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World Bank Document ------------------------------------------------ CountIy Background Papers .... Public Disclosure Authorized .. •• Public Disclosure Authorized Zimbabwe Country Background Paper Economic and Social Institute, Free University, Amsterdam Depanment of Economics, University of Zimbabwe, Harare Public Disclosure Authorized Draft Public Disclosure Authorized REGIONAL PROGRAMME ON ENTERPRISE DEVELOPMENT ZIMBABWE COlJNTR.Y BACJCGROUND PAPER April 1993 Economic and social Institute, Free University, Amsterdam Departaent of Economics, University of Ziababwe, Barare EXCHANGE RATE Annual Averages 1980 US$ 1.00 "" Z$ 0.64 1981 0.69 1982 0.76 1983 1.01 1984 1.24 1985 1.61 1986 1.67 1987 1.66 1988 1.80 1989 2.11 1990 2.45 1991 3.44 1992 S.10 BASIC INDICATORS population (1992) 10.4 million Population growth rate (1982-92) 3.2\ Urban population (1990) 28\ GNP per capita (1990) $ 640 Growth rates 1980-90: GDP agriculture 2.4\ GDP manufacturing 2.8\ GDP services 3.4\ Total GDP 2.9\ GDP deflator 10.8\ GDP in manufacturing (1989) $ 1384 million External debt (1990) $ 3.2 billion i CONTENTS I Overview of the Economy 1.1 Historical OVerview 1.2 The Structure of the Economy II The Manufacturing Sector 2.1 The Structure of the Manufacturing Sector 2.2 Sub-sectoral Profiles 2.2.1 Textiles, Clothing and Footwear 2.2.2 Metals and Metal Products 2.2.3 Food Processing 2.2.4 Woodworking and Furniture III The Policy and Institutional Environment 3.1 Introduction 3.2 The Legal System 3.3 Taxes 3.4 Price Control 3.5 Investment Regulations 3.6 Direct Foreign Investment 3.7 Public Enterprise Reform and Investment in Infrastructure 3.8 Local Government Regulations 3.9 Labour Regulations 3.10 Skill Formation 3.11 Financial Intermediation 3.12 Business Support Systems 3.13 Foreiqn Trade Requlations Annotated Biblioqraphy ii TABLES 1. Macroeconomic Indicators 2. Composition of GDP (1980 prices) at Factor Cost 3. Formal Employment by Sector 4. Composition of the Labour Force 5. Public Finance 6. Gross Savings by Type of Institution 7. Balance of Payments (1987 - 1992) 8. Index of volume of production of the manufacturing sector 9. Gross output of the Manufacturing Sector 10. Employment and Wage Bill in Manufacturing by Subsector, 1988 11. Balance of Trade of the Manufacturing Sector, 1982 12. Total Enrolment at Technical Colleges, 1990 13. Liquidity Ratios of Financial Institutions iii I. OVERVIEW OF ~ ECONOMY 1.1 Historical Overview It is useful to distinguish three periods in Zimbabwe's recent economic history: the period from the Onilateral Declaration of Independence (ODI) in 1965 until independence, the first post­ independence decade (1980-1990) and the period under the Economic Reform Programme (ERP) (from 1991 to the present). The ooI period is important for its lasting impact on the structure of the economy and its effect on the post-independence policies pursued by the government. At the end of the 1980s Zimbabwe was a heavily regulated economy, the legacy both of economic sanctions and of the socialist policies pursued after the ODr period. At present Zimbabwe is undergoing radical change under the Economic Reform Programme. In the past two years the economy has been liberalised to a significant extent. The UDl period When the Smith government declared Rhodesia independent, the country had an extremely open economy that had just gone through a period of rapid growth. In response to the Unilateral Declaration of Independence economic sanctions were imposed by Britain. Rhodesia was excluded from the sterling area, Rhodesian assets were frozen, all trade and capital transactions were prohibited, and official aid was terminated. Most countries followed the British example was followed so that two-thirds of Rhodesia's foreign trade was affected by sanctions. However, there were important exceptions, including South Africa and Portugal, so that Rhodesia did not lose access to harbour facilities in South Africa and Mozambique. The Smith government reacted to the imposition of sanctions with a highly interventionist set of economic policies. Controls were imposed on external trade, for.eign exchange, prices, wages, interest rates, investment and repatriation of profits. The government introduced import quotas and a system of foreign exchange allocation many elements of which still survive. Quotas effectively kept out all imports competing with domestic production. Onder the system of investment control the main criterion for judging applications was a project's net foreign exchange contribution; projects which were not expected to generate foreign exchange, either by raising exports or through import substitution, were not approved. In addition, the 1 system aimed at avoiding "duplication", i.e. investment in competition with established domestic producers. As a result of these government regulations firms were protected both from foreign and domestic competition. Partly because of this lack of competition, a system of mark-up price control was set up. All changes in prices required government approval and the system was rigidly enforced. There were three phases in the UDI period. The first two years were marked by a sharp decline in exports and a small decline in GDP. This was followed by a period of rapid growth and diversification (especially of the manufacturing sector). This period was characterized by remarkably high investment levels, the investment rate rising from 16\ of GDP in 1965 to 29\ in 1975. The manufacturing sector which was already quite well developed and export-oriented in 1965 grew at an average annual rate of nearly 8\, partly as a result of trade policy: aelling in the domestic market became easier as imports were kept out. Price and wage controls kept inflation low, which in combination with constant nominal exchange rates resulted in real depreciation, improving Rhodesia's competitiveness. This boom was followed by a period of contraction (1975-79), caused by the escalation of the liberation war, the 1973/74 oil price increases and the world recession. The contraction period (1975-79) was characterized by continuously deteriorating terms of trade; in five years the terms of trade fell by 36\1. Manufacturing output fell by 14~ between 1975 and 1979, partly as a result of shortages of imported inputs. Inflation increased and real interest rates turned negative. Private agents came to expect exchange rate depreciation and reacted with capital flight. The First Post-Xndependence Decade (1980-1990) In 1980 Zimbabwe inherited a heavily regulated, inward looking economy. The socialist government left most of the inherited controls intact, seeing them as useful instruments for achieving its growth and equity objectives. 'World Bank, Zimbabwe - An Industrial Sector Memorandum, Report No. 6349-ZIM, May 22, 1987, p. 10. 2 Table 1 Macroeconomic Indicators 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Aggregate Indicators Real GOP Growth (1980 prices)(") 11.0 13.0 1.4 -4.2 2.3 7.3 0.2 0.1 5.3 3.5 Inflation (") 10.3 14.5 14.2 19.4 3.5 2.6 15.2 9.2 11.9 12.9 Real Wage (1980= 100) 100.0103.7 114.5 110.2 11l.5 120.1 112.3 110.1 110.1 107.2 Real Exchange Rate (1980-=100) 100.0 115.1 132.0 134.2 123.3 108.7 119.7 108.2 92.5 85.6 Nom. Interest Rate on Public Debt (") 4.4 5.9 7.8 7.7 8.0 10.4 12.5 13.0 13.3 13.0 Nom. Interest Rate on Depoaiu (") 3.5 7.8 8.0 8.0 8.0 8.1 8.0 8.2 8.3 8.3 Composition of Expenditure (" of GOP) Private Consumption 64.5 67.0 65.0 66.1 62.4 63.2 60.1 52.7 51.7 50.9 Public Contumption 19.7 17.2 19.8 18.4 21.3 22.2 21.8 24.1 23.0 23.0 Private Fixed Investment 10.6 13.3 10.0 8.2 10.6 7.9 8.4 7.8 9.0 9.4 Public Fixed Investment 4.7 5.3 9.9 11.4 7.9 8.2 7.4 7.7 8.9 9.2 ChaDge in Stocks 3.5 4.4 1.2 -3.7 0.4 4.9 3.6 3.6 3.6 3.6 Expons 30.3 25.2 22.0 21.3 26.7 29.9 30.9 31.2 31.2 33.7 Imports 33.3 32.5 27.9 24.S 26.1 28.7 26.S 27.1 27.5 29.8 Consolidated Non-Financial Public Sector (NFPS) Deficit and Debt (~ of GOp) NFPS Deficit 9.1 13.5 13.1 J4.4 12.7 14.3 14.4 10.9 10.4 9.7 NFPS Foreign Debt 12.0 17.6 23.3 27.0 33.3 42.2 40.6 41.1 38.0 37.8 NFPS Domestic Debt 43.3 37.2 33.7 31.3 35.7 35.5 36.6 41.7 42.9 46.9 Money Supply (,.; of GOp) Base Money 6.9 7.1 7.3 6.2 6.7 7.5 7.2 7.0 7.7 1.7 MI 18.4 18.4 15.3 15.9 11.9 13.5 14.3 13.7 15.1 15.1 Quasi Money 16.8 16.3 17.7 14.9 15.2 16.4 13.7 18.1 17.5 17.5 Balance of Payments (USS million) Current Account -301 -739 -762 -S27 -177 -166 -51 -3 -3 Capital Account 176 419 668 203 285 225 159 149 91 Errors and Omissions 56 94 -43 5 28 40 -44 -6 14 Position .bove the line -69 -226 ·136 -319 136 99 64 140 102 Stocle of GrollS RellClVes 326 269 224 187 156 208 217 264 224 Sources: Morande and Schrnidt-Hebbel (1991), Table 1.1, b.BCd on RellClVe Bank of Zimb.bwe, Ministry of Finance of Zimb.bwe, Schmidt-Hebbcl (1990) and World Bank D.ta.
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