Country Report December 2002

Zimbabwe at a glance: 2003-04

OVERVIEW The Economist Intelligence Unit expects the president, , and his Zimbabwe African National Union-Patriotic Front (Zanu-PF) to remain in power for the next two years and possibly for several years after that. Supported by the security forces and party militias, the president will maintain the current high level of political repression against any form of opposition to his regime. The government is also likely to continue with its current economic policies—which have driven a massive economic decline in Zimbabwe since 1999—for as long as possible. Instead of addressing the fundamental problems causing the economic decline, such as the huge fiscal deficit and the loss of confidence in the government, economic problems will be addressed on an individual basis as they arise. As a result, we expect real GDP to decline by 12.1% in 2002, 8.8% in 2003 and 4.7% in 2004. As fiscal policy will continue to be loose, inflation is expected to rise from an average of 131.6% in 2002 to 281.7% in 2003, although it should moderate somewhat to 176.8% in 2004.

Key changes from last month Political outlook • Reported incidents of food aid being used for political ends by the government have increased sharply. The US may now take the lead in providing food aid outside of government channels. Economic policy outlook • The government’s budget for 2003 outlines a policy of agrarian-led economic recovery. However, owing to disorganisation, poor rains and the government’s land reform programme, this is unlikely to materialise. • The has announced that it will close foreign- exchange bureaux by the end of November and clamp down on the parallel foreign-exchange market. It has also introduced a dual interest rate policy. • Price controls have been widened to cover a much broader range of goods. Economic forecast • The parallel exchange rate had fallen sharply to around Z$2,000:US$1 by late November 2002. We are now forecasting that it will fall to Z$4,000- 5,000:US$1 by the end of 2003.

December 2002

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 9 Economic policy outlook 10 Economic forecast

14 The political scene

23 Economic policy

28 The domestic economy 28 Economic trends 30 Agriculture 31 Mining and industry 32 Finance and other services

33 Foreign trade and payments

List of tables 11 International assumptions summary 13 Forecast summary 25 Allocation of foreign exchange to non-exporters and individuals 27 Revenue projections 28 Government expenditure 29 Inflation data, 2002 31 Zimbabwean mineral production 34 External debt service

List of figures 13 Gross domestic product 13 Regional real exchange rates 18 Confirmed contributions to Zimbabwe’s food aid programme 26 Treasury-bills held by the Reserve Bank of Zimbabwe 28 Gross domestic product 33 Zimbabwe Stock Exchange industrial index

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Zimbabwe 3

Summary December 2002

Outlook for 2003-04 The Economist Intelligence Unit expects the president, Robert Mugabe, and his Zimbabwe African National Union-Patriotic Front (Zanu-PF) to remain in power for the next two years and possibly for several years after that. Supported by the security forces and party militias, the president will maintain the current high level of political repression against any form of opposition to his regime. The government is also likely to continue with its current economic policies, which have caused a massive economic decline in Zimbabwe since 1999, for as long as possible. Instead of addressing the fundamental factors causing the economic decline, such as the huge fiscal deficit and the loss of confidence in the government, economic policy will address individual problems as they arise. As a result, we expect real GDP to decline by 12.1% in 2002, 8.8% in 2003 and 4.7% in 2004. As fiscal policy will continue to be loose, inflation is expected to rise from an average of 131.6% in 2002 to 281.7% in 2003, although it should moderate somewhat to 176.8% in 2004. The political scene There is increasing evidence that the government is using food aid as a political weapon to starve its opponents and reward its supporters. The World Food Programme suspended food aid deliveries during the Insiza by-election. US officials have threatened “intrusive and interventionist” measures to deliver food aid directly to millions of starving Zimbabweans. This would increase tension between the government and donors of food aid. The US has become increasingly concerned about the increasing lawlessness in Zimbabwe. The trial for treason of the opposition leader, , has been postponed until February 3rd 2003. Zanu-PF is due to hold its annual congress in the town of Kadoma in mid-December. Economic policy The new finance minister, , has outlined a policy which aims to promote an agrarian revolution, although owing to disorganisation and the likelihood of poor rains in 2003 the maize crop is unlikely to recover significantly. The government has altered the regulations regarding foreign- currency accounts, as it wants to capture as much foreign exchange as possible. Price controls have been widened to cover a comprehensive range of goods. The Reserve Bank of Zimbabwe has introduced a dual interest rate policy whereby interest rates for consumer borrowing and mortgages will be market determined. The domestic economy Projections by the Ministry of Finance indicate that real GDP will contract by 11.9% in 2002 and 7.2% in 2003. The Zimbabwe dollar has fallen sharply on the parallel market in recent months. Gold production has continued to decline, although the fall may have started to bottom out. Platinum production has expanded rapidly in 2002 owing to increased output by Zimplats. Foreign trade and payments There have been rumours that the fuel deal with Libya has collapsed because of delays in payments by the government. External debt arrears have continued to mount in 2002 and are expected to reach US$1.4bn by the end of 2002. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: December 1st 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002 4 Zimbabwe

Political structure

Official name Republic of Zimbabwe

Form of state Unitary republic

Legal system Based on Roman-Dutch law and the 1979 constitution

National legislature House of Assembly with 150 members, 120 of whom represent geographical constituencies and are elected by universal adult suffrage every five years; 8 are provincial governors, 10 are customary chiefs and 12 others are appointed by the president

National elections June 2000 (legislative) and March 2002 (presidential); the next elections are due in June 2005 (legislative) and March 2008 (presidential).

Head of state President, elected by universal suffrage for a six-year term

National government The president and his appointed cabinet; last major reshuffle July 2000

Main political parties Zimbabwe African National Union-Patriotic Front (ZANU-PF), the ruling party since 1980, governed by a 138-member Central Committee and a 24-member Political Bureau (Politburo), holds 62 seats in parliament. The Movement for Democratic Change (MDC), formed by the trade union movement in September 1999, emerged as the main opposition party following the June 2000 election and has 57 seats. The Zimbabwe African National Union-Ndonga (ZANU-Ndonga) has one seat. A number of smaller parties and independent candidates contest elections

President Robert Mugabe Vice-presidents

Key ministers Defence Education, sports & culture Environment & tourism Energy & power development Finance & economic development Herbert Murerwa Foreign affairs Stanislas Mudenge Health & child welfare Higher & tertiary education Home affairs Industry & international trade Information & publicity Justice, legal & parliamentary affairs Lands, agriculture & resettlement Local government, public works & national housing Mines & mining development Edward Chindori-Chininga Public service, labour & social welfare Rural resources & water development Joyce Mujuru State security Transport & communications Youth development, gender & employment creation

Reserve Bank governor Leonard Tsumba

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Economic structure Annual indicators 1998a 1999a 2000a 2001b 2002b GDP at market prices (Z$ bn) 135.7 210.4 320.0 523.3 1,071.7 GDP (US$ bn) 5.7 5.5 4.3 3.3 1.9 Real GDP growth (%) 2.9 -0.7 -4.9 -7.3 c -12.1 Consumer price inflation (av; %) 31.8 58.1 55.7 74.5a 131.6 Population (m) 12.2b 12.4b 12.6b 12.8 13.1 Exports of goods fob (US$ m) 1,925.4b 1,924.5b 1,790.7b 1,722.2 1,617.9 Imports of goods fob (US$ m) 2,021.1b 1,675.1b 1,519.8b 1,544.9 1,559.1 Current-account balance (US$ m) -280.3b 26.3b -100.7b -203.6 -78.7 Foreign-exchange reserves excl gold (US$ m) 130.8 268.0 193.1 64.7a 51.0 Total external debt (US$ bn) 4.7 4.6 4.0 3.8 3.9 Debt-service ratio, paid (%) 35.6b 24.2b 20.5b 15.5 13.2 Exchange rate (av) Z$:US$ 23.68 38.30 44.42 55.05a 55.04 a Actual. b Economist Intelligence Unit estimates. c Official estimate.

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Agriculture, hunting & fishing 20.1 Private consumption 74.0 Mining & quarrying 1.8 Public consumption 14.9 Manufacturing 17.4 Gross fixed capital formation 10.2 Transport & communications 6.0 Change in stocks 1.2 Distribution, hotels & restaurants 19.2 Net exports of goods & services -0.4 Education 6.8

Principal exports 2000 % of total Principal imports cif 1999 % of total Tobacco 25.6 Machinery & transport equipment 34.4 Gold 13.3 Manufactures 17.1 Ferro-alloys 5.8 Chemicals 16.6 Nickel 3.7 Petroleum products & electricity 13.8

Main destinations of exports 2000a % of total Main origins of imports 2000a % of total South Africa 13.0 South Africa 43.5 UK 7.1 UK 4.1 Japan 8.3 Mozambique 4.0 Germany 6.4 US 3.3 Netherlands 5.4 Germany 2.7 a Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2000 2001 2002 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (Z$ m) Revenue & grants 22,530 29,612 29,850 26,098 35,113 47,831 55,832 66,721 Expenditure & net lending 35,796 61,580 39,263 36,716 44,751 55,987 83,732 73,133 Balance -13,266 -31,968 -9,413 -10,617 -9,638 -8,156 -27,900 -6,413 Total domestic debt (end-period) 124,723 162,814 179,126 195,839 196,048 194,068 247,515 304,171 Output Manufacturing index (1990=100) 101.6 99.2 77.2 87.7 92.1 84.1 n/a n/a Manufacturing index (% change, year on year) -4.9 -5.5 -10.8 0.2 -9.4 -15.2 n/a n/a Employment and prices Employment (‘000)a 1,227 n/a n/a n/a n/a n/a n/a n/a Mining 44 n/a n/a n/a n/a n/a n/a n/a Manufacturing 184 n/a n/a n/a n/a n/a n/a n/a Consumer prices (1995=100) 493.1 545.2 609.0 718.5 876.7 1,115.7 1,311.6 1,559.0 Consumer prices (% change, year on year) 56.4 57.3 56.8 59.0 77.8 104.6 115.4 117.0 Producer prices (% change, year on year) 49.7 56.2 49.5 65.5 87.6 97.5 105.1 87.1 Financial indicators Exchange rate Z$:US$ (av) 45.872 54.645 54.945 54.95 54.95 54.95 54.95 54.95 Exchange rate Z$:US$ (end-period) 52.91 54.945 54.945 54.95 54.95 54.95 54.95 54.95 Bank rate (end-period; %) 56.0 57.8 57.2 57.2 57.2 57.2 57.2 57.2 Lending rate (av; %) 66.5 70.3 46.5 41.0 33.8 30.8 30.8 33.7 Treasury bill rate (av; %) 62.1 59.9 19.9 12.3 16.2 22.0 31.0 30.3 M1 (end-period; Z$ m) 50,518 54,396 67,635 82,807 106,139 132,093 159,309 n/a M1 (% change, year on year) 40.8 53.3 76.0 90.9 110.1 142.8 135.5 n/a M2 (end-period; Z$ m) 73,632 79,372 100,023 123,000 152,175 181,331 222,129 n/a M2 (% change, year on year) 55.1 68.9 85.9 102.5 106.7 128.5 122.1 n/a ZSE Industrial index (end-period; 1967=100) 19,197 17,988 29,198 39,484 47,714 46,352 48,091 77,233 Sectoral trends Tobacco auctions (annual totals; ‘000 tonnes) ( 236.79 ) ( 201.7 ) n/a n/a Tobacco auctions (annual totals; Z$ m) ( 18,769 ) ( n/a ) n/a n/a Gold production (‘000 fine oz) 149 209 139 158 133 n/a n/a n/a Gold production (Z$ m) 1,901 2,858 1,945 2,241 1,935 n/a n/a n/a Chrome ore production (‘000 tonnes) 166 184 159 217 179 n/a n/a n/a Chrome ore production (Z$ m) 212.7 247.1 246.4 365.0 413.9 n/a n/a n/a Electricity production (m kwh) 3,232 3,042 2,926 3,022 n/a n/a n/a n/a Buildings authorised (Z$ m) 999.3 1,017.7 944.1 1,054.4 n/a n/a n/a n/a Foreign trade (Z$ m)b Exports fob incl gold 24,640.9 34,652.2 18,776.1 n/a n/a n/a n/a n/a Imports cif -21,959.0 -26,565.3 -18,340.0 n/a n/a n/a n/a n/a Trade balance 2,681.9 8,086.9 436.1 n/a n/a n/a n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 193.2 193.1 168.6 144.0 117.6 64.7 79.1 69.9 a Excluding employees of small agricultural units and small businesses in rural areas. b Including transactions in which no currency is involved. Sources: Central Statistical Office, Quarterly Digest; Reserve Bank of Zimbabwe, Quarterly Economic & Statistical Review; Monthly Review; IMF, International Financial Statistics.

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Outlook for 2003-04 Political outlook

Domestic politics The Economist Intelligence Unit expects the president, Robert Mugabe, and his Zimbabwe African National Union-Patriotic Front (ZANU-PF) government to remain in power for the next two years and possibly for several years after that. Supported by the country’s security forces and party militias, Mr Mugabe will maintain the currently high level of political repression against any form of opposition to his regime. The government is also likely to continue its current economic policies, which have caused a massive economic decline in Zimbabwe since 1999, for as long as possible. Rather than addressing the fundamental factors driving the economic decline, such as the huge fiscal deficit and the loss of confidence in the government, economic policy will address particular problems when they arise. A central element of the overall pattern of political repression will be to slowly, but steadily, undermine the main opposition party, the Movement for Democratic Change (MDC). This is likely to involve activity on three fronts. First, ZANU-PF will try to reduce the number of parliamentary and local council seats held by the MDC. Elections, particularly parliamentary by-elections, are likely to be characterised by serious intimidation of opposition candidates and voters and potential voting irregularities. Second, the ruling party will persevere in its attempts to undermine the MDC leadership through arbitrary arrests on a range of often spurious charges. It will also pursue the upcoming treason trial against the MDC president, Morgan Tsvangirai, scheduled to begin on February 3rd 2003. Finally, the government will also limit the MDC’s ability to organise any anti-government protests through the use of some of its recently passed legislation, such as the Public Order and Security Act. In addition to its attempts to undermine the MDC, Mr Mugabe’s government will intensify its repression of the independent and foreign press, non- governmental organisations, labour unions and ethnic minorities. In particular, having made a concerted effort to replace independent members of the judiciary with supporters of ZANU-PF, it will use this newly acquired control of the judiciary to restrict the rights of these targeted groups. The police force will also be used in this campaign and reports of police torture and other human rights abuses are expected to increase. The government will also defend its actions on the grounds that it is acting within the laws of the country which, although true, does not reflect the politicisation of the judiciary and the increasing difficulty of obtaining a fair trial in Zimbabwe. As Zimbabwe has been engulfed in famine during the second half of 2002, the Mugabe government has used scarce food supplies as a political weapon. No substantial increase in food supplies is likely in 2003, so ZANU-PF supporters will continue to be rewarded with food aid while those suspected of supporting the opposition will be denied access. This will be particularly evident in the southern Matabeleland provinces, which are populated by the Ndebele people. Although the Ndebele group make up about 20% of the total population, compared with the 7% of the population from Mr Mugabe’s Shona group,

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Matabeleland was a stronghold for the MDC in the 2000 parliamentary election, the 2002 presidential election and the recent local council polls. The government will also try to restrict food aid from being distributed in urban areas which have broadly voted in favour of the MDC in recent elections. The Mugabe government is taking a calculated gamble that the food shortages, coupled with the accelerating economic decline, will weaken the opposition. This certainly seems to have been the case to date; there is little sign of widespread anger against the government that could lead to mass protest. However, there is a possibility that an enraged population, particularly in the cities, will revolt. Worsening food and fuel shortages, triple digit inflation and rising unemployment could all provide the spark that leads to mass protests against the government in 2003. Of the potential triggers, worsening food shortages are the most likely to result in protest. It is predicted that the poor harvest in the 2001/02 crop year (April-March) will only meet domestic consumption until end-2002, leaving the country without the staple grain for the first three to four months of 2003. This deficit can only be met by imports, which it will become increasingly difficult for the government to finance. However, there are huge logistical difficulties in organising mass protests and Mr Mugabe is expected to use the army, police, war veterans and the party’s vigilante youth militia to forcibly put down any sign of an uprising. The international community will step up their targeted sanctions and encourage the efforts being made by South Africa and Nigeria to promote political reconciliation. Although these efforts have made little progress to date, neither the South African president, Thabo Mbeki, nor the Nigerian president, Olusegun Obasanjo, has given up on this approach. Following indications in October/November 2002 that the government’s fuel deal with Libya is in danger of collapsing, the South African government showed an interest in ensuring adequate fuel supplies to Zimbabwe. The potential benefit of this to Mr Mbeki is that it would give him some leverage with Mr Mugabe, forcing the Zimbabwean president to make some political compromises. However, Mr Mugabe has proved to be adept at political brinkmanship in recent years, and offers of compromise may initially seem promising, but eventually yield no results.

International relations Zimbabwe’s suspension from the Commonwealth is expected to continue throughout the outlook period, and it is likely to become increasingly alienated from the US, the UK and the rest of the EU. The main area of interaction between the Mugabe government and the international community will be the continued need for high levels of food aid. However, relations will be difficult. Towards the end of 2002 major donors voiced concern 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. This would increase antagonism between Zimbabwe and the Western powers and would make it more difficult for Zimbabwe’s neighbours in Southern Africa to continue supporting Mr Mugabe. Despite Mr Mugabe’s success in winning regional support for his land seizures, it may be more difficult for neighbouring governments to endorse his policy of depriving his political opponents of food. The withdrawal of Zimbabwean and other foreign troops from the Democratic Republic of Congo (DRC) is expected to continue,

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following the signing of a peace accord in July 2002. However, despite the claims of the Mugabe government that it has withdrawn all its troops, a significant number are likely to remain in the DRC to protect the commercial interests of Zimbabwe’s political elite there—mainly in mining and logging.

Economic policy outlook

Policy trends Presenting the budget for 2003 on November 14th, the new finance minister, Herbert Murerwa, made it clear that there would be very little change to overall economic policy in 2003-04. The government’s main aim will be to try to consolidate its seizures of white-owned commercial farms either by providing newly resettled farmers with seeds and fertiliser or with the finance to purchase them. The aim is to increase maize production in 2003, which will then drive a more general economic recovery. However, we do not expect this to materialise. The provision of inputs is likely come too late for most farmers. In addition, there are signs that the rains will be poor in 2003. Moreover, no matter what the rains are like, the far-reaching economic damage caused by the dismantling of most of the commercial farming sector and the much lower purchasing power of resettled farmers, cannot simply be repaired by a good maize crop. There is little indication that the government is willing to significantly reduce the budget deficit, which, along with the establishment of the rule of law, is a prerequisite for the restoration of macroeconomic stability. Instead, economic policy will continue to address various economic problems as they arise. However, as in the last two years, these piecemeal attempts at reform will simply create distortions that are then exploited for profit, with the private sector usually a step ahead of the government. Although it is obvious that current economic policies are ultimately unsustainable, they can probably be continued for several years against the background of ongoing economic decline. Given current indications that no change in economic policy is planned, there is unlikely to be any reconciliation between Zimbabwe and international donors and the Bretton Woods institutions. Even though a World Bank or IMF reform programme could quite quickly stop the economic decline, it will take years to repair the damage already inflicted on Zimbabwe’s economy. The economic and political crisis of recent years and the delay in implementing reform have created a build-up of problems, such as high domestic debt, a weakened financial sector, decaying infrastructure, a growing AIDS problem and a general crisis of confidence in the economy, all of which will be a drag on growth for years to come. In addition, it is increasingly likely that even if comprehensive economic reforms were to be introduced, the country’s commercial farming, mining and manufacturing sectors have now been irreparably damaged. This will hamper future economic recovery and undermine the country’s long-term economic prospects.

Fiscal policy The root cause of Zimbabwe’s economic crisis is Mr Mugabe’s unwillingness to reduce the country’s unsustainable fiscal deficit. Following the presentation of the budget on November 14th, we expect that the government will have run a deficit of 13.4% of GDP in 2002. Mr Murerwa gave no real indication in the budget that he will try to control the deficit, but instead highlighted the need to

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fund the newly resettled small-scale farmers. Wage settlements in the public sector will not keep up with inflation, which will push overall government expenditure down. Despite the benefits of fiscal drag caused by high inflation, government revenue will continue to decline. The weak revenue situation and the difficulty of increasing borrowing will constrain spending and we expect the budget deficit to remain broadly constant at 13.3% of GDP in 2003. As no substantive change to economic policy is expected in 2004, and continued economic decline will reduce revenue growth, the deficit will remain high at a forecast 12.5% 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 will place a huge burden on the economy in the medium term.

Monetary policy Monetary policy has become more complicated in recent months, owing to the announcement of a dual interest-rate policy by the Reserve Bank of Zimbabwe. In an attempt to limit its domestic debt repayments, the Reserve Bank will try to keep interest rates on Treasury bills as low as possible for as long as possible. Inflation is now around 140% and real interest rates on 91-day T-bills are currently in the order of –110%. The Reserve Bank has also created a special fund through which it will lend to export and productive sectors at a heavily subsidised rate. Other interest rates will be determined by market forces. It is unclear how long this dual policy can last, but as the Reserve Bank has been the main purchaser of T-bills in the second half of 2002, it is likely that the government will have to raise interest rates on them at some point if it wishes to continue borrowing from the private sector. The Reserve Bank will continue to lengthen the maturity profile of the government’s debt to reduce its immediate debt-servicing costs. However, it should be noted that the dual interest-rate policy and economic crisis have created a series of distortions in the economy which, coupled with lax supervision, could lead to a banking collapse in the next few years.

Economic forecast

International assumptions Although the US economy recovered quite quickly in early 2002, the pace of the recovery has slowed sharply since then. Coupled with 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, expanding by 2.7% in 2002, 3.3% in 2003 and 3.9% in 2004. One benefit of the uncertain global economic outlook is that the price of gold is now forecast to remain around US$300 troy/oz in 2002-04, which should, in normal circumstances, benefit the Zimbabwean economy. However, as gold production in Zimbabwe 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.

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International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.0 2.7 3.6 4.0 OECD 0.7 1.6 2.2 2.7 EU 1.4 0.9 1.6 2.2 Exchange rates ¥:US$ 121.5 125.5 128.8 130.5 US$:€ 0.896 0.948 1.070 1.053 SDR:US$ 0.785 0.772 0.737 0.745 Financial indicators € 3-month interbank rate 4.3 3.3 2.8 3.4 US$ 3-month Libor 3.8 1.8 1.4 3.2 Commodity prices Oil (Brent; US$/b) 24.5 24.9 24.5 19.1 Gold (US$/troy oz) 271.1 308.0 307.5 290.0 Food, feedstuffs & beverages (% change in US$ terms) -1.9 15.4 14.5 0.2 Industrial raw materials (% change in US$ terms) -9.8 0.2 6.1 9.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Economic growth We expect Zimbabwe’s economy to continue contracting during the outlook period, resulting in six years of declining real GDP. Based on government estimates in the budget, we expect that real GDP will have contracted by 12.1% in 2002. The decline has been led by the contraction in the agricultural sector, which we expect to have shrunk by 21% in 2002, owing to the disruption caused by the fast-track land reform programme, drought and AIDS. Although the decline in agriculture will slow to 7% in 2003, a substantial downturn in other economic sectors is forecast as the knock-on effects of the chaos in the commercial farming sector feed through to the rest of the economy. In addition, the growing shortages of foreign currency and fuel against a background of triple digit inflation will make it an extremely difficult economic climate for companies and mines to operate in. As a result, most will scale back their operations and shed labour and we expect real GDP to contract by 8.8% in 2003. Given the scale of the decline over the past four years—real GDP has shrunk by more than 25%—the decline will slow somewhat in 2004. This is because many firms will already have scaled back their operations substantially. There may also be some limited recovery in the agricultural sector as small-scale farmers eventually begin to start maize production. We are therefore forecasting that real GDP will contract by 4.7% in 2004.

Inflation Inflation has gradually accelerated in Zimbabwe during the course of 2002 to reach 144.2% in October. We now estimate that inflation will average 131.6% in 2002. We expect inflation to rise in 2003 because fiscal and monetary policy will be broadly unchanged, food shortages will continue and foreign exchange will be increasingly scarce. The monthly rate of increase since June 2002 indicates that annual average inflation of 400-500% is now possible in 2003. Inflation has very rarely been this high in Africa and the current situation is probably best compared with the inflation experienced in South American states such as Argentina and Brazil in the 1980s. However, owing to the introduction of widespread price controls in November 2002 such extreme rates

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may be avoided. As a result, we expect official inflation of 281.7% in 2003, although prices may rise more steeply on the black market. Inflation is likely to fall back in 2004 owing to some limited recovery in the agricultural sector and because of the high base of the consumer price index in 2003. But at an annual average of 176.8%, we still expect inflation to remain in triple digits.

Exchange rates We expect the government to maintain the current official exchange rate of Z$55:US$1 for as long as possible into 2003, owing to the need to import large amounts of food and because there is strong political resistance to devaluation. However, the government will continue to use a range of exchange rates to correct various economic distortions. At present five rates are used: the official rate; the rates offered as concessions to gold miners and tobacco farmers; the rate used to calculate customs duties on “luxury” imports; and the parallel rate. This, in turn, creates economic distortions and allows arbitrage trading between the different rates. Claiming that it is acting to stop speculation, the government has indicated that it will now seek to close down the parallel market, forcing it underground. However, given the importance of the parallel market in keeping the economy going, it is unclear how strenuously the government will attempt to clamp down on it. As a result of the threatened clampdown, the value of the Zimbabwe dollar on the parallel market fell from Z$800:US$1 in late September to Z$2,000:US$1 in November and could well be pushed as low as Z$4,000- 5,000:US$1 by end-2003. It is unclear how long the government can maintain the current exchange rate while inflation continues at over 100%. Given the politicisation of exchange-rate policy in the last 12 months, the unwillingness of senior members of the government to devalue the currency cannot be overstated. But as foreign- exchange earnings are likely to decline sharply in 2003, owing to the limited size of the tobacco crop and declining gold exports, we do not expect the government to be able to retain its current policy throughout 2003. We are therefore assuming that a devaluation will be forced upon the government in the first half of 2003 and are forecasting an average official exchange rate of Z$113:US$1 for the year. Having begun a policy of devaluation and with the economy still in decline, further devaluations are possible in 2004 and are likely to push the exchange rate down to an average of Z$275:US$1. However, the government is unlikely to allow the official exchange rate to fall anywhere near a market-determined value and the official rate will remain well out of line with the parallel-market rate.

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$1.6bn in 2002 to only US$1.2bn by 2004 as tobacco exports collapse and gold exports decline. Tourism receipts will remain stagnant and foreign aid inflows will be limited to humanitarian support. Although we estimate that imports were boosted in 2002 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 the country’s ability to import. Thus 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 plans to improve

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its debt-servicing record following the large arrears accumulated in 2001-02, we do not expect that it will pick up debt repayments quickly now that its arrears are so large. Although official transfers will remain low, owing to the low level of donor support for the country, private transfers have held up well, as the 2m Zimbabweans that are estimated to live outside the country have continued to send substantial remittances home. Overall, we expect that the current-account deficit was only US$79m (4.1% of GDP) in 2002, but it is forecast to widen to US$110m in 2003 (5.9% of GDP). The deficit will then narrow to US$77m (2.8% of GDP) in 2004, because of lower food imports and a more general contraction in demand for imports owing to the shortage of foreign exchange.

Forecast summary (% unless otherwise indicated) 2001a 2002a 2003b 2004b Real GDP growth -7.3c -12.1 -8.8 -4.7 Manufacturing production growth -9.3d -17.3 -7.1 -3.1 Gross agricultural production growth -12.2 -20.8 -7.0 -3.0 Consumer price inflation (av) 74.5d 131.6 281.7 176.8 Consumer price inflation (year-end) 112.1d 176.8 325.6 79.6 Short-term interbank rate 38.0d 36.5 92.5 109.9 Government balance (% of GDP) -7.2 -13.4 -13.3 -12.5 Exports of goods fob (US$ bn) 1.7 1.6 1.3 1.2 Imports of goods fob (US$ bn) 1.5 1.6 1.4 1.2 Current-account balance (US$ bn) -0.2 -0.1 -0.1 -0.1 Current-account balance (% of GDP) -6.2 -4.1 -5.9 -2.8 External debt (year-end; US$ bn) 3.8 3.9 3.5 3.1 Exchange rate Z$:US$ (av) 55.1d 55.0 113.0 275.0 Exchange rate Z$:¥100 (av) 45.3d 43.8 87.8 210.7 Exchange rate Z$:€ (year-end) 48.5d 56.7 206.2 365.8 Exchange rate Z$:US$ (av; parallel market) 55.0d 55.0 193.6 350.0 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official estimate. d Actual.

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The political scene

Famine takes hold The impact of the drought that has affected Southern Africa in 2002 really took hold in Zimbabwe in October and November, when millions of people started to go hungry. Nearly half of the 14m people affected by the famine are in Zimbabwe. This is a dramatic reversal of previous regional food crises when Zimbabwe was the least affected country because of its relatively stable domestic production. The impact of the drought is particularly acute in Zimbabwe because the poor rains are only one of the causes of the current food crisis. The main cause of the crisis is the land seizures carried out under the president, Robert Mugabe, which have disrupted commercial agriculture. The resettlement process was ineptly managed, leading to the scarce availability of seeds and other inputs, and this, together with poor rains and the impact of AIDS, has had a severe impact on the productivity of the rural labour force. The UN World Food Programme (WFP) distributed food to 3m people in November and this is set to increase to 4.5m people in December. This still falls far short of the estimated 6.7m who are at risk of starvation. Although most of those going hungry are in rural areas, surveys by various non-governmental organisations (NGOs) show that up to 800,000 people in Zimbabwe’s cities are also starting to suffer from the food shortages. The signs are clearly visible in most major cities, particularly at feeding stations operated by NGOs. Food shops in most cities do not have supplies of the staple food, maize meal, and with inflation at 140%, even if the food stuffs are available many city dwellers cannot afford basic foods as the value of their real salaries is being quickly eroded. All these trends are likely to get worse in the coming months as the modest harvest obtained in 2002 runs out and the country becomes increasingly dependent on food imports. Moreover, it now looks increasingly likely that there will be a second year of drought in 2003 (see Agriculture).

Food aid is being used as a Numerous accounts from aid workers and local residents have made it clear that political weapon the Mugabe government is taking advantage of the scarcity of food to punish supporters of the opposition Movement for Democratic Change (MDC). The government is exploiting the monopoly held by the state-owned Grain Marketing Board (GMB) on importing the staple food crop, maize. This gives the state a strategic stranglehold over importing grain and moving it throughout the country. Because of this, it is continuing to sell relatively cheap maize through the GMB depots across the country, but it is restricting these sales to people who hold membership cards of the ruling Zimbabwe African National Union- Patriotic Front (ZANU-PF) party. There are reports from every corner of the country that the GMB depots are refusing to sell food to suspected supporters of the MDC. In addition, police roadblocks at strategic points have refused to allow people to transport all but the smallest amounts of maize meal to hungry family members. Despite various pleas to the donor community to push the government to relax its import controls, private companies, NGOs and individuals—who could pay for their own food imports—are being restricted from doing so. Frontline Marketing is also making a legal challenge, aiming to end the GMB’s monopoly.

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In addition to restricting sales through the GMB depots, several areas that have traditionally been strongholds of support for the MDC have been more deliberately denied food aid. One of the worst examples of this is Binga, in north-western Zimbabwe on the shores of Lake Kariba, which is traditionally the worst-off district in Zimbabwe in terms of poverty and food supply. Bing was prevented from receiving any food for five months. Not only was the WFP not able to deliver food, but the government also banned feeding schemes for schoolchildren run by the Catholic Commission for Justice and Peace and Save the Children (UK). Not surprisingly, the Binga district hospital reported more than 30 deaths from malnutrition. MDC officials stated that the district was being starved because of its solid voting for the MDC. Other areas in Matabeleland were similarly affected, including Nkayi and Filabusi. Speaking publicly about the issue, the Catholic archbishop of Bulawayo, Pius Ncube, claimed that the people of Matabeleland would die because of Mr Mugabe’s plotting to stay in power. Another area that has been targeted not to receive food aid has been Buhera, the home of the MDC leader, Morgan Tsvangirai.

The WFP stops food The use of food aid as a political weapon was particularly noticeable during distribution in Insiza campaigning for the parliamentary by-election held in Insiza district in southern Zimbabwe in October (the by-election was held on October 26th-27th). A gang of Mr Mugabe’s supporters threatened WFP workers and stole 3 tonnes of food aid, which they subsequently distributed to their supporters. Police took no action against the thieves. Following the incident, the WFP suspended all food deliveries to the Insiza area, saying that it would not tolerate any politicisation of its food distribution. The run-up to the Insiza by-election was also marked by violence and considerable intimidation of the MDC, which made it difficult for the party to campaign and which have been characteristic of recent by-elections in Zimbabwe. This is a trend that we expect to continue throughout 2003. Because of violence and the politicisation of food aid, turnout was only 42.3% of registered voters and the by-election result was virtually a mirror image of the outcome of the June 2000 parliamentary election. Whereas the MDC’s candidate, George Ndlovu, won 12,049 votes in June 200o, this time ZANU-PF’s candidate, , polled 12,115 votes to the 5,102 polled by the MDC’s candidate, Siyabonga Ncube,

Zanu-PF wins the local council Elections were held at the end of September for Zimbabwe’s 27 urban and 1,397 elections rural councils. Beset by intimidation and changing bureaucratic requirements, the MDC was only able to field 646 candidates (September 2002, page 14). It was also unable to hold any election rallies in the run-up to the polls owing to the stipulations of the Public Order and Security Act. In addition, the intimidation of voters resulted in a low turnout. Thus, it is not surprising that ZANU-PF won control of 1,340 of the 1,400 councils, although this can hardly be seen to reflect popular support for the ruling party. Instead, the council elections, like recent parliamentary by-elections, clearly indicate how the government will slowly reduce the electoral representation of the MDC over time. ZANU-PF is also hoping that this electoral strategy will increase divisions within the MDC between those who want to pursue democratic opposition to the government and those who feel that more radical political action is the only way to promote political change in Zimbabwe.

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The trial of Morgan Tsvangirai The MDC faces another major political test: the forthcoming trial of its leader, is postponed until February Morgan Tsvangirai, and two of his deputies, and Renson Gasela, for allegedly plotting to have Mr Mugabe assassinated. This has been dragging through the courts for some time and the trial date has now been postponed until February 3rd (June 2002, page 14). The government is apparently having trouble securing the Canadian consultant, Ari Ben Menashe, as a witness against Mr Tsvangirai. However, the government is not only targeting the leadership of the MDC. Several other MDC MPs have also faced, or are facing, court cases. For example, Roy Bennet was kept in custody for refusing to leave his farm and Paul Madoze was cleared of attempted murder. Although legal experts view most of the charges made as spurious, the MDC is being forced to devote considerable energy and resources to these trials. Another indication of the debilitating pressures on the party was the death, in mysterious circumstances, of , once the MDC’s spokesman and youngest MP. Mr Jongwe apparently killed his wife in July after an argument over whether she was having an affair. He turned himself in to the police and then died in jail in October, in what was apparently suicide. It is not clear whether the murder of Mrs Jongwe and the death of Mr Jongwe simply constituted a tragic course of events. However, it is a well-known tactic of Eastern European secret services to highlight, or manufacture, marital affairs on the part of political opponents who they feel will react strongly to the accusations. The case also highlights the huge pressures currently faced by MDC legislators, at a time when the party is struggling to formulate a political strategy to confront the government.

A human rights group It is not only MPs who are suffering from state repression. Further evidence of highlights political starvation the violence and intimidation that is being directed against MDC supporters is provided by the NGO, Danish Physicians for Human Rights, in a damning report against the Mugabe government published on November 20th and entitled Vote Zanu-PF or Die. The well-respected Danish group has been closely monitoring the situation in Zimbabwe for two years and the November report is the third detailed report on Zimbabwe that it has issued in 2002 (March 2002, page 16). The report alleges that the Mugabe government is starving its political opponents and that officials, particularly the police, are carrying out torture on a significant number of opposition supporters. The report notes that “the political abuse of food aid is the most serious and widespread human rights violation in Zimbabwe at this time” and that the threat of being deliberately starved by the government has profoundly influenced vulnerable rural voters in recent elections. It also argues that ZANU-PF appears to be deliberately trying to maintain a situation where there is too little food in the country by controlling all sales and imports of food. Too little food is, in turn, serving a dual purpose. • First, it allows political control through the control of access to food. • Second, it facilitates the creation of a Zanu-PF-dominated black market, through which various elements of the Zanu-PF hierarchy can make considerable profit. The report concludes that the international donor community needs to dramatically increase the flow of food into the country and free the food supply

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from government control. It gives a very stark warning that if non-partisan food supplies into the country are not increased, starvation and death will occur along party political lines.

Torture continues with The Danish physicians’ group also found that torture by government officials is impunity still going on in Zimbabwe, stating that “there is a deliberate policy of torture and impunity by the authorities”. The report notes that the appointment of a new minister of home affairs, Kembo Mohadi, in the August 25th cabinet reshuffle appears to have coincided with an escalation in instances of torture reportedly perpetrated by the police. The report documents 13 cases of torture that it can support with medical and legal affidavits. In seven of the 13 cases, the torture was carried out by police officers; beatings and electric shock treatment were the main methods used. The report argues that such repression is likely to increase in the early months of 2003, at a time when the ability of NGOs—such as the Amani Trust and the Human Rights NGO Forum—to research and document abuses is being severely curtailed by the government. The government has repeatedly stated that these NGOs are operating illegally. The pressure on the Amani Trust has been particularly intense; its offices have been raided and its medical director was jailed and then released without charges (September 2002, page 14).

The US warns that it will act In response to the evidence that the Mugabe government is depriving over the misuse of food aid opposition supporters of food, the US government warned that it may adopt “intrusive, interventionist measures” to deliver food aid directly to the millions of starving Zimbabweans. Mark Bellamy, assistant secretary-of-state for African affairs, said that the measures being considered by the Bush administration include some that would challenge Zimbabwe’s sovereignty. He said that the US is considering such drastic measures because the Mugabe government is aggravating the effects of a region-wide famine by systematically blocking food from reaching areas which support the MDC. He said that the US would be prepared to take measures which violated Zimbabwe’s sovereignty because it had received disturbing reports of food aid being used a political weapon by the Mugabe government and feels a responsibility to ensure that people are not starved for political reasons. In particular, Mr Bellamy said that he has received credible reports detailing how the Mugabe government has created several “cut- off points” where food is prevented from reaching opposition supporters. He asserted that it was safe to predict that the situation is going to get a lot worse and that there will be no change to Mr Mugabe’s policy unless outside forces intervene. The US is currently providing about one-third of the food aid being distributed in Zimbabwe by the WFP. Although the US government has so far refused to specify what action it may take to deliver food aid directly to Zimbabweans, the Bush administration opaquely noted that it was “considering all approaches”. However, Mr Bellamy did note that, at the very minimum, the US wants to see aggressive and assertive monitoring to ensure that food is being distributed in an even-handed, humanitarian way throughout Zimbabwe. He added that the US government would not take government assurances that food aid is being distributed fairly at face value. Experts in food aid have suggested that the US government may be

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considering the possibility of air drops of food, similar to those which have been carried out in Sudan and to Kurdish rebels in Iraq. It is likely that this would occur in rural areas, such as Matabeland, which are being targeted by the government as areas that have supported the MDC. Within a week of the US announcement, the EU announced that it would consider co-operating with the US on delivering food aid independently of the Mugabe regime.

The tough talk by the US on the distribution of food aid in Zimbabwe is in sharp contrast to the subdued statements made by the WFP about the Mugabe government’s hampering of the fair distribution of food relief. Privately, however, WFP and UN officials in say that they are frustrated by the government’s obstruction of food deliveries to areas that support the MDC. The WFP also suspended food deliveries to Insiza district during campaigning for the by-election held there in October after Mr Mugabe’s supporters stole 3 tonnes of food aid, which they distributed to their followers. Police took no action to stop the theft or arrest the perpetrators. Other bodies have echoed the hard stance taken by the US. The US representative to the UN Food and Agriculture Organisation, Tony Hall, visited Zimbabwe in October and outspokenly criticised the Mugabe government for preventing respected international charities including Save the Children and Oxfam from distributing food relief. Mr Hall and other UN officials have also urged Zimbabwe to allow maize and other grains to be freely imported into Zimbabwe.

The US condemns lawlessness Soon after its warning on the distribution of food aid, the US government made in Zimbabwe it clear that its policy towards the Mugabe government is hardening by issuing a strong condemnation of the breakdown of the rule of law in Zimbabwe. The condemnation came after an employee of the US embassy in Harare was beaten up by Mr Mugabe’s “war veterans” on November 15th. The US government charged that Zimbabwe had descended into “lawlessness”. The embassy employee was working in a group led by a UN official to interview farm workers displaced by Mr Mugabe’s land seizures. The team was investigating how to help the former farm workers who, according to the US statement, are subsisting on a diet of berries and termites. War veterans loyal to Mr Mugabe detained the aid workers, beat the two Zimbabwean citizens in the group and stole several items including a camera. In an unusually strong statement, the US

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government said that the incident is “symptomatic of the lawlessness that has affected Zimbabwe in the last two-and-a-half years”. It is akin to the intimidation and violence suffered by thousands of Zimbabweans since the rule of law was, in effect, suspended. The Americans called for swift action to identify and arrest the perpetrators and called, once again, on the government of Zimbabwe to restore the rule of law and respect for human rights. The beating of the embassy employee came just one week after Zimbabwean police shot dead an American university lecturer at a roadblock in mysterious circumstances. The American had been questioned at the roadblock about the papers on his rental car. He then drove 20 km to get his passport and voluntarily returned to the roadblock, where he was shot and killed. In response to the US criticism, the Zimbabwean government counter-charged that the beating of the embassy employee was the result of the interventionist behaviour of some US embassy staff. The information minister, Jonathan Moyo, claimed that the US officials had been trespassing on farms on the pretext of looking for displaced farm workers, claiming, rather unbelievably, that there are no displaced farm workers in Zimbabwe and that the US embassy knows that. Mr Moyo went on to dismiss the charge of lawlessness as “quite preposterous”, arguing that everyone knows that the US is the citadel of Mafia conduct and racist vigilante groups and demanding, even more preposterously, “when will America restore its rule of law by controlling the Mafia and the Ku Klux Klan?” Although such demands go down well with a section of the Zimbabwean public and are well covered in the government-controlled press, there is also little doubt that for most Zimbabweans the rantings of the information minister are increasingly seen as an embarrassment for the country. The US appears to be taking a leading role in pressing the Mugabe government, while the UK government has adopted a much-lower profile position, preferring to work with both the US and the EU. This reflects the fact that relations between the UK and Zimbabwe are now extremely poor, particularly because of the land issue and the two countries’ colonial history. Any pressure applied by the UK government has become increasingly counter-productive, often being lost in accusations of colonial interference and support for white commercial farmers and the status quo. Although not as high profile as the US, all the Western embassies in Harare are disturbed by the reports of the misuse of food aid. Diplomats have said they will be assertively monitoring the distribution of food aid and reports of hunger. As this will take them to all corners of Zimbabwe, they are likely become the targets of Mr Mugabe’s war veterans and militias in many rural areas. Such incidents may well become an area of conflict between the Mugabe regime and Western governments in the months ahead.

ZANU-PF’s annual congress is While the MDC is still searching for an effective strategy to counteract the to be held in mid-December government’s ongoing repression, ZANU-PF may be about to partly refresh its image. The party is due to hold its annual congress in the central town of Kadoma in mid-December and since early November there has been considerable speculation that Mr Mugabe will use the conference to make significant changes to the party hierarchy. Local press reports have consistently stated that that the two elderly vice-presidents, Simon Muzenda and Joseph Msika, will retire, allowing Mr Mugabe to make new, and younger, replacements.

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Although this is very possible, any changes made are unlikely to change the basic nature of the ruling party. Instead, they will simply mean that different people are carrying out Mr Mugabe’s policies. The front-runners to replace the two vice-presidents include , who became minister of state within the president’s office in the August reshuffle (September 2002, page 13); Jonathan Moyo, the information minister; and , the speaker of parliament who is often viewed as Mr Mugabe’s chosen successor. All three can be expected to loyally pursue Mr Mugabe’s wishes. The slim chance of a moderate securing either of the vacant posts was amply illustrated at the end of November, when the former moderate cabinet ministers, and , resigned their non-constituency parliamentary seats and were replaced by Mugabe loyalists. Mr Makoni, the former finance minister, was widely regarded both inside and outside the party as a voice of moderation but this move effectively ends his current political role, although he still is a member of the ZANU-PF central committee. The two parliamentary seats freed by the resignations will be filled by Amos Midzi, the energy minister and Witness Mangwende, the transport minister. The two ministers have held an uncertain status since their appointment in August because they did not hold parliamentary seats, which is a requirement to be a cabinet minister, but both are loyal to the president. The resignation of the two vice-presidents has also fuelled speculation that the president is planning to leave office voluntarily in the not too distant future. There is a viewpoint that having completed the process of land reform, or the third chimerenga (revolution), and faced with failing health, a collapsing economy and regional and international isolation, Mr Mugabe may be convinced to step aside voluntarily. Although this is not impossible to conceive, the Economist Intelligence Unit still thinks that this is unlikely. If Mr Mugabe were to step aside, even if he were replaced by a trusted loyalist such as Mr Mnangagwa, it would create a huge political vacuum within ZANU-PF. This could lead to such rapid political change that Mr Mugabe could soon find himself having to seek exile in Namibia or Malaysia rather than face prosecution at home. Acutely aware of this possibility, the president is much more likely to remain clinging onto power.

New legislation will worsen Several new bills were placed before parliament for approval in October political repression including controversial amendments to the Labour Relations Act and the Access to Information and Protection of Privacy Act (AIPPA). The amendment to the labour act would further restrict the rights of trade unions to organise and call strikes. The changes to the AIPPA would restrict the ability of journalists to report on events in Zimbabwe by creating an offence called “abuse of freedom of expression”. In addition, the government has announced that in 2003 it will submit a new bill to increase controls over charities, trusts and NGOs. Such an announcement provides a strong indication that the government will press ahead with its campaign to reduce the ways in which unions, the press and civic organisations can operate. The registration of journalists The government is moving ahead with registration of all journalists and is under way newspapers in the country with its newly created Media and Information

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Commission, as required under the AIPPA. No newspaper or journalist can operate legally without registering and the commission has the right to withdraw registration at any time. At present, the aim is to register all journalists registered by the end of the year, but as the process also involves a personal interview at the Ministry of Information, there are doubts within media circles that this will be possible given that there is less than a month left. By mid- November, more than 13 Zimbabwean journalists had been charged with crimes under the AIPPA and were awaiting trial. While the compulsory registration and arrest of journalists tends to capture news headlines, the government has also adopted a more indirect measure to quieten the independent press; the imposition of price controls on newspapers. Although the profitability of local independent newspapers has declined sharply decline in recent years, the sector has still been able to make money by raising cover prices and owing to relatively buoyant advertising revenue. Although there is a natural limit on newspapers’ ability to raise prices at times when incomes are declining, their inability to raise prices will fundamentally undermine their profitability. Although state-owned newspapers such as The Herald will continue to receive state support to cover any losses, privately owned papers have no such fall-back. The latest financial data for Zimbabwe Newspapers, which publishes The Herald and is state run although it is listed on the Zimbabwe Stock Exchange, showed that it lost Z$42.3m (US$770,00) in 2001 and Z$73.2m in 2000. The only way that the independent press will be able to keep operating will be if independent publishers, such as Trevor Ncube, the owner of the Daily News and the Independent, are willing to cross-subsidise them. This may be possible for some time, but could be increasingly difficult to sustain for a prolonged period.

South Africa continues to send Although political repression has been stepped up in Zimbabwe in the last six mixed signals months and leading providers of food aid are now considering more direct efforts to distribute food aid, the international community has still not developed a clear strategy to deal with the Mugabe government, except to say that South Africa should take the lead. In this regard, the South African president, Thabo Mbeki, continues to send out mixed signals. At a meeting of the Commonwealth troika in Abuja (which consists of the presidents of Australia, Nigeria and South Africa) in late September which aimed to decide what action the organisation should take against Zimbabwe, no new sanctions were recommended and nor was an indefinite suspension from the Commonwealth. Although invited, Mr Mugabe did not attend the meeting in Nigeria. However, at the annual summit of the Southern African Development Community (SADC) held in Luanda in late September, SADC did send a very public rebuke to the Zimbabwean government when it denied Mr Mugabe the deputy chairmanship of the organisation under the agreed rotation system. Instead, this was passed to the Tanzanian president, Benjamin Mkapa, and the Angolan president, Jose Eduardo dos Santos, assumed the chairmanship from South Africa. Although the Zimbabwean government put a brave face on the snub, arguing that Mr Mugabe did not have time to deal with the issues involved owing to pressing domestic issues, there is little doubt that the government was upset by the public rebuke.

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Exploiting the Democratic Republic of Congo

The final report of the UN’s panel of experts on the illegal exploitation of natural resources and other forms of wealth in the Democratic Republic of the Congo (DRC) concentrates on how the DRC has been exploited by elite networks. The report defines an elite as a small group of people from the political and military leadership of a country who ensure the viability of various monopoly economic activities through their control over the military and other security forces, which they use to threaten violence or carry out selected acts of violence (December 2001, page 20).

Of these elite networks, probably the most important have been those between Congolese and Zimbabwean elites, which have transferred ownership of at least US$5bn worth of assets from state mining companies to private companies under their control over the past three years without having compensated or benefited the government of the DRC. The panel’s report argues that even if the present moves towards peace do eventually culminate in a complete withdrawal of Zimbabwean forces, the network’s grip on the DRC’s richest mineral assets and related businesses will still continue. The report highlights the fact that Zimbabwe’s political-military elite signed six major trade and service agreements with the DRC government in August 2002 and is in the process of establishing new holding companies to disguise its ongoing commercial interests in the country. The UN investigators also claimed to have received a copy of a memorandum dated August 2002 from the Zimbabwean defence minister, Sidney Sekeramayi, to the president, Robert Mugabe. This proposed the establishment of a joint Zimbabwe-DRC company in Mauritius to disguise the continuing economic interests of Zimbabwe Defence Force in the DRC, thereby countering the negative publicity that Zimbabwe’s involvement in the DRC has attracted.

The report does not give details of the exact extent to which Zimbabwe has benefited, or not, from its role in the DRC. In late August it was reported that the Zimbabwean government was trying to secure repayments of Z$100bn (US$1.8bn) that it claims it spent on the war in the DRC. This includes not only the cost of paying for its army to be in the country, but also of arms that it purchased for the government and various debts owed to parastatals, such as Air Zimbabwe. In addition, there is convincing evidence that some of the individuals who have been closely involved in the DRC have yet to make any substantial amounts of money from the concessions that they have purchased. In fact, there is some evidence that John Bredenkamp, one of the principal Zimbabweans identified in the report, was actually sold what have proved to be two “dud” copper/cobalt mines in exchange for the writing off of the debt owed to him for supplying the DRC army with aeroplanes. However, it is clear that the Zimbabwean political and military elite has no intention of withdrawing from its operations in the DRC in the immediate future as it will try to obtain some payback for its expenditure to date. However, following the publication of the UN’s report, the DRC government has suspended some of the ministers identified as being involved in the elite networks. This will further complicate Zimbabwean involvement in the DRC.

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Economic policy

An agrarian revolution is The new minister of finance, Herbert Murerwa, presented the budget for 2003 unlikely to occur on November 14th. As expected, the budget did not present any major change in economic policy direction, although, in a similar vein to his predecessor, Simba Makoni, Mr Murerwa did acknowledge the extent of the economic crisis in 2002. The government appears to have two main policies to turn the economy around, neither of which seem very realistic. The first, and most important, of these is to foster an agrarian-led economic recovery. The government hopes that agriculture will drive an overall improvement in the economy and boost demand in the industrial sector.

Direct inputs are to be given to The government hopes to achieve its agrarian revolution through two A1 farmers agricultural financing strategies. In the budget it sets aside Z$12.5bn (US$200m) to provide direct budgetary allocations in the form of crop inputs and extension services for A1 farmers (subsistence farmers who have been resettled on occupied farms). In addition, it has promised an additional Z$1.5bn to field trials and training and has committed various amounts via the capital expenditure budget. However, this has still to be disbursed and spent.

Commercial banks are to The government’s hopes for a sharp rise in agricultural production are really support A2 farmers centred on A2 farmers; these are farmers with a larger land area allocated to them who are supposed to become the new commercial farmers. As a result, the government and the Reserve Bank of Zimbabwe are pushing ahead with plans to arrange finance for A2 farmers. The initial aim was for commercial banks to lend to A2 farmers using Z$60bn (US$1.1bn) which was to be raised by the issue of an agri-bond. However, interest in the agri-bond has been limited, despite the fact that it will be exempt from withholding tax, because the rate of interest offered on it was only 24.5%. There is also uncertainty as to the overall outlook for the farming sector. As a result, the Economist Intelligence Unit believes that the bond was substantially under-subscribed when it was closed on November 22nd. It now seems likely that the bond will be continued under an “open tap” facility, or that it will be available through commercial banks and other financial institutions for purchase over the next year or so. Despite the failure of the agri-bond to attract all the hoped for funding, the government is already encouraging commercial banks to start lending to A2 farmers and has promised a bridging facility to offset any financing shortfalls. Nonetheless, the lending programme still poses major problems for commercial banks. The most obvious of these is that A2 farmers do not have title deeds to the farms that have been allocated to them. As a result, the banks could find themselves with no counterpart funds from the bond and unable to repossess the land in case of default. The government has tried to offset this concern by claiming that it will meet the outstanding value of any unpaid loan. Although this sounds plausible, in practise it means that the banks will be left heavily exposed by an ill-defined government guarantee, which may not be honoured. The only way round this for the commercial banks will be to strictly control the amount that they lend so they are not overexposed to excessive levels of

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potentially bad debt. Moreover, if the scheme were to fail badly this year, many commercial banks would be very wary of entering a similar scheme next year.

Maize planting in 2003 is likely Although it is still theoretically possible that the government’s two agricultural to be beset by problems financing schemes could result in substantial quantities of maize being planted this year, the reality is that next year’s crop has probably already been planted by commercial farmers. Planting could be delayed up to January, owing to the lack of planning and general chaos. However, it is more likely that the inputs promised to A1 farmers, or to be purchased by A2 farmers with loans, will arrive too late to have any impact, particularly if, as expected, the rains are poor (see Agriculture). As inflation is rising rapidly, many A2 farmers are also finding the cost of buying inputs such as fertilisers prohibitive, despite the proposed lending scheme. All this indicates that the proposed agrarian revolution is only likely in 2004 at the earliest, and that large sections of the rural population will be heavily dependent on international food aid for a second year running.

The government tries to In addition to driving through an agrarian revolution, the other main theme of capture more foreign exchange the budget appeared to be addressing the looming shortage of foreign exchange (forex) in the economy. The government needs forex to buy both food aid and fuel. However, rather than devalue the Zimbabwe dollar to boost the competitiveness of Zimbabwean exports, the government seems intent on offering alternative incentive packages to exporters, such as the tobacco price subsidy or the gold floor price. Although full details of the government’s policy to boost its forex earnings were not outlined in the budget, the minister of finance did announce that he planned to close down the foreign-exchange bureaux by the end of November 2002. In the last few years, the bureaux have conducted a thriving parallel market in Zimbabwe. Firms needing forex for imports have sourced most of this via the bureaux, which, although not legal, was broadly tolerated. However, closing the bureaux is unlikely to send industry back to sourcing foreign exchange through official channels. Instead, it will force the parallel market underground, which will result in increased costs for industry. Although the government is keen to stress that the parallel market has been a major source of inflation, the reality is that the prime causes of inflation are lax fiscal policy and rising food prices. The parallel market has provided an important safety valve by allowing many businesses, which would otherwise have ceased operating, to retain access to forex and imports. After the announcement of the budget, the government announced that the decision to close the foreign-exchange bureaux would be carried out in conjunction with new foreign-currency rules for exporters. Under the old regulations, exporters had to surrender 40% of their foreign-exchange earnings to the Reserve Bank, but could keep the remaining 60% in a foreign-currency account (FCA) with their commercial bank for use within 90 days. However, as of November 15th, exporters have been required to surrender 50% of their forex earnings to the Reserve Bank. Moreover, and crucially, rather than the exporters’ share of forex being retained in FCAs held by commercial banks, it will now be surrendered to the Reserve Bank. Commercial banks will have to apply for it on behalf of the exporters within 60-days; otherwise, it will be surrendered to the Reserve Bank for allocation to alternative uses. Under the new guidelines issued

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by the Reserve Bank, firms will only get their 50% share if it falls into priority categories. These are essential imports of raw materials, capital equipment and spare parts; service-related payments; business insurance; and business travel allowances (Category A). Any remaining forex requirements for non-exporters and individuals will then be paid out; at least 60% will be allocated to the purchase of Category B imports and 20% to Category C and D imports.

Allocation of foreign exchange to non-exporters and individuals % of allocation Category B imports Essential capital equipment, raw materials & spare parts at least 60 Category C imports Medical expenses, tertiary education, debt-service payments, business travel for non-exporters, pensions & insurance premiums up to 20 Category D imports Royalty fees, professional service fees, profits & dividends, emigration allowances, alimony & maintenance payments up to 20

Source: Reserve Bank of Zimbabwe, directive issued under Section 35(1) of the exchange control regulations.

Forex allocation is now subject Owing to the use of FCAs and the parallel market, many firms in both the to greater political control financial and manufacturing sectors have had access to sufficient foreign exchange to keep importing and operating. Moreover, many have offset declining profits—caused by rising costs and the collapsing economy—with profits obtained from forex trading. However, under the new foreign-currency regulations, there is a very real possibility that profits made from forex trading will dry up, pushing many businesses to either drastically scale back operations or close down altogether. In addition, many will find it much harder to simply obtain forex. This is particularly the case for importers of consumer products, who are likely to close most quickly as their supply of forex dries up completely. The real question will be the extent to which the government tries to clamp down on trading on what is now, in effect, a black market. Much will also depend on how effectively the Reserve Bank implements the agreed guidelines. At present, it is promising to provide forex within 24 hours of applications filed by commercial banks at 10 am. However, it is not clear whether it will meet this self-imposed deadline. Perhaps more worrying is the fact that the Reserve Bank will have considerable discretion over whom it allocates forex to.

Price controls are extended to Despite the new foreign-currency regulations, Zimbabwe’s traders and a wider range of goods industrialists are extremely resourceful and may find new ways around the system. Their ability to find ways around similar measures is clearly illustrated by the way they have avoided the price controls imposed by the government in October 2001—mainly be slightly changing the packaging of goods so that they do not fit the categories of goods subject to price controls. In addition, the government has not enforced the price controls rigorously. Mr Murerwa partly acknowledged the failure of price controls in his budget and made a side-swipe against the speculators that are, in his view, pushing up prices. But rather than broadening the definition of goods subject to price controls—which would have made avoiding them much harder—he proposed the introduction of further price controls on inputs into the production process. This, Mr Murerwa argued, would help to control costs, particularly if linked with some form of social contract holds down wages. However, as is often the case in Zimbabwe, events

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moved ahead very quickly and when new price controls were announced the day after the budget, they turned out to be much more far reaching than even Mr Murerwa had apparently foreseen, covering virtually every product in the country from newspapers to fax machines (see Economic trends).

The Reserve Bank announces a On Wednesday 20th November, the final element of the government’s “new” dual interest-rate policy economic policy was outlined by the Reserve Bank in its annual Monetary Policy Statement. The Reserve Bank will now seek to implement a dual interest- rate policy. Under this, it will lend to exporters and “other producers” at a rate of 15%—around half the previous rate. It will receive assistance for this through the use of a Z$25bn (US$0.45bn) revolving fund, which the central bank governor, Leonard Tsumba, said the Reserve Bank would seek to expand if necessary. The Reserve Bank is to let the market decide at what rate it wishes to lend money for other types of borrowing, notably consumer borrowing and mortgages. The Reserve Bank is also hopeful that the change in interest-rate policy will result in the reining in of money lent for speculative activity, such as investment in the stock market, property and foreign-currency trading. The Reserve Bank also announced that it had suspended the bank rate, or the rate at which commercial banks can borrow money from the central bank. Mr Tsumba argued that the rate had become irrelevant since it was fixed at 57.2%.

The move to push up some interest rates may be beneficial in the long run, in that it could help to slow the speculative bubble that has engulfed Harare’s housing market and stock market in the last two years (see Finance and other services). Some funds should now also be attracted back into savings accounts rather than alternative investments. However, as with many of the moves recently introduced by the Reserve Bank, much will depend on the central bank’s discretion, as it has the right to approve or reject borrowing applications to the new revolving fund. The dual interest-rate policy also creates yet another distortion in the economy that some borrowers will be able to exploit. In addition to the revolving fund for loans to exporters and the productive sectors, Mr Tsumba also announced that the Reserve Bank had so far lent Z$6.3bn to subsidise the gold-price support system in 2002 and a further Z$38.1bn to subsidise the tobacco-price support scheme.

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The actual budget numbers are Given all the policy announcements in the budget, and in the days following it, a non-event the announcement of the actual budget figures was something of a non-event. The budget is based on the assumption that there will be a gradual decline in inflation over the course of 2003; it projects that inflation will fall to only 96.1% by end-2003. This projection is important, because it underlies the budget’s revenue and, more importantly, its expenditure projections. Along with most independent economists, we expect inflation to be much higher in 2003 and for both the revenue and expenditure figures to prove much higher than the government is forecasting. This will force the minister of finance to present a supplementary budget during the course of the year to meet the higher-than- forecast levels of spending. Although all the data in the budget must be treated with caution because of the low inflation projection, considering the extremely poor economic and political circumstances facing Mr Murerwa, the budget was not a bad attempt and indicates that there are still some good economists operating at the Ministry of Finance.

Revenue projections (Z$ m) 2001 2002 2003 % change Original Revised Forecast Revised Forecast 2003/02 Personal tax 52,250 47,000 96,000 109,500 233,000 113 Company tax 12,250 11,000 27,985 28,269 58,500 107 Sales tax 29,500 26,500 48,000 56,500 125,000 121 Customs duties 20,250 17,000 49,115 25,000 33,450 34 Excise taxes 5,950 5,400 9,315 17,954 32,000 78 Sub-total 120,200 106,900 230,415 237,223 481,950 103 Total (incl others) 140,284 126,500 251,866 265,500 540,500 104

Sources: Budget Blue Book ; Robertson Information Services.

Spending on the armed forces On the expenditure side, the main benefit of the budget was that it allowed and police is to increase Mr Murerwa to highlight the large increases in expenditure planned for education and health although, even in terms of the budget’s inflation projections, the increase is only a modest rise in real terms. It is also clear that the government is intent on increasing its defence spending, to ensure that soldiers are paid. Home affairs also recorded a large increase, a large part of which will be absorbed by the police force. The increased allocation for rural and water development largely reflects the government’s plans to build several major dams in 2003 at Tuli-Manyange, Marovanyati, Shavi, Bubi-Lupande and Gwayi-Shangani. Perhaps most worrying is the relatively modest increase proposed for spending on lands and resettlement, even though there is an obvious need to increase funding for the land reform programme.

The deficit is still likely to be On the basis of its projections, the government is now forecasting a budget well over 10% of GDP deficit of 11.5% of GDP in 2003, compared with an estimated budget deficit of 14.1% of GDP in 2002. However, the full size of the budget deficit in 2002 and that forecast for 2003 is still not clear. As Mr Murerwa explained, the deficit could be as high as 17.8% of GDP in 2002, if it were to include expenditure on the tobacco- and gold-price support schemes. Spending on the tobacco-price support scheme was Z$9.1bn and spending on the gold-price support scheme was US$37.5bn. Theoretically, both can be excluded from the budget because

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they have been paid for by the Reserve Bank. However, the tobacco-price support scheme, which was to be paid out of general revenue, should probably be included in the budget, even if the gold-price support scheme can be excluded.

Government expenditure (Z$ m) 2001 2002 2003 % change Original Revised Estimate Revised Estimate 2003/02 Education 33,166 38,917 63,292 71,469 147,519 106 Defence 13,293 16,208 34,403 37,738 76,417 103 Health 10,934 12,492 22,460 34,963 73,428 110 Home affairs 6,744 8,224 17,886 21,981 49,500 125 Lands & resettlement 4,024 5,520 16,493 26,957 40,549 50 Social welfare 2,689 5,518 5,791 18,442 32,268 75 Local government & housing 1,722 2,351 8,964 9,604 18,036 88 Transport & communications 2,863 2,897 6,109 6,094 20,750 241 Justice, legal & parliament 3,158 3,158 7,455 8,640 20,232 134 President & cabinet 2,550 3,020 5,838 7,024 13,260 89 Rural & water development 2,043 2,126 5,370 5,844 15,373 163 Sub-total 83,186 100,431 194,061 248,756 507,331 104 Total (incl others) 104,355 120,544 237,603 401,707 783,934 97

Sources: Budget Blue Book ; Robertson Information Services.

The domestic economy Economic trends

The decline in real GDP will Although the government is hoping for an agrarian-led economic recovery, the continue in 2003 minister of finance, Herbert Murerwa, still based his budget on a projected 7.2% contraction of real GDP in 2003. This follows on from the estimated 11.9% decline in 2002, which had already been presented in the final supplementary budget of the outgoing finance minister, Simba Makoni. If the forecast for 2003 proves accurate, then it will take the cumulative decline in Zimbabwe’s GDP since 1999, when growth first turned negative, to 27%. Although the growth forecast in the budget does seem broadly realistic, the Economist Intelligence Unit is expecting inflation to be much higher than the government is predicting. As outlined in the budget, the government is planning to try and bring inflation back into double digits, to 96.8%, by end-2002. On the one hand, this does seem possible. The latest data issued by the Central Statistics Office put inflation at 144.2% in October. However, the headline rate hides some important trends. Of these, the most important is that the month-on-month increase in each of the last three months has been over 10%. If rates like this are annualised, then annual average inflation of over 200%, and even higher, is inevitable.

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Inflation data, 2002 (1985=100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Index 1,244.5 1,303.4 1,386.9 1,459.7 1,574.5 1,642.8 1,787.0 1,992.7 2,357.7 2,621.9 % change, month on month 6.6 4.7 6.4 5.3 7.9 4.3 8.8 11.5 18.3 11.2 % change, year on year 116.7 116.3 113.3 114 122.5 114.5 123.5 135.1 139.9 144.2

Source: Central Statistics Office.

The government is obviously hoping that the widespread introduction of price controls will help to slow the ongoing rise in inflation. On November 15th, the day after the budget, the government introduced yet further price controls so that they now not only include a range of basic foodstuffs and everyday consumer goods but also newspapers and drugs, and goods required by the motor industry (such as batteries and oil), the education sector (text books and school uniforms), the construction industry (building materials, iron and steel) and information technology (fax machines, printers, scanners and photocopiers). Most notable were the price controls imposed on seeds, agricultural machinery and spare parts, which are targeted at resettled farmers. However, in a separate measure, the government did allow an increase in urban omnibus fares, although this had been agreed some time in advance as part of a staged attempt to increase fares.

The supply of goods will dry Although the introduction of price controls will probably prevent official up because of price controls inflation from reaching 400-500%, because the price controls only address the symptoms, not the cause, of high inflation, they will have only a limited impact. Unless the government really brings the fiscal deficit under control and limits the printing of money to finance it, inflation will remain in triple digits in 2002 and 2003, and if government spending goes completely out of control, inflation will accelerate into hyperinflation. Perhaps more worryingly, owing to the widespread price controls and the clampdown on foreign exchange, most of the goods affected by price controls will soon not be available, as imports will dry up and domestic producers will struggle to make any profit on them. Instead, goods will increasingly only be available on the black market. However, given the wide-ranging nature of the goods affected, it remains unclear how the government will police the new controls, or if, as has happened to date, they will be largely ignored.

The Zimbabwe dollar falls As the official exchange rate for the Zimbabwe dollar is still fixed at the sharply on the parallel market completely unrealistic rate of Z$55:US$1, the parallel rate has collapsed sharply in recent months. Although the Zimbabwe dollar was still trading at around Z$800:US$1 on the parallel market in September, the end of the tobacco auctions appears to have worsened foreign-exchange shortages in the market. This led to a sharp decline in the parallel rate to around Z$1,200:US$1 by early November. The announcement in the budget that Mr Murerwa is to close foreign-exchange bureaux and change the way in which foreign-currency accounts are used to bank export receipts (see Economic policy), led to another sharp fall in the parallel rate to Z$2,000:US$1 by the end of November. However, it is still not clear how stringent the clampdown on the parallel rate will be. If the

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government tries to enforce its regulations strictly, then a parallel-market rate of Z$4,000-5,000:US$1 is not implausible by the end of 2003.

Agriculture

Poor rains seem increasingly The likelihood that the 2003 rains will be as poor as th0se in 2002 is increasing. likely in 2003 At the end of November, there had still been no significant rainfall to encourage those who had planted crops early. In early November the International Research Centre of Climatic Predictions stated that the threat of an El Niño-type weather phenomenon has moved from “weak to moderate and will continue to increase”. Thus, it is increasingly likely that Zimbabwe will experience weather conditions in 2002/03 similar to those in 2001/02, with rainfall too high in December and then too low in January. This report is very similar to that published by the Southern African Development Community’s Drought Monitoring Centre which had forecast in September that there was only a 35% probability of normal weather in 2003 and a 45% chance that Zimbabwe would experience below average rainfall. Poor rainfall will make the government’s efforts to boost small-scale agricultural production all the more difficult, if not impossible. Moreover, the commercial farming sector is much reduced. During previous times of drought, irrigated commercial farm production has been important in preventing a drastic decline in the maize crop. However, even those farmers who are still able to work are not producing maize for fear that their crops will simply be stolen before they have a chance to harvest and sell them.

Government-led land seizures Mr Mugabe’s controversial land redistribution programme has continued in are consolidated recent months; activity was most intense in August and September. Government supporters have now seized hundreds of previously white-owned farms. In November the Commercial Farmers’ Union (CFU) estimated that only 600 white-owned commercial farms are now operating in Zimbabwe, compared with 4,500 a year ago. However, a further 600 white farmers still visit their properties occasionally, if the security situation allows, although they are unable to do any work on the farms. Even those farmers still operating are under considerable pressure from the surrounding squatters. To speed up the process, Mr Mugabe’s government passed an amendment to its Land Acquisition Act and signed it into law in early November. The newly altered act allows for the quick seizure of properties instead of the previous 90-day waiting period between notification and actual seizure. The overwhelming consensus amongst the 600 farmers still visiting their farms and those who were forced to evacuate their properties and live in Harare or other major cities seems to be to keep hold of their title deeds, keep up their mortgage repayments and wait. Many still believe that a second bad crop season will result in many of the resettled people on their farms drifting back to the villages and communal farming areas from where they originate. The white farmers hope that when this happens, and the current political crisis comes to an end, many of them will be able to move back onto their farms, even if they are farming on a much smaller scale than before.

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Mining and industry Official gold production is Rather than resolving some of the fundamental distortions within the economy, declining the government has continued to try and offer compensation to producers by tampering with the exchange rate and providing subsidies. However, because inflation is rising rapidly and the exchange rate is volatile, any benefits granted by the government, although effective for a while, tend to be easily eroded. For example, by 2003 the bonus payment offered to tobacco farmers in 2002 will have been severely eroded in real terms by inflation and will need to be increased. The government has also come under considerable pressure from the Chamber of Mines to constantly revisit its gold pricing policy. This seems to have had some effect, a new series of measures having been added onto the existing price support scheme in September. This type of scheme could help to stop the decline in gold production in Zimbabwe, which has fallen to an estimated 15.8 tonnes in 2002, from a high of 28 tonnes in 1999. According to figures calculated by John Hollaway and Associates, at the parallel market rate of Z$1,250:US$1, major gold mining companies in Zimbabwe were being paid US$368/troy oz of gold in late October, which was broadly comparable with the world price. The producers who have suffered most have been the small-scale producers who are now being paid well below the world price for gold. This, in conjunction with the economic crisis, has led to a sharp increase in black-market exports of gold. John Hollaway and Associates estimate that these could now be as high as 10 tonnes a year. There have also been indications that some rather adventurous foreign investors are now beginning to look at Zimbabwe’s gold mining sector. The state-owned Herald newspaper reported that a South African company, The African Mining Group, has acquired the gold mines in Zimbabwe that were owned by Independence Gold (these were formerly owned by the Lonhro Group). The African Mining Group is owned by Mzi Khumalo, a controversial, but leading, beneficiary of the black economic empowerment process currently under way in South Africa. It has also been reported that 30% of the new company will be sold to local investors in the first quarter of 2003.

Mineral production (tonnes unless otherwise indicated) 2001 2002a Asbestos 136,327 167,000 Black granite 385,532 234,000 Chrome 780,150 750,000 Coal 4,064,497 3,950,000 Gold (kg) 18,050 15,830 Iron ore 360,862 260,000 Iron pyrites 88,156 81,500 Limestone 3,798,956 4,950,000 Nickel 8,145 7,100 Palladium 371 2,480 Phosphate 87,880 99,500 Platinum (kg) 519 2,300 Rhodium (kg) 42 295 a Estimates. Source: John Hollaway and Associates.

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Platinum exports increase The platinum sector has continued to grow strongly. Having started to export rapidly in 2002 platinum matte to South Africa from the Selous refinery in January 2002, it is now estimated that Zimbabwe will export 2,300 kg of platinum and 295 kg of rhodium in 2002—nearly a five-fold increase on 2001. Platinum has only become an attractive sector for investment because of the vast array of exemptions awarded to it. These allow all export proceeds from platinum to be held in foreign-currency accounts and permit direct imports of fuel and food. The special treatment given to the platinum sector was clearly acknowledged by the managing director of Zimbabwe Platinum Mines (Zimplats), Roy Pitchford, when speaking at the World Platinum Congress in Johannesburg in mid-November. He noted that, although the economy is in bad shape, owing to the company’s fiscal regime, Zimplats is, in effect, an “economy within an economy”. Some companies are still Despite the difficult economic climate in Zimbabwe, some companies are still managing to do well managing to produce very good results. In an annual survey of the top companies in Zimbabwe, published by the Financial Gazette and Jewel Bank on October 17th, the top company was Tans Zambezi Industries (TZI), which has been able to withstand the problems in the economy because of its diverse portfolio of companies. In second place was the National Merchant Bank of Zimbabwe (NMZB). The ongoing good performance of NMZB means that it will continue to be one of the leading candidates to take over any failing bank in Zimbabwe. (The Reserve Bank of Zimbabwe is more likely to encourage a merger between banks, rather than announce a bank failure if one were to arise). In third place was the Seed Company of Zimbabwe, which has probably faced the most difficult problems, given the changes in the agricultural sector. However, the problems faced by farmers may get worse in 2003. Owing to the huge reduction in the commercial farming sector, coupled with the decline in crop production in 2002, farmers will struggle to obtain enough seeds to grow and sell in 2003, and foreign exchange for imports will be in short supply. Companies are forced to think On a more positive note, one effect of the current economic crisis in Zimbabwe regionally is that it has forced many Zimbabwean companies to seek markets outside of Zimbabwe. There are high-profile examples of this, such as Econet Wireless, which now operates telephone networks from Lesotho to Nigeria. Innscor Africa, a Zimbabwean fast-food company, has announced that it plans to move into Nigeria, Morocco, Senegal and Tunisia as part of its pan-African investment drive; the company has already established a presence in seven other African countries. Many of these deals have been made in conjunction with Exxon Mobil, various Innscor brands including Chicken Inn, Pizza Inn, Creamy Inn, Bakers Inn, Nandos and Steers have set up outlets at petrol-filling stations. The latest company to announce a regional expansion programme is the cotton company Cottco. It plans to develop concessions to promote and purchase seed cotton in Mozambique and is exploring opportunities in Zimbabwe.

Finance and other services The stock market rise falters The Zimbabwe Stock Exchange (ZSE) has continued to defy the country’s overall economic collapse for much of 2002, but in recent months, economic reality has begun to catch up with the ZSE. On October 25th the ZSE industrial index had risen to 110,124.6, up by 138% on the 46,351.9 recorded at the end of 2001.

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However, most of the increase occurred in the first seven months of the year— the index reached 100,951.3 at the end of July—and growth has slowed in line with the deteriorating economic outlook and the rise in inflation to record levels. The market even fell back marginally in August, although it picked up again in September and October. However, following the budget the stock market weakened significantly. On Friday November 29th it had fallen back to 93,231.9. According to Sagit Stockbrokers, the market was struggling to get to grips with the potential impact of a number of policy announcements, particularly the extension of price controls to such a wide range of items. It was also deeply concerned that there would be further unexpected policy pronouncements. Traders were also worried about the practicality of introducing a dual interest- rate structure and because the increase in interest rates for savers has made holding cash in bank accounts more attractive. Finally, there was concern about the government’s attempts to boost the export sector through targeted subsidies and low interest rates, rather than by simply devaluing the exchange rate. As a result of these concerns, there were significant price falls across the market and, according to Sagit, the value of Astra, Cottco, Delta, Natfoods, PGIZ, Tanganda, and TZI all fell sharply.

Foreign trade and payments Fuel supplies remain erratic It was reported in mid-September that the government had managed to renew its US$360m annual fuel deal with Libya, following the personal intervention of the president, Robert Mugabe. However, the re-emergence of long fuel queues across the country in early November suggests that there may be a new fuel crisis. According to inside sources, the Libyans are unhappy that the government did not make the prompt payments that Mr Mugabe had promised. Zimbabwe’s outstanding debts to Libya are currently estimated at around US$100m and have put Tamoil Italia, the Libyan-owned downstream oil refining and distribution company, in financial difficulty. According to the reports of oil executives, Libyan tankers have consistently arrived at the Mozambican port of Beira to deliver fuel in recent months, but when Zimbabwe could not even pay port costs, the Libyans sailed on to South Africa and sold the shipment for foreign currency. However, at present, it is unlikely that the deal between Zimbabwe and Libya

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will unravel completely. Although we expect the Libyans to step up their demands for payment, they are unlikely to stop providing fuel to Zimbabwe entirely, as this would undermine their influence with the government. A partial solution seems to have been found in the recent agreement of a partnership between the National Oil Company of Zimbabwe (Noczim) and an international company, Tamoil, to establish a company to procure fuel. The minister for energy and power, Amos Midzi, recently told parliament that the new company, Tamoil Zimbabwe, will be involved in the distribution of fuel to retail outlets. However, owing to the tension between Zimababwe and Libya, fuel supplies in Harare are likely to be increasingly erratic over the course of 2003 with periods when supplies are limited. In a surprise move in early November, Mr Mugabe announced that he would allow multinationals to import their own fuel for retail, rather than having to buy fuel from the state oil importer, Noczim. However, it remains unclear whether this policy will be workable in the current climate, even if it is approved by the cabinet. The multinationals would still need foreign exchange to fund the imports, and this would have to come from either the Reserve Bank of Zimbabwe or the parallel market. As normal blend petrol is currently retailing at Z$74.47/litre (cheaper than bottled water), it would not be economical to import petrol using the parallel-market rate. At the parallel-market rate of Z$2,000:US$1, a litre of fuel bought in the international market for 25 US cents would have to be sold at Z$500/litre merely to recoup costs, excluding transport and distribution costs. This would, in turn, drive inflation up still further and would not be acceptable given the move towards greater price controls. Allowing the multinationals to obtain foreign currency at the official rate would simply defeat the objective of the changes in the marketing arrangements. In summary, the idea seems unworkable from the outset and is likely to dropped. External debt arrears build up The minister of finance, Herbert Murerwa, noted in his budget speech that in 2002 Zimbabwe’s external debt arrears have continued to mount during 2002. He also estimated that there was a net investment outflow of US$347m from Zimbabwe during the year. This, coupled with declining foreign-exchange inflows and the need to meet emergency food imports, has resulted in the further build-up of external debt arrears. In the budget Mr Murerwa estimated that arrears on external debt payments would total US$1.3bn at end-2002, up from an estimated US$762.7m at end-2001. The Reserve Bank subsequently stated that it estimated that Zimbabwe’s external debt arrears would total US$1.4bn at end 2002. Although the minister of finance said that the government would try to address the issue of external debt arrears, this is extremely unlikely given the increasing foreign-exchange shortages that we are expecting during the outlook period.

External debt service (Z$ m) Capital Interest Arrears 1999 7,728 3,400 0 2000 4,287 1,538 0 2001 32,715 11,678 68,915 2002 30,145 9,165 71,500 2003 34,354 3,309 78,000 Sources: Budget speeches; Robertson Information Services.

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