Zimbabwe Zimbabwe at a Glance: 2003-04

Country Report September 2003

Zimbabwe Zimbabwe at a glance: 2003-04

OVERVIEW Although it appears increasingly likely that there will be a negotiated end to Zimbabwe’s political crisis, progress in organising formal talks between the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC) is likely to be slow and subject to periodic setbacks. Any talks are unlikely to yield concrete results until 2004. Meanwhile, food and fuel shortages are worsening, prices are rising rapidly and the economy is collapsing. Rising political tensions due to the repression of the MDC by the government and strikes organised by the MDC could easily erupt into violent clashes between opposition supporters and the security forces. As a result of the political crisis and poor economic policy, we forecast that real GDP will contract by 13.1% in 2003 and 6.1% in 2004; inflation will continue to soar, averaging 368% in 2003 and 444% in 2004.

Key changes from last month Political outlook • A senior high court judge, Paddington Garwe, has ruled that there is enough evidence to continue the trial for treason of the leader of the MDC, Morgan Tsvangirai, even though most lawyers believe that the evidence is weak. The continuation of the trial will keep up the pressure on the MDC, though the government is unlikely to seek the death penalty if Mr Tsvangirai is convicted. Economic policy outlook • The Zimbabwe dollar is likely to be devalued again in the coming months, as the high rate of inflation quickly erodes the competitiveness of the currency. We now expect the exporters’ rate to average Z$922:US$1 in 2003. The parallel rate fell very sharply in early August, to over Z$6,000:US$1. Economic forecast • Using data from the IMF, we now estimate that the country ran a current- account deficit of 7.5% of GDP in 2003. As exports and imports will fall sharply in the outlook period, we forecast that the deficit will be 4.7% of GDP in 2003 and 5.2% of GDP in 2004.

September 2003

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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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

13 The political scene

19 Economic policy

22 The domestic economy 22 Economic trends 25 Agriculture 27 Manufacturing 27 Mining 28 Finance and other services

29 Foreign trade and payments

List of tables 10 International assumptions summary 12 Forecast summary 23 Inflation 26 Tobacco sales 27 Platinum exports 30 Balance of payments 30 Net capital flows 31 Reserves, official figures 31 Reserves and monetary liabilities, 2002

List of figures 13 Gross domestic product 13 Consumer price inflation 24 Human Development Index 25 Destination of Zimbabwean emigrants 29 Zimbabwe Stock Exchange industrial index, 2003 29 Imports

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Summary September 2003

Outlook for 2003-04 Although a negotiated end to Zimbabwe’s political crisis appears increasingly likely, progress in organising formal talks between the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC) is likely to be slow and subject to periodic setbacks. Any talks are unlikely to yield concrete results until 2004. Meanwhile, food and fuel shortages are worsening, prices are rising rapidly and the economy is collapsing; and rising political tensions due to government-organised repression of the MDC and strikes organised by the MDC could easily erupt into violent clashes between opposition supporters and the security forces. As a result of the political crisis and poor economic policy, we forecast that real GDP will contract by 13.1% in 2003 and 6.1% in 2004; inflation will continue to soar, averaging 368% in 2003 and 444% in 2004. The political scene The US government adopted a tough stance towards the Zimbabwe government in the run-up to the US president’s five day, five-nation tour of Sub-Saharan Africa and has stepped up its pressure on the South African president, Thabo Mbeki, to help resume talks. The government has kept up the pressure on the MDC, and the trial for treason of the opposition leader, Morgan Tsvangirai, is now set to proceed, although it is unlikely that he will be sentenced to death. Economic policy The government has appealed to the World Food Programme for humanitarian assistance, mainly in the form of food aid. The cash shortage has got worse, and the government has proved unwilling to take measures to resolve it. The prospect of a devaluation of the Zimbabwe dollar has increased, although it could still be blocked by the president. Interest rate policy has come back into the spotlight: the president has called for rates to be reduced. A dual fuel pricing policy may be introduced in an attempt to reduce fuel shortages. The domestic economy Inflation has continued to soar, the year-on-year rate reached 364.5% in June. The Zimbabwe dollar has fallen sharply on the parallel market. The UNDP’s Human Development Report 2003, illustrates the human cost of the country’s economic collapse in recent years. New data show the extent of emigration by educated Zimbabweans. Sales at the tobacco auctions have slowed. The stock market soared in July on the prospect of falling interest rates and a possible devaluation of the Zimbabwe dollar. Foreign trade and payments Current-account data from the IMF show the extent to which exports and tourism earnings have collapsed since 2000. There has been a sharp surge in remittances from Zimbabweans living overseas. The IMF estimates that the country’s usable foreign-exchange reserves were US$15m at the end of 2002, compared with an officially stated level of US$83.4m.

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

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 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 Simon Muzenda Joseph Msika

Key ministers Defence Sydney Sekeramayi Education, sports & culture Aeneas Chigwedere Environment & tourism Francis Nhema Energy & power development Amos Midzi Finance & economic development Herbert Murerwa Foreign affairs Stanislas Mudenge Health & child welfare David Parirenyatwa Higher & tertiary education Swithun Mombeshora Home affairs Kembo Mohadi Industry & international trade Samuel Mumbengegwi Information & publicity Jonathan Moyo Justice, legal & parliamentary affairs Patrick Chinamasa Lands, agriculture & resettlement Joseph Made Local government, public works & national housing Ignatius Chombo Mines & mining development Edward Chindori-Chininga Public service, labour & social welfare July Moyo Rural resources & water development Joyce Mujuru State security Nicholas Goche Transport & communications Witness Mangwende Youth development, gender & employment creation Elliot Manyika

Reserve Bank governor Leonard Tsumba (left office in July 2003, his replacement has not been announced)

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Economic structure

Annual indicators 1998a 1999a 2000a 2001b 2002b GDP at market prices (Z$ bn) 135.7 210.4 320.0 515.3 1,082.2 GDP (US$ bn) 5.7 5.5 5.4 4.8 4.6 Real GDP growth (%) 2.9 -0.7 -4.9 -8.8 c -12.8 Consumer price inflation (av; %) 31.8 58.1 55.7 74.5a 134.5a Population (m) 12.2b 12.4b 12.6b 12.8 13.1 Exports of goods fob (US$ m) 1,925.4b 1,932.5b 2,194.7b 1,608.8 1,417.6 Imports of goods fob (US$ m) 2,019.5b 1,675.1b 1,849.0b 1,778.7 1,822.2 Current-account balance (US$ m) -275.0b -40.6 b 41.5b -308.5 -345.5 Foreign-exchange reserves excl gold (US$ m) 130.8 268.0 193.1 64.7a 83.4a Total external debt (US$ bn) 4.7 4.6 4.0 3.8a 3.5 Debt-service ratio, paid (%) 35.6b 24.1b 17.2b 6.4 14.9 Exchange rate (av) Z$:US$d 23.68 38.30 44.42 55.05a 55.04a a Actual. b Economist Intelligence Unit estimates. c Official estimate. d In February 2003 the government introduced a dual exchange rate system; the rate of Z$55:US$1 is applied to a range of official government transactions: Z$824:US$1 is the rate applied to all other transactions with the Reserve Bank of Zimbabwe.

Origins of gross domestic product 2001a % of total Components of gross domestic product 2000a % of total Agriculture, hunting & fishing 25.1 Private consumption 71.7 Mining & quarrying 1.5 Public consumption 15.4 Manufacturing 14.0 Gross fixed capital formation 13.3 Transport & communications 10.6 Change in stocks 0.2 Distribution, hotels & restaurants 17.1 Net exports of goods & services -0.6 Education 6.7

Principal exports 2000b % of total Principal imports cif 2000b % of total Tobacco 25.6 Machinery & transport equipment 29.1 Gold 13.3 Manufactures 16.7 Ferro-alloys 5.8 Chemicals 16.6 Nickel 3.7 Petroleum products & electricity 11.1

Main destinations of exports 2002c % of total Main origins of imports 2002c % of total China 5.8 South Africa 47.7 South Africa 5.6 Democratic Republic of Congo 5.7 Germany 5.6 Mozambique 5.3 UK 4.8 UK 3.1 Japan 4.6 US 3 a Reserve Bank of Zimbabwe data. b Actual. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2001 2002 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (Z$ m) Revenue & grants 29,850 26,098 35,113 47,831 55,832 66,721 70,618 111,813 Expenditure & net lending 39,263 36,716 44,751 55,987 83,732 73,133 94,417 112,383 Balance -9,413 -10,617 -9,638 -8,156 -27,900 -6,413 -23,799 -570 Total domestic debt (end-period) 179,126 195,839 196,048 194,068 247,515 304,171 335,893 346,263 Output Manufacturing index (1990=100) 77.2 87.7 92.4 91.7 68.3 72.8 75.7 74.1 Manufacturing index (% change, year on year) -10.8 0.2 -9.1 -7.6 -11.1 -17.0 -18.1 -19.2 Employment and prices Employment (‘000)a 1,197 1,184 n/a n/a n/a n/a n/a n/a Mining 42 41 n/a n/a n/a n/a n/a n/a Manufacturing 178 178 n/a n/a n/a n/a n/a n/a Consumer prices (1995=100) 609.0 718.5 876.7 1,115.7 1,311.6 1,559.0 2,045.8 3,052.7 Consumer prices (% change, year on year) 56.8 59.0 77.8 104.6 115.4 117.0 133.4 173.6 Producer prices (% change, year on year) 49.5 65.5 87.6 97.5 105.1 94.7 99.0 n/a Financial indicators Exchange rate Z$:US$ (av) 54.945 54.95 54.95 54.95 54.95 54.95 54.95 54.95 Exchange rate Z$:US$ (end-period) 54.945 54.95 54.95 54.95 54.95 54.95 54.95 54.95 Bank rate (end-period; %) 57.2 57.2 57.2 57.2 57.2 57.2 57.2 29.7 Lending rate (av; %) 46.5 41.0 33.8 30.8 30.8 33.7 35.8 45.8 Treasury bill rate (av; %) 19.9 12.3 16.2 22.0 31.0 30.3 26.7 26.0 M1 (end-period; Z$ m) 67,635 82,807 106,139 132,093 159,309 179,558 252,249 356,644 M1 (% change, year on year) 76.0 90.9 110.1 142.8 135.5 116.8 137.7 170.0 M2 (end-period; Z$ m) 100,023 123,000 152,175 181,331 222,129 263,032 363,142 528,972 M2 (% change, year on year) 85.9 102.5 106.7 128.5 122.1 113.8 138.6 191.7 ZSE industrial index (end-period; 1967=100) 29,198 39,484 47,714 46,352 48,091 77,233 99,521 103,495 Sectoral trends Tobacco auctions (annual totals; ‘000 tonnes)b ( 201.7 ) ( 167.0 ) Gold production (kg) 4,789 4,728 4,375 4,157 3,846 4,091 3,920 3,612 Gold production (Z$ m) 2,228 2,709 2,698 2,949 3,018 3,494 4,081 5,701 Chrome ore production (‘000 tonnes) 193 213 179 195 180 193 206 171 Chrome ore production (Z$ m) 472 537 647 904 1,118 1,314 2,301 2,640 Electricity production (m kwh) 1,730 1,963 2,238 n/a n/a n/a n/a n/a Buildings authorised (Z$ m) 944.1 1,095.6 1,180.3 n/a n/a n/a n/a n/a Foreign trade (Z$ m)c Exports fob incl gold 19,453.1 14,821.4 20,008.9 n/a n/a n/a n/a n/a Imports cif -16,686.6 -32,010.9 -28,095.0 n/a n/a n/a n/a n/a Trade balance 2,766.5 -17,189.5 -8,086.1 n/a n/a n/a n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 168.6 144.0 117.6 64.7 79.1 69.9 87.3 83.4 a Excluding employees of small agricultural units and small businesses in rural areas. b Provisional data for 2002. cIncluding NCI transactions. 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 Three years of political instability and economic collapse in Zimbabwe may be drawing to an end as a result of efforts to start negotiations between the ruling party, Zimbabwe African National Union-Patriotic Front (ZANU-PF), and the opposition Movement for Democratic Change (MDC). However, before meaningful talks can begin, a number of crucial matters have to be decided, in particular the status of the president, Robert Mugabe, and his role in the talks. All this will take time to resolve!an agenda is unlikely to be agreed before the end of the year and may even take six months to draw up!and the talks themselves could drag on even longer. A resolution of the country’s political, economic and humanitarian crisis is therefore not likely for at least a year, although once a breakthrough has been made progress could be rapid. The key to a meaningful dialogue between ZANU-PF and the MDC will be the retirement of Mr Mugabe, probably not as the country’s president, which is unlikely, but as leader of ZANU-PF. This would free the party to pursue talks with the MDC on resolving the country’s political crisis. A likely outcome of these talks would be an agreement to introduce a new constitution that would include safeguards for free and fair elections. Once passed by parliament, which would require an agreement between the two parties, it would be possible to hold fresh parliamentary and presidential elections under the new constitution. An alternative would be for the two parties to agree on a new Electoral Act, so that fair elections could be assured. Some optimistic political analysts say one or other of these processes could be under way by the beginning of 2004, but 2005 would seems a more realistic date. One of the key factors driving the talks forward is likely to be the intervention of regional leaders, particularly the South African president, Thabo Mbeki. Together with the Nigerian president, Olusegun Obasanjo, he has been the most closely involved in attempts to resolve the crisis and is under pressure from the US and UK governments to find a solution. This pressure will intensify in the coming months in the run-up to the Commonwealth heads of government meeting to be held in December in Abuja, Nigeria. Both Mr Obasanjo and Mr Mbeki are aware that, if they cannot get talks under way, the meeting will be overshadowed by the Zimbabwe crisis and a row over whether Mr Mugabe should be allowed to attend the meeting. As Zimbabwe is suspended from the Commonwealth Council of Ministers, Mr Mugabe should not be invited, but some African leaders may boycott the heads of government meeting if he is excluded. Once Zimbabwe gets to the stage of holding new elections, Mr Mugabe and his party would certainly lose if they were freely conducted under full international monitoring. However, although the international pressure on the regime, the deteriorating economic situation and increased political manoeuvring signal the beginning of the end for Mr Mugabe, his control of ZANU-PF and the security forces remains strong and this is likely to lead to increased violence and

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deepening economic decline in the short term. The country’s worsening economic condition is fuelling popular antipathy to the government, and as the economy deteriorates, poverty and hunger will become the most potent pressure on the incumbent president. Political tension is likely to grow throughout 2003, before progress is made in talks between the government and opposition. The rise in political tension will be driven by increased confrontation between the government and the MDC, as Mr Mugabe’s government continues attempting to undermine the MDC as a political force and weaken its bargaining position. It will continue its campaign of arbitrarily arresting MDC MPs and activists on often spurious charges; the best-known case is the trial of the MDC’s president, Morgan Tsvangirai, on two weak and unconvincing charges of treason. In addition, the government will continue to use controversial legislation, such as the Public Order and Security Act, to limit the MDC’s ability to organise anti-government protests. In response, the MDC is likely to continue organising strikes, which will close the country down for periods. To limit the ability of the government to prevent the demonstrations that will accompany the strikes, the MDC is unlikely to give advance warning of its mass actions, although it is aware that confrontations with the security forces could lead to loss of life.

International relations To date Mr Mugabe has played a clever hand on the international front and continues to divide international opinion on how to deal with his regime. The key to his success has been to keep the international focus on the land redistribution issue. He has argued that his land redistribution policy is needed to correct a historical injustice!an argument that receives a sympathetic hearing from leaders in Africa and other developing countries. Coupled with his depiction of his government as one that is willing to stand up to Western powers and neo-colonialism, this has shifted the international focus away from the conduct of the 2002 presidential election, human rights abuses and the undermining of the rule of law and democracy. Mr Mugabe has also proved adept at offering concessions when needed and then not implementing them when political pressure subsides. The net effect has been a lack of international consensus on how to handle his regime, although the attitude of some African leaders against Mr Mugabe appears to be hardening. Although relations with the US and EU will continue to be tense!both have adopted targeted sanctions against senior members of ZANU-PF which limit their ability to travel and have frozen their financial assets!they will continue to provide food aid on humanitarian grounds. But this will prove controversial, since food aid has been used as a political weapon in the past and is likely to be again. This fear is likely to harden the US administration’s demands for greater control by donors over the distribution of food aid. Moreover, if it can be shown that Mr Mugabe is using food aid for political ends, it would make it more difficult for Zimbabwe’s neighbours in Southern Africa to continue supporting him.

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Economic policy outlook

Policy trends The new economic policy!the National Economic Revival Programme (NERP)! outlined by the government in late February to address Zimbabwe’s economic crisis is already in tatters. The shortage of banknotes and foreign currency experienced in July and August, and the government’s odd and ineffective methods of addressing these problems, illustrate that there is now little constructive policy planning, merely ad hoc crisis management coupled with a hefty dose of wishful thinking. If there was any belief that NERP would be a solution to Zimbabwe’s economic crisis, the government itself undermined it by unilaterally announcing increases in wages and prices and then extending price controls over a comprehensive list of basic items. One of the central elements of NERP was that all wage and price decisions should be agreed upon by the tripartite negotiating forum (consisting of the government, organised labour and the business community), under which businesses and the unions were to police wage and price increases to help meet the inflation target of 96% by the end of 2003. In addition, it is clear that the programmes outlined in the NERP to boost various sectors of the economy, in particular the gold and tobacco sectors, and which would, in turn, improve foreign-exchange earnings, will not be implemented. Meanwhile, the fact that in July the government was forced again to appeal to the World Food Programme for emergency food aid to carry the country through to the next harvest in March 2004 has ruled out any possibility of an agriculture-led recovery, which the government had hoped to bring about. Even if it is able to rationalise its chaotic land reform programme and get some seeds and fertilisers to resettled farmers in time for sowing in late 2003, the impact of this will be modest owing to its poorly thought out economic policies, as a result of which the prices paid to farmers are likely to remain too low, and the economic damage caused by the loss of most of the commercial farming sector. The collapse of commercial agriculture in Zimbabwe will also continue to affect the rest of the economy, with which it used to have strong linkages.

Fiscal policy Although there is considerable doubt about the accuracy of the government’s budget data, data from the Reserve Bank of Zimbabwe (the central bank) for 2002 indicate that the government has used the high rate of inflation to allow it to reduce the budget deficit. Whereas fiscal creep has allowed revenue to grow in line with inflation, the growth of expenditure has officially been lower than the rate of inflation, which has pushed the deficit down to only 4.3% of GDP in 2002. In 2003, as the economic contraction continues, revenue growth will weaken. This, combined with the continuing need to import food and fuel and to support resettled small-scale farmers, will increase the budget deficit to 7.2% of GDP in 2003. A modest increase in maize production in 2004 will reduce the need for government food imports, but this will be offset by new wage demands. Continued economic decline will reduce revenue growth, and the fiscal deficit will remain high at a forecast 6.9% of GDP. One benefit to the government of the high rate of inflation and highly negative real interest rates is that, with a deficit financed entirely from domestic sources, the cost of financing it is much reduced and its value is quickly eroded. However, these gains to the government are at a significant cost to those forced to lend to it,

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and represent a huge transfer of wealth from the private to the public sector, which will limit the long-term growth potential of the economy.

Monetary policy Monetary policy in Zimbabwe is becoming increasingly distorted by the country’s high inflation rate and political pressures on the Reserve Bank to keep interest rates on 91-day Treasury bills as low as possible to limit government domestic debt repayments. As inflation is now over 350% per year and heading upwards, real interest rates on 91-day T-bills are currently around "300%. The difficulty of finding buyers for T-bills forced the Reserve Bank in April to start raising interest rates on longer-maturity T-bills to around 100%, still a hugely negative real interest rate. However, this has pushed up commercial lending rates and has caused new political pressure for rates to be lowered to boost lending to the so-called productive sectors of the economy, especially as financial institutions and companies have found themselves facing a liquidity crisis. What is clear is that whether rates change marginally in the next year, they will continue to remain hugely negative in real terms, with the economic distortions that this creates.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.2 2.9 2.9 3.7 OECD 0.9 1.8 1.6 2.2 EU 1.5 1.0 0.7 1.8 Exchange rates ¥:US$ 121.5 125.3 117.1 115.5 US$:€ 0.896 0.945 1.123 1.183 SDR:US$ 0.785 0.772 0.717 0.701 Financial indicators € 3-month interbank rate 4.26 3.33 2.15 2.06 US$ 3-month Libor 3.78 1.80 1.11 1.42 Commodity prices Oil (Brent; US$/b) 24.5 25.0 26.8 18.9 Gold (US$/troy oz) 271.1 310.3 338.8 315.0 Food, feedstuffs & beverages (% change in US$ terms) -1.9 12.7 2.1 1.8 Industrial raw materials (% change in US$ terms) -9.7 2.2 9.1 3.9 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The Economist Intelligence Unit now expects only a slow recovery in the global economy from late 2003, as oil prices fall back and in response to some easing of fiscal policy, particularly in the US. As a result, we expect world GDP growth to reach only 2.9% in 2003!the same as in 2002!but it should pick up to 3.7% in 2004. One benefit for Zimbabwe of the uncertain global economic outlook is that the price of gold is now forecast to average US$339/troy oz in 2003, before falling back marginally to US$315/troy oz in 2004. However, given the country’s current economic policies, economic developments will be much more strongly influenced by domestic factors!in this case, the gold purchase price set by the Reserve Bank and rising input costs!than by trends in the world economy. As a result, we expect Zimbabwe’s gold production to continue declining in 2003-04.

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Economic growth Real GDP has contracted each year from 1999 to 2002, and the Zimbabwean economy is set to decline during the outlook period. The main factors driving the decline are political unrest!made worse in 2003 by strikes and “stayaways” in Harare and Bulawayo!and the disruption to the economy caused by the fast- track land-reform programme, drought and AIDS. In addition to the knock-on effects that the decline in commercial agriculture is having on industry and services, all Zimbabwean businesses and mining operations are being adversely effected by shortages of foreign currency and fuel at a time of price controls, falling purchasing power and triple-digit inflation. As a result, most will reduce their operations and shed labour, and we expect real GDP to contract by 13.1% in 2003. Although the economic decline will slow in 2004! mainly because many firms will already have scaled back their operations substantially and as there may be some limited recovery in food production as the remaining commercial farmers and small-scale farmers increase maize production!real GDP is still forecast to contract by 6.1% in 2004.

Inflation In June Zimbabwe’s inflation rate made a larger that expected upward jump, to 364.5%, up from 300.1% in May, when it crossed the 300% level for the first time. Although it is unlikely to continue to accelerate at this rate, it will continue to rise as fiscal and monetary policies are expected to remain broadly unchanged, the parallel exchange rate will fall, fuel and electricity prices will increase, and food shortages will continue. As a result, we forecast average inflation of 367.6% in 2003, and a year-end rate of around 500%. However, because very few goods are available at official prices, the official rate may well underestimate the rate of inflation for most consumers. Although there is a possibility that inflation could spiral out of control into hyperinflation in 2004, we still think that this is unlikely unless the government loses control of spending. Instead, we expect inflation to peak in mid-2004. It will, however, average 444.2% for the year, driven by the size of the fiscal deficit, the resulting very high rates of money-supply growth, continuing shortages of most goods and the weak recovery of food production.

Exchange rates Although the finance minister, Herbert Murerwa, agreed to a partial devaluation of the Zimbabwe dollar in February 2003!the official rate of Z$55:US$1, used for selected government transactions, remained in place, but the Reserve Bank set a rate of Z$824:US$1 for all others needing foreign currency (the exporter’s rate)! with triple-digit inflation the Zimbabwe dollar has quickly become hugely overvalued again. As a result, pressure for a further devaluation has been growing in the last few months. Another devaluation is likely to be strongly opposed by the president and some other cabinet ministers, but we expect a devaluation of around 100% before the end of the year, although the government will continue to maintain the official rate for imports of food and fuel. With inflation remaining high in 2004, further devaluations will be necessary; the exporter’s rate will average Z$922:US$1 in 2003 and Z$3,117:US$1 in 2004. Meanwhile, because of the shortage of foreign exchange from official channels, the black-market rate is thriving and provides a fairly accurate indicator of the value of the currency. Because of the shortage of foreign currency and the lack of confidence in economic policy, the parallel rate had fallen to over Z$6,000:US$1 in early August.

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External sector Using data provided by the IMF in its July 2003 Article IV report and historical data from the Reserve Bank of Zimbabwe, we estimate that Zimbabwe ran a current-account deficit of 7.5% of GDP in 2002. We expect export earnings to fall from US$1.4bn in 2002 to US$1.2bn in 2004, as tobacco exports nearly halve and gold exports decline. Tourism receipts will remain stagnant in 2003-04, and foreign aid inflows will be limited to humanitarian support. As a result, foreign- exchange shortages will get worse in the next few years, which, coupled with the collapse in the economy, will cause imports also to contract. The scale of the decline in imports will be limited by the need to import maize to offset domestic shortages and to pay for fuel and electricity imports. We forecast that imports will contract from US$1.8bn in 2002 to US$1.5bn in 2004. On the invisible trade account, although the government will run up substantial arrears on its debt-service commitments, it will continue to make some debt- service payments, keeping the income account firmly in deficit. In contrast, the current transfers account will continue to show a small surplus. Although official transfers will remain low given the lack of donor support, private transfers are expected to hold up, as the estimated 2m Zimbabweans that live outside the country send money home to support relatives in economic need. We forecast that the overall current-account deficit will remain substantial at 4.7% of GDP in 2003 and 5.2% of GDP in 2004.

Forecast summary (% unless otherwise indicated) 2001a 2002b 2003c 2004c Real GDP growth -8.8d -12.8 d -13.1 -6.1 Manufacturing production growth -9.0 -14.5 -14.6 -4.8 Gross agricultural production growth -12.1b -22.0 -11.0 -4.0 Consumer price inflation (av) 74.5 134.5a 367.6 444.2 Consumer price inflation (year-end) 112.1 198.9a 499.6 274.9 Short-term interbank rate 38.0 36.5a 65.0 89.9 Government balance (% of GDP) -6.9b -4.3 -7.2 -6.9 Exports of goods fob (US$ bn) 1.6b 1.4 1.3 1.2 Imports of goods fob (US$ bn) 1.8b 1.8 1.6 1.5 Current-account balance (US$ bn) -0.3b -0.3 -0.2 -0.3 Current-account balance (% of GDP) -6.4b -7.5 -4.7 -5.2 External debt (year-end; US$ bn) 3.8 3.5 3.2 3.1 Exchange rate Z$:US$ (av)e 55.1 55.0a 921.9 3,116.7 Exchange rate Z$:¥100 (av)e 45.3 43.9a 787.3 2,698.4 Exchange rate Z$:€ (year-end) 48.5 57.7a 1,880.0 5,220.0 Exchange rate Z$:US$ (av; parallel market) 185 716a 3,483 7,542 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Official or IMF estimates. e In February 2003 the government introduced a dual exchange rate system; the rate of Z$55:US$1 is applied to a range of official government transactions: Z$824:US$1 is the rate applied to all other transactions with the Reserve Bank of Zimbabwe. is the rate quoted from 2003.

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The political scene

The US steps up the pressure In recent months the US government has taken the lead in increasing on Mr Mugabe international pressure on the president, Robert Mugabe. Having already imposed smart sanctions on the regime in March (June 2003, page 15), the US president, George Bush, subjected the Mugabe government for sustained criticism and diplomatic pressure in the run-up to his five-day-five nation official visit to Sub-Saharan Africa in July. The new wave of pressure started five days before the tour when the US secretary of state, Colin Powell, wrote an article published in the New York Times condemning Mr Mugabe for his “violent misrule” claiming that he was a leader “whose time has come and gone”. In the article, Mr Powell called on the South African president, Thabo Mbeki, to apply pressure on Mr Mugabe so that democracy and realistic economic policies could be restored to Zimbabwe. Mr Powell said that the best outcome for Zimbabwe would be a new round of elections under a transitional government with the “president gone”. The Mugabe government reacted in typically combative fashion. An editorial in The Herald, accused Mr Powell of being an “Uncle Tom” and of dancing to the tune of his masters. The counterattack against the US administration was stepped up by the information minister, Jonathan Moyo, who said that the US secretary of state was a liar for claiming that the Mugabe government had abused human rights. Not surprisingly, this prompted a spirited counter attack from the US, the US embassy in Harare issuing a press statement condemning the “racist slurs” on Mr Powell.

The US and South African Of more consequence than the war of words between the US and Zimbabwe presidents discuss Zimbabwe governments, was the fact that Mr Powell’s article, pressuring both Mr Mugabe and Mr Mbeki, was strategically timed to concentrate attention on South Africa’s policy towards Zimbabwe during Mr Bush’s visit to South Africa. Indeed, Zimbabwe was a key topic in the talks between the two presidents. Before Mr Bush’s visit there had been considerable press speculation that the talks would have a more positive outcome than they did. However, following the talks, Mr Bush presented a united front with Mr Mbeki, claiming that the

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South African president was the “point man” on Zimbabwe. What went on in their discussions is less clear, but sources close to the talks indicated that Mr Bush stepped up the pressure on the South African president and said that South African companies would benefit from a new aid package to Zimbabwe if the political crisis were to be resolved. The reconstruction package promised by Mr Bush is apparently around US$10bn over an unspecified period, if a new president takes office in Zimbabwe. Even Mr Bush’s public endorsement of Mr Mbeki was a form of pressure, indicating that Washington was expecting Mr Mbeki to achieve progress on Zimbabwe within a reasonable period.

Zimbabwe is added to a US In the weeks after Mr Bush’s African visit, there was little sign of any new blacklist initiative from Mr Mbeki, but it is now clear that the US administration expects South Africa to help bring about new, supervised elections in Zimbabwe. Following his Africa trip, Mr Bush sent out one of his strongest statements against the Mugabe regime by including it in a list of six regimes that he claimed were guilty of oppression and human rights abuses in a proclamation to mark “captive nations week”. As well as Zimbabwe, the other five regimes are Cuba, Iran, Iraq, Myanmar and North Korea. The Zimbabwean government, however, refused to make any official comment about its inclusion in the list.

Mr Mugabe still has some Mr Mugabe responded to the increased diplomatic pressure from the US by support from African leaders mustering the support of fellow African leaders. At the summit of the African Union (AU), held in Maputo, Mozambique, in mid-July, Mr Mugabe was elected to the vice-chairmanship of the AU’s regional committee on Southern Africa. The British press voiced outrage at Mr Mugabe’s election to the post, and considered it an indication that the AU, like its predecessor, the Organisation of African Unity, was going to support sitting heads of state, no matter how bad their misrule. Mr Mbeki’s spokesman, Bheki Khumalo, tried to play down the appointment, arguing that the post was rotated each year and it was simply Mr Mugabe’s turn. However, this is disingenuous, as the Southern African Development Community (SADC) skipped Mr Mugabe’s appointment as deputy chairman under the agreed rotation system in late 2002. In this case, the deputy chairmanship passed directly to the Tanzanian president, Benjamin Mkapa, who will assume the chairmanship of SADC in late 2003 (December 2002, page 21). But it should be noted that support for Mr Mugabe’s appointment was hardly strong, indicating how far his standing has fallen among other African leaders. Just a couple of years ago Mr Mugabe would have been in line to become chairman of the AU; now he is being sidelined.

Political repression has not Whatever the international pressure on the Zimbabwean president, it has not diminished made any difference to the government’s overall campaign to repress the opposition party, Movement for Democratic Change (MDC). Morgan Tsvangirai, the leader of the MDC, was arrested and jailed for more than a week in June for allegedly supporting anti-government violence by organising the party’s successful and peaceful five-day anti-government national strike (June 2003, page 17). Mr Tsvangirai was eventually released, but arrests of other MDC officials and members have continued, as well as violent attacks on MDC members by Mr Mugabe’s “Green Bombers”, the much feared youth militia of the Zimbabwe African National Union-Patriotic Front (ZANU-PF). Far from

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giving the opposition party any protection from the violence, the police force works with the militia in hounding the party. The government has also visibly stepped up its pressure on opposition politicians in local government. Its most prominent victim being the mayor of Harare, Elias Mudzuri, a member of the MDC who has suffered arrest, eviction from office and general harassment. The MDC leader is charged with treason

One high-profile attempt by the government to undermine the MDC has been its prosecution of the party’s leader, Morgan Tsvangirai for treason. The prosecution wound up its case at the end of July, and Mr Tsvangirai’s defence, led by George Bizos, a South African lawyer who defended opponents of the apartheid regime, called for the case to be dismissed, arguing that the state had not presented sufficient evidence to show that Mr Tsvangirai, or the two other MDC officials on trial, had plotted the assassination of Mr Mugabe, as was alleged. At the beginning of August, a senior High Court judge, Paddington Garwe, started considering the arguments of the defence, before ruling on August 8th that Mr Tsvangirai’s trial would proceed, despite the fact that most lawyers consider that evidence against him, including the notorious video tape filmed in Canada, is so weak that the case should have been dismissed. The charges against Mr Tsvangirai’s co-accused, the MDC’s secretary- general, Welshman Ncube, and the party’s shadow agriculture minister, Renson Gasela, were dismissed. The government’s determination to continue the case is a clear sign of how seriously the independence of the judiciary has been compromised in the past few years. The High Court is widely viewed to be packed with judges known to be strong supporters of the government, with only a few exceptions. Judge Garwe, in particular, is reported to be the recipient of a seized farm and other government favours. However, so far the government has not pursued a second charge of treason against Mr Tsvangirai.

Almost all the charges against MDC leaders are patently spurious, according to legal experts. But the cases sap the organisational strength and energy of the party. Moreover, Mr Tsvangirai faces the death penalty if found guilty of treason: which is an important psychological weapon that the government can use against Mr Tsvangirai and his party. The government also probably hopes that the charges will create divisions within the party and may encourage some members to consider dropping Tsvangirai as party leader. It is unlikely that the government would press for the death penalty in a patently flawed trial!that would give the MDC a potent propaganda weapon and a martyr to boot!but it will probably push for a prison sentence of over six months which would, under Zimbabwean law, prevent Mr Tsvangirai from standing for election as president.

The MDC is unsure of its Although the strike in June succeeded in closing down virtually every shop and next move business in the main towns, its aftermath has been an anti-climax because of the failure to get large numbers of protestors out on the streets. to show their opposition to the government. But this is both difficult and dangerous to do, given that the government has well-trained police and military, equipped with sophisticated anti-riot hardware ranging from small arms, to tear gas and armoured vehicles armed with powerful water cannon designed for use

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against large gatherings. Moreover, the regime has shown that it will use the full force of its security forces to suppress any opposition demonstrations.

Rumours of Mr Mugabe’s Although the political situation has changed little over the past year, many retirement grow political commentators believe that Mr Mugabe will retire in the next six months. December still seems to be the favourite date for this, as this is when ZANU-PF will hold its annual conference, at which the details of the resignation can be finalised. December was the date apparently given to President Bush by President Mbeki, but this has been denied by the South African government. Even The Herald, a newspaper loyal to Mr Mugabe, is anticipating his departure; an article in the paper suggested that the vice-president, Joseph Msika, would succeed him. Many political commentators have also seized on the fact that in recent months Mr Mugabe has carried out a rare tour of the country. This, it is claimed, is to sound out opinion in ZANU-PF on whether he should announce his retirement at the party congress in December, although it is unlikely that many in the party hierarchy would give an honest answer if asked directly.

He is likely to resign only as Much of the journalistic speculation about Mr Mugabe’s resignation is unclear president of the party about distinguishing between his presidency of the country and his presidency of ZANU-PF. The Economist Intelligence Unit still doubts that the he will voluntarily offer to resign as president of Zimbabwe. However, it seems increasingly likely that he will announce his resignation as president of ZANU- PF at the conference in December. Although this would not signal an end to the political crisis in the country, his resignation as president of ZANU-PF would help to break the current political impasse, as it would pave the way for the two parties to start serious talks.

Mr Mugabe’s resignation as party leader would follow significant concessions made by the MDC that indicate its willingness to opening a dialogue with ZANU-PF. In particular, at the state opening of parliament in late July the MDC made a number of conciliatory gestures towards the president: • it ended its boycott of presidential speeches to parliament, when its MPs listened to Mr Mugabe’s opening address to the new session of parliament on July 22nd; • at the same time, Mr Tsvangirai, who is not a member of parliament, sat in the visitors’ gallery, surrounded by Mr Mugabe’s supporters to listen to the president’s address. The MDC has also signalled that it wants to open negotiations between the two parties by appointing more senior party members to its negotiating team, including Mr Ncube; and that it would consider dropping its legal case against the results of the 2002 presidential election if the talks made progress towards resolving the country’s political, economic and humanitarian crisis. In his address to parliament, Mr Mugabe, for his part, refrained from making one of his more aggressive attacks on the MDC, which has raised hopes of political compromise.

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The MDC’s challenge of the presidential election results is to be heard in November

One of the main obstacles to talks with the MDC, according to Mr Mugabe, is the party’s legal challenge of the results of the presidential election in 2002: he has repeatedly stated that talks can not begin until the case is dropped and his election recognised. The MDC’s case is that Mr Mugabe’s election is not valid because of convincing evidence of violence by his supporters and massive vote-rigging. It has, however, become a victim of the logjam in the country’s courts, although there has recently been some progress: following an urgent application to the courts in the middle of July, the MDC’s petition is to be heard on November 3rd.

Given the political manipulation of the courts in Zimbabwe in recent months, it is unlikely that the MDC will win its case. After a preliminary hearing the presiding judge will probably dismiss the case on the grounds of insufficient evidence. However, this will end the matter and remove yet another obstacle to talks between ZANU-PF and the MDC. The talks will concentrate on If talks are started in the coming months, they will have to make progress at an drawing up a new constitution early stage with some extremely sensitive issues. In particular, they will have to tackle the question of Mr Mugabe’s continuing as head of state and whether he will be offered immunity from prosecution for human rights abuses. Once these hurdles are overcome, the talks are likely to concentrate on drawing up a new constitution for the country, a formal agreement on its passage through parliament and a timetable for fresh elections. New elections held according to standards set by the Southern African Development Community would then, it is hoped, put in place a government with a mandate from the people to sort out the country’s dire economic problems. A new government with popular backing would get considerable support from the international community, including the World Bank and the IMF The benefit of this approach!where the focus is on drawing up a new constitution rather than a transfer of power!is that both the MDC and ZANU- PF could claim that it represents a victory of sorts. • The MDC can support such a process because it is confident that it would win a new round of parliamentary and presidential elections if they were held under strict international supervision to limit the extent and scale of any fraud. The party has made it clear that it would rather come to power through peaceful democratic means that by leading a violent revolt that would no doubt be very bloody. • Mr Mugabe could support such a negotiated end to his years in power because it would allow him to step down with a degree of respect, especially if he can negotiate an agreement providing immunity from prosecution for human rights abuses and corruption.

The talks will threaten However, it is unclear whether Mr Mugabe could carry his party through such ZANU-PF unity talks. Some high-ranking members of ZANU-PF are in favour of such a process as they believe they would have a chance at winning power for themselves. They would especially be from the moderate wing of the party, which could emerge as the dominant faction in any negotiations. However, others in

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Mr Mugabe’s cabinet are firmly opposed to the talks. Those against talks are mainly ministers who have not won parliamentary seats through election, but are appointees of Mr Mugabe, such as the information minister, Jonathan Moyo, the justice minister, Patrick Chinamasa, and the agriculture minister, Joseph Made. They know that if Mr Mugabe were to retire, they would not stand a chance of remaining in power and will work against the talks at every step. This group’s power within the party was illustrated on August 10th, when Mr Mugabe made an outspoken speech at the Heroes’ Day holiday at which he was supported by both Mr Moyo and Mr Chinamasa. Another problem for the talks, especially given the opposition of some sections of ZANU-PF, is that Mr Mugabe is a master at appearing to give ground in negotiations, responding to regional and international pressure by offering compromise, only to take it back later, when it becomes clear that he had no intention of making good his offer. There is, therefore, a need to ensure that any talks address this issue at an early stage and put in place mechanisms to limit the ability of the president to go back on his promises.

Finding an unbiased mediator For this reason, and the fact that talks could split ZANU-PF, one element for could prove tricky ensuring that all sides stick to any agreements made in the talks, is to have a strong, impartial mediator, who can broker compromises between both sides and commands enough respect that the parties would feel moral pressure to honour their agreements. The choice of mediator is therefore critical. Although the South African government has so far taken the lead in trying to broker talks, the MDC does not consider it a neutral party, but rather pro-ZANU-PF. The Nigerian government is less tainted by this perception, and its new foreign minister, Oluyemi Adeniji, has so far not been involved in the crisis so may be seen as neutral. Others suggest another regional foreign minister, possibly from Mozambique or Tanzania. In the meantime, the Zimbabwean church continues to be the main mediator in the political process. At the beginning of August a delegation of Zimbabwean church leaders met first with Mr Mugabe, and then with Mr Tsvangirai, and said that they would continue their shuttle diplomacy help get the talks off the ground. Bishops from the Catholic Church, the Anglican Church and the Evangelical churches also announced they would visit South Africa and Nigeria for talks with the authorities. However, many do not see the church as unbiased: the justice minister, Patrick Chinamasa, has publicly attacked church leaders, claiming that they are not neutral mediators, but “MDC activists in church collars”.

ZimbabweTalks on a is new publicly constitution scaling In late July Sibusiso Moyo, the director-general of Cosleg, the joint venture set back its involvementare mostin the likely DRC up with Congolese investors and the Zimbabwe Defence Forces, through its company, Operation Sovereign Legitimacy (Osleg), to exploit economic opportunities in the Democratic Republic of Congo (DRC), stated in an interview with the Zimbabwe Independent that his company was no longer involved in any commercial activity in the DRC. Cosleg has been reported at various times to be involved in mining in the DRC, although according to Mr Moyo, a retired army officer, since the withdrawal of the Zimbabwean military from the DRC the only activities taking place involving Zimbabwean companies are those covered by the memorandum of understanding between

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the two governments in areas such as electricity exports to Zimbabwe, trade and investment. When asked about the recent UN report on the economic exploitation of the DRC (December 2002, page 22), Mr Moyo denied the charge that Zimbabwe had participated in the illegal exploitation of the country’s resources. In the same newspaper, the minister for mines and minerals development, Edward Chindori-Chininga, is quoted as saying that his ministry was not involved in any activity in the DRC either through the Zimbabwe Mining Development Corporation or any other institution. It is too early to tell whether the Zimbabwean military has given up its operations in the DRC. Most political analysts suspect that the army and government have chosen to deny their business activities in the DRC because they want to avoid further scrutiny by the UN as the peace process in the country moves forward. Meanwhile, they have been setting up a range of private companies, with a lower profile than Cosleg, which can exploit the opportunities that they had become involved in through the army. This, they hope, will circumvent the Security Council resolution of January 24th, following the UN report, which demanded that countries should take immediate steps to end their illegal activities in the DRC. Moreover, many individuals named in the UN report realise they will have less protection from prosecution if the political crises in both Zimbabwe and the DRC are really being resolved. The UN report named among others the commander of the Zimbabwe Defence Forces, General Vitalis Zvinavashe, the director of defence policy, Colonel Simpson Sikhulile Nyathi, the defence minister, Sidney Sekeramayi, and the speaker of parliament, Emmerson Mnangagwa, as being directly involved in the illegal exploitation of resources in the DRC.

Economic policy

The government appeals The Zimbabwe government has formally appealed for humanitarian assistance for food aid to the World Food Programme (WFP). According to government sources, the decision to make a formal appeal had been delayed by disagreements over official crop forecasts: some in the cabinet still refused to accept the full scale of the food shortages facing the country (June 2003, page 27) or admit that Zimbabwe did not have enough foreign exchange to import food itself on the scale required. Although details of the appeal are not available, it is understood that government has requested 600,000-800,000 tonnes of food aid to carry the country through to the next harvest in March 2004. In 2002 the government appealed for 705,000 tonnes of food. The delay in the appeal could have important consequences. According to the WFP, because of the delays it is unlikely that donors, even if they are willing to provide food, will be able to provide it in time to stop people going hungry. The WFP spokesman in Zimbabwe, Luis Clemens, said in early August that food stocks would probably last only until the end of the month, noting that the situation was deteriorating quickly in many parts of the country, with new people turning up at distribution centres to register for food aid. The food shortage was particularly severe in Tsholotsho and Matabeleland. In July the MDC warned that there would be deaths if the government did not appeal to

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aid agencies for food relief. However, death from starvation may have already begun. There have been unconfirmed media reports that 43 people, mostly children, died in the country’s second city of Bulawayo from malnutrition in the first half of the year. In late July the UN launched the 2003/04 Regional Consolidated Appeal for Southern Africa (the appeal covers July 1st 2003-June 30th 2004). The appeal seeks to raise enough resources to provide emergency assistance for 6.5m people in Southern Africa affected by a combination of the failed harvests of recent years and HIV/AIDS. The WFP is leading the appeal, seeking US$320m for 540,000 tonnes of food aid to be distributed mainly in Lesotho, Malawi, Mozambique, Swaziland, Zambia and Zimbabwe. The WFP has highlighted the particularly acute need of Zimbabwe: US$200m of the US$320m is to be spent on food aid for an estimated 4m people there. The WFP has called on the government to lift the monopoly on imports held by the Grain Marketing Broad and stop fixing the price for basic foods at unrealistic levels, both of which are limiting the ability of the private sector to supply food to the country

WillThe they Z$500 or willnote they is being not While the government delayed in requesting food aid from the international withdrawn from circulationdevalue? community, economic policy seems to have descended to a farcical level as the cabinet has searched for a way of resolving the country’s growing shortages of banknotes (June 2003, page 27). In late July the minister of finance, Herbert Murerwa, announced that the government would withdraw the Z$500 note from circulation within 60 days in order to alleviate the country’s cash shortage. The government justified its decision on the grounds that the note was being hoarded, though did not explain why anyone would want to hoard a note whose value is being daily eroded by 350% inflation. Most economists argue that at times of high inflation, the rational response of most people is either to buy goods before their price rises again!hoarding goods not banknotes!or to transfer the money into a more stable currency which will hold its value if one is available, normally US dollars, but in Zimbabwe’s case regional currencies such as the South African rand or the Botswana pula. The withdrawal might make sense, if the government reissued the same notes stamped over as Z$5,000 (or even Z$50,000), as has happened in other countries undergoing such high levels of inflation. Otherwise the reasons for the note shortage!inability to pay for paper and ink to print new notes coupled with the fact that inflation has eroded the value so much that demand for the notes for even small transactions is huge!will remain completely unchanged. The government announced another desperate measure in early August: that the Reserve Bank of Zimbabwe (the central bank) would introduce travellers’ cheques for local use. The cheques will range from Z$1,000 to Z$100,000, which means that fewer will be required to make simple transactions!the highest-value banknote is only worth Z$1,000. The cheques are cheaper and easier to print. However, they are also easier to forge and they may be acceptable only to people that know and trust the person passing the cheque.

The devaluation debate While the government struggles to sort out its cash crisis, it is also in the middle continues of another internal debate about whether to devalue the currency again. Although it has been reported at various times in the press that Mr Murerwa

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would soon release the government’s long-awaited quarterly review of the country’s economic performance!which would determine whether any adjustments needed to be made to the National Economic Recovery Programme!there had still been no sign of the review by mid-August. As in the past, the cabinet seems split over devaluation, the president still bring opposed to the move. The IMF wrote in its July 2003 Article IV report, that, though the authorities recognised that the exchange rate was overvalued, “political factors, including at the highest level, blocked a change”. Those supporting the president against devaluation argue that the devaluation in February has not helped to raise export earnings. Instead, it has just increased the clamour for yet another devaluation. In their thinking, the focus of economic policy should not be on devaluing the currency, but on the need to boost exports, in particular, the need to move away from exports of unprocessed primary productions, to the export of value-added goods. However, in an interview in The Herald in late July, Mr Murerwa, indicated that another devaluation of the dollar was possible, even if it only applied to certain exporters as in the past. However, he gave no indication of the scale of the devaluation that the government was considering or of its possible date. There has been some talk in the private sector that the government might give in and effect a 200% devaluation to bring the exporters’ exchange rate, but perhaps not the official rate, in line with the July parallel market rate (which was then Z$2,600-3,000:US$1). However, the Economist Intelligence Unit considers this to be very unlikely given the political sensitivity of devaluation and the sharp fall in fact the parallel rate in early August (see Economic trends). Any devaluation is more likely to be of 80-100% which would put the exporters’ rate at around Z$1,500-1,600:US$1, compared with its current rate of Z$824:US$1, though the possibility that the president will block a devaluation remains high.

Interest rate policy comes back With long-term interest rates on Treasury bills slowly creeping up in the middle into the spotlight of the year (June 2003, page 23) and the growing shortage of cash, it is perhaps not surprising that commercial banks have been forced to raise their minimum lending rates in the past few months in order to attract money to be held in accounts. The first to announce that it was raising rates was Kingdom Bank, which increased its minimum lending rate to 87% in late July, compared with 80% in June. Minimum lending rates were 30-40% at the start of the year, so have doubled in the past eight months (although they are still hugely negative in real terms). Whether this will have much impact is unclear. In its Article IV report in July 2003, the IMF stated that although most banks had capital adequacy ratios that exceeded international standards, this should not be taken as an indication of the soundness of the banking sector, since the high rate of inflation had eroded the real value of the minimum capital requirement and low real interest rates made it easy for companies to service their loans. However, as interest rates have risen during the year, companies are finding it increasingly expensive to meet their loan repayments and some could default on their debt. The possibility of interest rates falling was raised by the Mr Mugabe in his speech at the opening of parliament in late July, when he said that interest rates would have to come down in order to “recharge the economy” and encourage the real generation of wealth rather than creating

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money through speculative activities. However, given its difficulties in financing the country’s deficit, the Reserve Bank will probably oppose the move. The solution may be that, with rising inflation and stable nominal interest rates, falling real interest rates will avert an immediate liquidity crunch.

A dual fuel-pricing system may Despite hopes that a new fuel contract had been agreed with Libya (June 2003, be introduced pages 32-33) fuel shortages have continued, indicating that even if an agreement had been reached supplies are being released only when payments are received. As a result, the black market for fuel has continued to grow. In response to this, in late June the government banned motorists from carrying fuel cans in cars without a permit. Many people, as a result, have had large reserve fuel tanks built into cars. Special fuel allocations to minibus operators, introduced to save the public transport system from collapse, are also finding their way on to the private market. The shortages have increased speculation that the government will introduce a dual fuel pricing system. This was alluded to in Mr Mugabe’s speech to parliament in late July when he said that the National Oil Company of Zimbabwe (Noczim) would soon be competing with private-sector companies in the import and distribution of fuel. Under a dual pricing structure, the government and other groups considered to be critical economic operators!would be able to buy fuel at a cheaper price from Noczim, whereas the private-sector companies!BP, Caltex, Mobil, Shell and Total!would have to arrange their own supplies. However, for this to work, they would have to raise their prices. At present the official price of blended petrol is Z$400/litre, whereas it costs around Z$1,500/litre on the black market. However, as the parallel exchange rate has fallen recently, this will have to increase still further as it is unlikely that private-sector oil companies will be able to obtain all the foreign currency they need to pay for fuel at the exporters’ exchange rate. Meanwhile, those with access to petrol from Noczim, most of them with political links to the ruling Zimbabwe African National Union-Patriotic Front, will continue to make substantial profits from reselling petrol to the private market at the higher prices.

The domestic economy

Economic trends

Inflation continues to rise Zimbabwe’s year-on-year inflation rate surged to 364.5% in June, an all-time high, according to data from the Central Statistical Office. There did not seem to be one specific factor driving the increase, instead all the components making up the consumer price index registered huge price increases on the previous year. Increases in the prices of goods were led by a 434% rise in food prices and a 607% rise in the cost of meals outside the home. Increases in the price of services were more modest by comparison, though the rate of increase was still in triple digits. On average, prices rose by 21.1% between May and June, the largest monthly increase on record. Although economists had expected inflation to increase in the coming months, the increase in June was substantially above what most of them had forecast.

Inflation rate (% change) 2002 2003 Year Jan Feb Mar Apr May Jun Year on year 134.5 208.1 220.9 228.1 269.2 300.1 364.5 Month on month – 9.9 9.1 8.8 18.4 16.9 21.1

Source: Central Statistical Office.

This acceleration with no particular cause is worry, as it raises fears that inflation is in danger of spiralling out of control into hyperinflation. Indeed, the official rate may well underestimate the rate of inflation for consumers, because very few goods are now available at official prices, many items now being bought in parallel markets, which charge much higher prices, and some goods are simply not available. Of additional concern is that inflationary pressure is likely only to rise in the months ahead as the government is forced to raise fuel prices, many basic foodstuffs remain in shortage and the recent decline in the parallel exchange rate pushes up the cost of imports (the parallel rate fell sharply in late May-early June from Z$1,600:US$1 in the first five months of the year to around Z$2,000:US$1, before stabilising at around Z$2,500:US$1 in recent months). Inflation will also be driven by the large fiscal deficit and the resulting high rate of money supply growth.

The parallel rate falls sharply One of the factors that has helped drive up the rate of inflation has been the in early August collapse of the parallel exchange rate. After the sharp falls in the parallel rate in late May and early June (June 2003, page 25), it seems to have held steady for a couple of months, However, it seems to have fallen very sharply again in early August. Although the Zimbabwe dollar was trading at around Z$2,500- 3,000:US$1 at the end of July, by early August it had fallen to Z$4,500:US$1 before falling sharply again: by August 9th, the parallel rate had shot up to Z$6,200:US$1. A variety of reasons have been put forward for the fall: the shortage of cash; the decision to introduce travellers cheques, which indicates that the government has given up on rational economic policy; the lack of inflows from the tobacco auctions; the lack of a central bank governor; and the unwillingness of those with foreign currency to release it on to the market in anticipation of further falls in the exchange rate. All might have triggered the collapse, although whether one is more important than the other is debatable. The main cause of the fall in the parallel rate has been the shortage of foreign exchange at a time of huge demand due to the lack of confidence in the government and its policies. On a slightly more positive note, it is possible, as in the past, that the rate has overshot its equilibrium value and that it could rebound slightly if the government does agree to a devaluation of the exporters’ rate in the coming months.

Report reveals consequences The country’s economic decline in recent years is illustrated in the recently of the economic collapse published Human Development Report from the UN Development Programme (UNDP). In this year’s report, Zimbabwe dropped to 145th position in the UNDP’s Human Development Index (HDI) in 2001!out of the 175 countries that were ranked!a sharp fall on the preceding years when it was ranked around 125th-130th place. The HDI is a composite measure of average achievement in

three aspects of human development: life expectancy, education and economic well being. The Zimbabwe’s fall in the HDI ratings means that it is no longer ranked as a country of medium human development, but as one of low human development. As the data refer to 2001, since when Zimbabwe’s economic decline has gathered pace, the country looks set to fall even more quickly down the HDI rankings in subsequent years. As well as the contraction in GDP in recent years, other factors driving the fall in the HDI ranking are the collapse of the country’s health and education services against the background of the HIV/AIDS crisis. Zimbabwe joins a number of countries whose HDI rating is now lower than in 1975, the first year the HDI was compiled. The other two are the Democratic Republic of Congo and Zambia. In other words, Zimbabweans are now worse off than in 1975, at the height of the civil war in Rhodesia, when the country was under full-scale international sanctions rather than the limited smart sanctions being imposed by the US and EU at present.

The UNDP measures the A factor often cited in Zimbabwe’s favour until recently was the fact that it had extent of the brain drain one of the most educated and skilled labour forces in Southern Africa. However, a recent study by the Scientific and Industrial Research and Development Centre (SIRDC), funded by the UNDP, has highlighted the extent of the brain drain in recent years. According to the SIRDC study, at least 500,000 professional Zimbabwean workers have left the country in recent years. It estimates that there are now 479,348 professional Zimbabweans living abroad!mostly in the UK, Botswana and South Africa!although the study acknowledges that are a large number of Zimbabweans outside the country that it could not contact, especially in South Africa where many are illegal immigrants or have acquired South African passports The study argues that in the last four years the number of skilled Zimbabweans leaving the country has reached such a level that it has serious implications for the country’s growth potential. Of those identified in the study, the vast majority held bachelor’s degrees, and of these, 20% held master’s degrees, and 5% had PhDs. 54.5% of those questioned in the survey said that they had left Zimbabwe in search of work, low salaries being the most important reason for leaving,

although the exchange rate and the lack of opportunity for career development were also given as important reasons for leaving the country. As the report notes, because of low pay many skilled workers, such as university teachers, doctors and scientists, drive minibuses and taxicabs, or even run small bars and beer parlours, in order to earn enough to survive.

The study shows that, of all professions, healthcare and teaching are the worst affected by the brain drain, doctors, teachers and nurses being the most common professions of those interviewed. This is because it is the healthcare and education sectors that have faced the most drastic spending cuts. In fact, the report found that the flight of doctors had been “so overwhelming” that the Ministry of Health has sought to maintain staffing levels by recruiting hundreds of Cuban doctors, who are paid in foreign currency. The only good news in the report is that most emigrant Zimbabweans intended to return to the country, although 25% did say that they were unsure whether they would permanently live in Zimbabwe again.

Agriculture

Sales of tobacco are slow This is the time of year when inflows of foreign currency from the tobacco auctions start to flow into the country, which should help alleviate the ever growing shortages of foreign currency. However, as in recent years, tobacco farmers have tried to use some of their limited economic muscle to ensure that they also benefit from any proposed devaluation, especially since the tobacco subsidy, which benefited them last year, was withdrawn when the government partly devalued the Zimbabwe dollar in February (March 2003, page 23). This angered many farmers, who claim that, because they have to buy many of their inputs at the parallel exchange rate, they should have some additional benefits. As a result, according to Rodney Ambrose of the Zimbabwe Tobacco Association, there was a sharp decline in crop deliveries to auction floors in July and August. Speaking to the press, he confirmed that deliveries to the tobacco auction floors had declined by about 40% to 700,000-800,000 kg a week, and that some floors were not being used because of low tobacco

deliveries. It has also been reported that the Burley Tobacco Sales Floor in Mutare has been closed as it does not have enough business to stay open. The building is being rented to the World Food Programme instead. Although it represents only a small part of the total crop, burley tobacco is important around Chipinge in Manicaland province. The slow rate of delivery to the auction floor is an additional problem this year, as the government’s land reform programme has depressed the overall tobacco harvest. It is estimated that 100m-125m kg of tobacco will be sold this year, compared with 167m kg in 2002 (June 2003, page 28).

Tobacco sales (Apr 23rd-Jul 4th) 2002 2003 % change Sales (‘000 kg) 38,545 25,647 -33.5 Average price (US$/kg) 2.05 2.02 -1.5 Total value of sales (US$ m) 78.9 5.17 -34.4

Source: Reserve Bank of Zimbabwe, Weekly Economic Highlights, Vol. 5, No. 11.

Farmers and government The government and the small number of commercial farmers remaining in resume their war of words the country resumed their war of words in the run-up to the annual congress of the Commercial Farmers’ Union (CFU) in July. In a new attack on the CFU, the minister of agriculture, Joseph Made, said that commercial farmers were partly responsible for the collapse of the economy because of their “racist view on the land issue” and that commercial farmers had become “irrelevant” given the success of the government’s land reform programme. He accused them of not returning export earnings to the country!a reference to recent accusations against tobacco farmers!which was a form of economic sabotage and one of the reasons for the country’s growing shortage of foreign exchange. The CFU still claims about 2,100 members, although only around 1,200 are still farming, compared with around 4,500 before the land reform programme started. Of those farming, probably only 600 are able to operate their farms as before; the other 600 face harassment by the militias of the ruling party, Zimbabwe African National Union-Popular Front (ZANU-PF), and the theft of their equipment and crops. Meanwhile, the government is trying to put a better face on its land reform programme and convince a sceptical public that it has actually led to the resettlement of landless people and not just the transfer of farms from commercial farmers to those with close links to the president and the party. At the CFU conference, it was claimed that only 129,000 people had settled on seized farms, compared with the government’s figure of over 300,000. In addition, at the beginning of August, the president, Robert Mugabe, held a series of meetings with the cabinet, the politburo of ZANU-PF and later the party’s Central Committee, at which he apparently told the party’s senior officials that they could hold only one farm each and that any that had more than one farm could one keep one property and surrender the rest for resettlement. Mr Mugabe’s announcement was an acknowledgement of the findings of the government’s land audit team, the Land Review Commission, which was appointed in May. Headed by the former cabinet secretary, Charles Utete, a close ally of the president, this confirmed the popular perception that

that the land reform had been plagued by corruption and that party officials had grabbed the best properties for themselves. The commission’s full report is due to for release in September, although it may never see the light of day. Mr Mugabe apparently gave party leaders until August 14th to turn over their excess farms, though there is not expected to be anything more than a token offering from a few party leaders, as may of those who grabbed several farms have put them in the name of family members and other associates.

Manufacturing

Bread crisis highlights the Bread, a key staple food for many urban Zimbabweans has been in short insanity of current policies supply for over a year; bread queues are now common from early morning to late evening outside most bakeries and supermarkets when supplies are available. However, the industry was thrown into further crisis in recent months. Following an increase in the price of wheat from the Grain Marketing Board by 1,200% in early July, bakers and supermarkets raised the price of a loaf from the official price of Z$250 to Z$1,000 without seeking permission from the government. The government reacted by ordering companies to return to the official price and fined bakers and food shops a total of Z$20m. Despite this, very few loafs are now available at Z$250, most consumers now having to pay the black-market price of Z$1,000 for a loaf. The confrontation shows again how the government is losing grip with economic reality. With inflation at over 350% pushing up wages and other input prices, as well as the increase in grain prices, bakers cannot produce bread at the mandated price: unless they sell at the black-market price they will simply go out of business.

Mining

Implats bids for Zimplats The only sector of the economy that attracts investor interest, despite the political crisis and the economic problems in the country, is platinum mining. The latest development involves a formal bid by the world’s second largest platinum producer, Impala Platinum (Implats) for a 49.5% share in Zimbabwe Platinum Mines (Zimplats). Implats already owns a 35.7% holding in Zimplats which operates the Ngezi platinum mine in Zimbabwe. However, market analysts are split over whether the Implats bid of A$4.08 (US$2.77; Zimplats is listed on the Australian Stock Exchange) is sufficiently high to persuade holders to sell. Some Australian analysts have argued that the Implats offer is underpriced, suggesting that the South African group is flying a kite to see whether it can get the rest of the shares at a bargain price.

Platinum matte exports 1998 1999 2000 2001 2002 Volume (‘000 kg) 9.4 5.4 21.1 35.6 37.4 Value (US$ m) 3.4 2.0 11.4 17.5 17.8

Source: IMF, Zimbabwe Selected Issues and Statistical Appendix, July 2003.

However, Implats’s finance director, David Brown, insists that the offer of A$4.08 per share represents a balance between the risk of operating in Zimbabwe and the reward from the investment. He points out that the offer is

69% above the average price on the market in the month before Implats stated its intention to bid for the minorities. Whether the Australian deal goes ahead or not, Implats has also announced that it would be adding the 14.33% stake owned by South Africa’s ABSA Bank, in a R142m (US$28.5m) deal that has given Implats majority control with just over 50% of the shares. It is to early to tell whether the bid will succeed, though a number of important questions about the bid remain unresolved. • Zimplats has already offered 15% of its shares to the Zimbabwean government as part of its agreement over the development of Ngezi mine and related tax arrangements. To date the state-owned National Investment Trust of Zimbabwe, which was supposed to take up the 15% on behalf of black Zimbabweans, has failed to do so. It is not known whether Implats would be willing to proceed with the 15% offer. • Zimplats is not covered by any recognised takeover regime. In 1998 the company claimed that it was governed by the UK City Code on mergers and takeovers and the London Takeovers Panel, but this is inaccurate because though the firm is incorporated in Guernsey it is not listed in Britain and its senior management is based in Harare. Although Zimplats is listed on the Australian Stock Exchange the only laws governing its corporate operations are those applicable in Guernsey, where there are no takeover rules.

Zimplats is likely to recommend Zimplats is likely to recommend that its shareholders accept the offer, meaning the offer to shareholders that the question of takeover rules is unlikely to be raised. If the takeover goes through, Implats will take control of the Zimbabwean company’s 164m oz of platinum resources. Zimplats owns a number of platinum interests, including the Hartley mine and smelter and the Ngezi open-cast mine. The firm opened Ngezi in 2002, announcing in February 2003 that production might increase fivefold within a decade to produce 1m oz/year of platinum group metals and gold. Implats believes that it could double that to 2m oz/year within 20 years.

Finance and other services

The ZSE keeps climbing Although the industrial share index of the Zimbabwe stock exchange (ZSE) rose by 97% in the first five months of 2003, there was some concern that the stockmarket boom had begun to run out of steam. After impressive gains in January and February, in the three consecutive months of March, April and May, the ZSE industrial share index rose by 4.6%, 5.1% and 8.8%, respectively. However, the ZSE started to pick up again in June and then soared by just over 100% in July. Most of the rise in July followed the president’s speech at the opening of parliament in which he indicated that interest rates might fall again. The prospect of this, coupled with hopes of a devaluation in the coming months, were the two main spurs to the ZSE industrial index, pushing it up from 357,654.41 at the close of trading on July 21st, to 571,168.38 at the close of trading at the end of the month, a rise of nearly 60% in the space of just eight trading days. During the surge, the index rose above 500,000, and the prospects of its rising above 1m, probably some time in early 2004, are increasing.

Foreign trade and payments

The current account moves In the report of its Article IV consultations with the Zimbabwean government sharply into deficit in July, the IMF also published its estimates of the country’s current-account and balance-of-payments data up to 2002 (2001 and 2002 data are provisional). The data, in their aggregate form, are broadly similar to those published in graphical form in Weekly Economic Highlights by the Reserve Bank of Zimbabwe (RBZ, the central bank) in April 2003. The IMF data confirm the view of the Economist Intelligence Unit, that the country’s export earnings have collapsed since the worsening of the country’s economic crisis from 2000. Exports, which were over US$2bn in 2000, had fallen to an estimated US$1.42bn by 2002, a drop of 35%. However, because of the need to import food, imports have fallen by only 1.5% over the same period. According to the IMF data, non-food imports fell from US$1.79bn in 2000 to US$1.52bn in 2002, a fall of15%. Food imports thus rose from only 3.3% of imports in 2000 to 16.7% of imports in 2002. The combination of these trends pushed the trade account from a surplus in 200o to a substantial deficit in 2002.

In the case of the invisible trade account, with tourism earnings collapsing the deficit on the non-factor services account has also increased sharply, reaching an estimated US$202m in 2002. However, this should be offset by the fact that the country has failed to make many of its external debt repayments in recent years, which has narrowed the deficit on the investment account. In the case of official transfers, although flows to the government have slowed substantially, the IMF estimates that there has been a sharp increase in private transfers into Zimbabwe from the many Zimbabweans now living overseas.

Balance of payments (US$ m) 2000 2001a 2002a Exports 2,195 1,609 1,418 Imports 1,849 1,779 1,822 Trade balance 346 -170 -404 Net non-factor services -90 -131 -202 Net investment payments -390 -324 -290 Net private transfersb 175 234 418 Current account balance (excl official transfers) 41 -391 -478 Net official transfers 53 40 35 Current account balance (incl official transfers) 94 -351 -443 Capital account balance (incl official transfers) -289 -387 -334 Errors & omissions 41 363 393 Overall balance -207 -415 -420 a Provisional IMF estimates. b Includes IMF staff estimates of private remittances and food-related transfers to NGOs. Source: IMF, Zimbabwe Selected Issues and Statistical Appendix, July 2003.

The data on private transfers are mainly an IMF estimate, indicating how bad the authorities have been in recording transfers. But this is not the only problem with the data. Their weakness is apparent from the huge size of the errors and omissions figure, which is nearly the size of the current-account deficit itself. This reflects not only the problems that the government has had in collecting the data, but also problems in converting the data into Zimbabwe dollars given the huge problems with the exchange rate and the fact that many transactions have actually been carried out using more than one exchange rate. It also reflects the fact that owing to the over- and under-invoicing of many trade flows, considerable capital flight out of the country has not been captured in the capital account.

Net capital flows (US$ m) 1999 2000 2001a 2002a Foreign direct investment 101 53 40 35 Portfolio investment 21 -1 -68 0 Long term capital 73 -230 -270 -256 Short-term capital -56 -126 -90 -135 a Provisional IMF estimates. Source: IMF, Zimbabwe Selected Issues and Statistical Appendix, July 2003.

Capital flows dry up Even though many capital flows are under-recorded, the capital account has moved from a surplus of US$188m in 1999 to a deficit of US$387m in 2001 and US$334m in 2002. This is due to the sharp drop in net foreign direct investment into the country!which would have been much greater without the interest in the platinum sector!and outflows of portfolio capital in 2000 and 2001. The portfolio outflows would probably have been higher if investors were able to obtain foreign exchange when they sold their investments and because of the strong performance of the Zimbabwe Stock Exchange, which probably encouraged many foreign investors to remain in the market. Long-term capital flows also turned sharply negative as donors stopped their financial support for the country. Steady outflows of short-term capital reflect the nervousness of investors towards the country and the fact that many international companies will not give credit to Zimbabwean companies, demanding that all transactions, including trade, are conducted in cash.

Reserves, official figures (US$ m; year-end) 1998 1999 2000 2001 2002 Foreign-exchange reserves 130.8 268.0 193.1 64.7 83.4 Gold (national valuation) 82.6 105.4 45.4 27.5 22.7

Source: IMF, International Financial Statistics.

Exact level of foreign-exchange According to data from the Reserve Bank, Zimbabwe’s foreign-exchange reserves is unclear reserves rose in 2002. However, the IMF has questioned the accuracy of the data. According to the official data provided by the RBZ to the IMF’s International Financial Statistics, foreign-exchange reserves rose from US$64.7m at the end of 2001 to US$83.4m at the end of 2002, although at only about half a month’s import cover, reserves are very low by international standards. As the IMF has pointed out yet again, the RBZ has continues not to report reserve data in a meaningful manner, although it does periodically provide data on “usable reserves”. According to the Fund, these amounted to only US$15m at the end of 2002, considerably below the officially stated amount and the equivalent of only three days of imports. The IMF also states that the country’s foreign-exchange reserves are substantially below its short-term liabilities, which means in effect that the country would have no foreign-exchange reserves if it were to pay off these liabilities.

Reserves and monetary liabilities, 2002 (US$ m) Gross reserves 165 Gold 37 Foreign exchange 91 Foreign monetary liabilities 302 IMF liabilities 276 Other short term liabilities 26 Net reserves -137

Source: IMF, Zimbabwe Selected Issues and Statistical Appendix, July 2003.