of the electoral laws before the March 2005 parliamentary elections.

Economic policy outlook

Policy trends The government is, in theory, still committed to following the policies outlined in its national economic revival programme introduced in February 2003, but in practice, economic policy has become little more than ad-hoc crisis management coupled with a hefty dose of wishful thinking. If there is a consistent strand to economic policymaking it is that, as far as possible, the

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government will attempt to exert greater control over the economy, rather than address the root causes of the current problems, namely: the political crisis, which has undermined investor confidence; lax fiscal and monetary policies, which have resulted in triple-digit inflation; the willingness to allow the currency to become highly overvalued; and the disastrous land reform programme, which has undermined food production and exports. Moreover, the problem with greater government intervention is that it often creates more distortions than it resolves. It also tends to drive more economic activity onto the black market, thereby fuelling the decline in the formal sector. Assuming that elections are held in 2005 and that the results are recognised internationally, global support for economic reconstruction and recovery could start towards the end of 2005.

Fiscal policy With the new finance minister, Christopher Kuruneri, (appointed in February 2004) facing charges for breaching foreign-exchange controls as part of the president's anti-corruption campaign, the senior civil servants in the ministry of finance now controlling fiscal policy will be unwilling to fundamentally alter the policy of recent years: currently the government is using fiscal creep to keep the budget deficit under control. Essentially, fiscal creep allows revenue to grow in line with inflation, whereas expenditure growth is kept lower than the inflation rate (although high in nominal terms). As a result, the Economist Intelligence Unit estimates that the budget deficit will be around 6.1% of GDP in 2004. However, since this figure excludes the high levels of government subsidy, as well as expenditure by parastatals, the true extent of the budget deficit could turn out to be substantially wider. With elections scheduled for March 2005, the government is likely to use the November budget to announce a series of expenditure increases that will come into effect early in 2005. We forecast that these will push the deficit up to 7.8% of GDP in 2005. If there is a change of government, the new administration would struggle to reconcile the accounts and restore a semblance of fiscal discipline. Meanwhile, the major benefits to the government of high inflation and profoundly negative real interest rates are that the cost of financing the deficit, which is met entirely from domestic sources, is much reduced and that the value of the debt stock is quickly eroded, although this is at the expense of the private sector.

Monetary policy Gideon Gono—who was appointed the new governor of the Reserve Bank of Zimbabwe (RBZ, the central bank) in late 2003—is now the main driving force shaping economic policy in the country, although monetary policy has changed little since his appointment. Instead, the RBZ will continue to try and retain a multiple-interest-rate policy throughout 2004-05. This aims to keep interest rates on 91-day Treasury bills as low as possible, in order to limit the government's domestic debt repayments, while exporters can continue to borrow from the Reserve Bank at heavily subsidised rates. However, the RBZ is keen to push up other interest rates. In late February it introduced a new government debt instrument, Financial Bills. These are similar to T-bills, but the interest is paid by the Ministry of Finance and is set at a higher rate. The RBZ is also keen for commercial banks to charge higher lending rates. However, the temporary rise in commercial lending rates in early January, coupled with the collapse of the

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stockmarket and property prices, prompted a liquidity crisis for seven leading commercial banks. The RBZ has since provided temporary liquidity to the market and placed two smaller banks (Intermarket and Barbican) under curatorship, which has temporarily resolved the crisis. It has also announced that commercial banks must obtain an international credit rating from a reputable agency by December 2005, which could force many smaller banks to close, but may at least avert a wider run on the banking system. Meanwhile, with inflation hovering around the 600% level in 2004, real interest rates on short-term government debt will remain between -400% and -500%, which will continue to have a hugely distorting effect on the economy as it ensures a major transfer of wealth from the private to the public sector. Moreover, by continuing to fund the government’s fiscal deficit, monetary policy will do little to reduce the rampant inflation.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.8 4.7 4.1 OECD 1.6 2.1 3.2 2.5 EU 1.0 0.7 1.8 2.0 Exchange rates ¥:US$ 125.3 115.9 105.3 106.5 US$:€ 0.945 1.132 1.270 1.357 SDR:US$ 0.772 0.714 0.665 0.646 Financial indicators € 3-month interbank rate 3.33 2.33 1.77 1.75 US$ 3-month Libor 1.80 1.21 1.26 2.80 Commodity prices Oil (Brent; US$/b) 25.0 28.8 27.0 22.1 Gold (US$/troy oz) 310.3 362.8 421.3 375.0 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 6.4 2.5 Industrial raw materials (% change in US$ terms) 2.2 12.7 20.3 -2.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. A steady recovery in the world economy looks set to take hold in 2004, led by the rapid pick-up in growth in the US since the third quarter of 2003, as well as in Asia. World GDP growth, calculated on a purchasing power parity basis, is forecast to reach 4.7% in 2004 and to remain high in 2005, at 4.1%. However, the recovery in the world economy will have little impact on Zimbabwe’s economy given the country’s incoherent economic policies and political crisis. Instead, economic developments will be much more strongly influenced by domestic factors, notably the availability of foreign exchange and the rapidly rising domestic production costs. These factors, for example, are much more important in determining the fall in gold exports and the rise in platinum exports, rather than the international price, which is expected to remain high in both cases in both 2004 and 2005.

Economic growth Economic activity is set to continue its decline during the forecast period, owing to the current political crisis and the lack of coherent economic policy,

combined with the disruptions to the economy caused by the rapid imple- mentation of the land reform programme and the adverse impacts of drought and AIDS. In addition to the knock-on effects that the slump in commercial agriculture is having on industry and services, all businesses and mining operations are being negatively affected by shortages of foreign currency and fuel. At a time when price controls have been imposed, purchasing power is falling and near-hyperinflation persists. Real GDP contracted by around 40% between 1999 and 2003, but the rate of economic decline will slow in 2004-05, largely because many firms have already scaled back their operations, but also because food production may recover to a limited extent as the remaining commercial and small-scale farmers boost maize production. Nevertheless, real GDP is forecast to contract by 9.2% in 2004 and by 3.3% in 2005.

Inflation Despite having risen rapidly in 2003 (reaching over 600% in November), the rise in the inflation rate seems to have levelled off in late 2003 and early 2004. The latest year-on-year rate is for February, when inflation was at 602.5%. However, we expect this levelling-off in the inflation rate to be temporary and the monthly rate will continue to rise in 2004—fiscal and monetary policies are not expected to change, imports are priced using the parallel exchange rate and shortages of most products will continue. Hyperinflation is a possibility in 2004, but we think this is unlikely to occur unless the government completely loses control of spending. Instead, we expect inflation to peak in 2004—it is forecast to average 621% but will probably not accelerate more dramatically owing to the sharp increase in the index last year—before falling slowly in 2005 as food production recovers modestly, although it will remain in triple digits in 2005, at a forecast 548%.

Exchange rates In mid-December the recently appointed governor of the Reserve Bank of Zimbabwe (RBZ, the central bank) announced a new system for selling foreign exchange. This requires 25% of foreign-exchange earnings to be surrendered to the central bank at the official exporters’ rate of Z$824:US$1. The remaining 75% has then to be sold at auction within certain time frames. Although this is a more market-oriented system than the previous fixed peg, the auction is being closely controlled—the RBZ can reject bids for foreign exchange, particularly if it believes that the money will be used for non-essential activities—and the RBZ has only allowed the exchange rate to fall slowly so far in 2004. In early May, the auction rate was around Z$5,300:US$1 compared with the black-market rate of around Z$6,500:US$1. The problem, however, is that only allowing a modest fall in the auction rate, compared with the high rate of inflation, has continued to undermine competitiveness, and in April the RBZ once again introduced support price schemes for gold and tobacco exporters and a new minimum exchange rate for migrant remittances. This has made the exchange-rate regime more complex, but avoided a major devaluation (to which the president is firmly opposed). With only further modest falls in the auction rate in the next two years, we forecast that the combined exporters'/auction rate will average Z$4,076:US$1 in 2004, before falling to Z$6,673:US$1 in 2005.

External sector We estimate that export earnings were only US$1.4bn in 2003 and that Zimbabwe will continue to face a major foreign-exchange shortage in the outlook period, owing to falling gold and tobacco exports against a background

of stagnant tourism receipts (only platinum exports should continue to perform well in the forecast period). Foreign-exchange shortages and falling real GDP mean that imports will continue to contract, although substantial maize imports will still be required to offset shortfalls in domestic food production. On the invisible trade account, with declining tourism earnings the services account will remain firmly in deficit. The income account will follow the same trend: although the government will continue to build up substantial debt- service arrears, it will maintain some debt-service payments. By contrast, the current transfers account will continue to show a surplus. Although official transfers will remain low, owing to the lack of donor support, private transfers are expected to hold up as the estimated 2m Zimbabweans who live outside the country send money home to support relatives in economic need. We forecast that the overall current-account deficit will continue to be substantial, at 8% of GDP in 2003, 7.6% of GDP in 2004 and 6.9% of GDP in 2005. The government will continue to build up arrears on external debt repayments and to seek unorthodox ways to meet its financing requirement.

Forecast summary (% unless otherwise indicated) 2002a 2003b 2004c 2005c Real GDP growth -13.0d -13.2 -9.2 -3.3 Manufacturing production growth -16.7 -14.7 -4.8 0.0 Gross agricultural production growth -22.0b -12.0 -8.5 0.5 Consumer price inflation (av) 134.5 384.7a 620.7 548.3 Consumer price inflation (year-end) 198.9 598.7a 611.3 309.8 Short-term interbank rate 36.5 97.3a 319.8 532.5 Government balance (% of GDP) -4.4b -7.0 -6.1 -7.8 Exports of goods fob (US$ bn) 1.6b 1.4 1.3 1.3 Imports of goods fob (US$ bn) 1.8b 1.7 1.6 1.5 Current-account balance (US$ bn) -0.3b -0.3 -0.3 -0.3 Current-account balance (% of GDP) -11.6b -8.0 -7.6 -6.9 External debt (year-end; US$ bn) 4.1 4.0 3.9 3.8 Exchange rate Z$:US$ (av)e 55.0 727.9a 4076.1f 6673.4 Exchange rate Z$:¥100 (av)e 43.9 628.0a 3871.0f 6266.1 Exchange rate Z$:€ (year-end) 57.7 1039.4a 6259.0f 10050.0 Exchange rate Z$:US$ (av; parallel market) 55 824a 4,706f 7,500 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Official/IMF estimate. e In February 2003, the government introduced a dual exchange-rate system. While the rate of Z$55:US$1 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, which is the rate now quoted. f On January 12th, the government introduced a foreign-exchange auction for exporters. The rate quoted here is a combination of the official rate of Z$824:US$1 and the auction rate.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 7th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule