Country Report

Zimbabwe at a glance: 2008-09

OVERVIEW Although political and economic pressure will continue to build on the president, , he remains an extremely astute political operator who has proved adept at outmanoeuvring challengers from the opposition and civil society and!perhaps more pertinently!from within the ruling party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF). It is almost certain, therefore, that he will stand in, and win, the March 2008 presidential election, while ZANU-PF will remain dominant in the legislature. There is little likelihood of any warming of relations with donors, who will restrict their activities to the provision of crucial humanitarian assistance. Economic policy will continue to be driven by political considerations, and the economy will continue to shrink, albeit at a somewhat slower rate.

Key changes from last month Political outlook • Political instability is expected to remain high. A series of constitutional changes agreed with the opposition has been hailed as a first step towards solving the country"s long-running political crisis, but these measures are actually comparatively minor, and are unlikely to lead the way to a free-and- fair poll. Economic policy outlook • The government has finally devalued the Zimbabwe dollar, although the gap with the parallel-market rate remains wide and is increasing. It will ultimately have to raise nominal interest rates, but such increases are unlikely before the March 2008 election. Economic forecast • The forecast period has moved forward to cover 2008-09. Real GDP will continue to shrink, although the rate of contraction will moderate to 2% in 2008 and 1.6% in 2009 thanks, in part, to a moderate recovery in gold mining and base-metal production. A series of price controls and wage freezes has helped to reduce official inflation figures somewhat, but has actually exacerbated the underlying problem by cutting supplies of essential goods still further. With state spending likely to rise in the run-up to the March elections, inflation is set to remain at four-digit levels in 2008. The Zimbabwe dollar has been devalued; further such action is unlikely before the election.

September 2007

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Zimbabwe 1

Contents

Zimbabwe

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2008-09 7 Political outlook 9 Economic policy outlook 11 Economic forecast

14 The political scene

19 Economic policy

22 The domestic economy 22 Economic trends 23 Agriculture 25 To u r i s m 25 Mining 28 Infrastructure 29 Industry

29 Foreign trade and payments

List of tables 11 International assumptions summary 13 Forecast summary 23 Inflation, 2007 26 Gold production, Jan-Jun 27 Platinum production, Jan-Jun

List of figures

14 Gross domestic product 14 Consumer price inflation

Country Report September 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Zimbabwe 3

Zimbabwe September 2007 Summary

Outlook for 2008-09 Although political and economic pressure will continue to build on the president, Robert Mugabe, it is almost certain that he will stand in, and win, the March 2008 presidential election, while the ruling party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF), will remain dominant in the legislature. Policy will continue to be driven by political considerations, and the economy will continue to shrink, albeit at a somewhat slower rate. The Zimbabwe dollar is unlikely to be devalued again before the March 2008 polls, but the parallel-market rate for the currency will continue to diverge from the official rate as individuals and institutional buyers seek to escape inflation- related losses on local-currency holdings.

The political scene The government and opposition have agreed a series of constitutional changes that will in theory pave the way for free-and-fair elections. These have been hailed as a triumph for regional negotiators, led by South Africa, but in truth they cover comparatively minor issues, and seem designed to ensure that South Africa endorses the 2008 polls. The government has continued to attack critics, while shortages of staple foods and clean water have prompted a number of international agencies to warn of famine and/or humanitarian disasters.

Economic policy Policy has continued to be driven almost entirely by political dictates. In June the government sought to tackle spiraling inflation by ordering sweeping price cuts of all goods including food and fuel; in fact, this chiefly served to worsen shortages of staple goods, and prompted a number of warnings from manufacturers that they faced ruin because official prices were well below the cost of production. However, introducing a supplementary budget in early September, the finance minister insisted that the measures had been a success, and announced a 99%-plus devaluation of the Zimbabwe dollar.

The domestic economy Despite the introduction of price controls, inflation rose above 7,600% in July. The WFP has made an urgent appeal for funds for Zimbabwe, amid signs that the government is failing to pay for crucial maize imports. The Reserve Bank of Zimbabwe (the central bank) has raised the local price of gold nearly ten-fold in an attempt to bolster the sector. Zimbabwe"s largest mobile phone operator, Econet Wireless, is spending US$15m to expand its network, while H J Heinz has announced that it is divesting from the country.

Foreign trade and payments Zimbabwe appears to have revived a deal to buy five Russian aircraft, notwithstanding concerns about the suitability and safety of the planes, and the potential difficulty of finding spare parts.

Editors: Pratibha Thaker (editor); Jane Morley (consulting editor) Editorial closing date: September 16th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report September 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007 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; eight are provincial governors, ten are customary chiefs and 12 others are appointed by the president; a Senate of 66 members was established in November 2005

National elections March 2002 (presidential), March 2005 (legislative) and November 2005 (Senate); the next presidential and parliamentary elections are provisionally scheduled for March 2008

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

National government The president and his appointed cabinet; last major reshuffle February 2004

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 also contest elections

President Robert Mugabe

Vice-presidents

Key ministers Agricultural engineering & mechanisation Agriculture & rural resettlement Defence Economic development Education, sports & culture Energy & power development Michael Nyambuya Finance Foreign affairs Health Higher & tertiary education Stanislas Mudenge Home affairs Indigenisation & empowerment Industry & international trade Information & publicity Legal & parliamentary affairs Local government Mines National security To u r i s m Transport & communications Chris Mushowe Water resources & infrastructural development

Reserve Bank governor

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Economic structure

Annual indicators 2003a 2004a 2005 a 2006 b 2007b GDP at market prices (Z$ bn) 5.52 23.88 83.83 909.15 55,138.62 GDP (US$ bn) 2.09 4.94 3.06 2.70 1.89 Real GDP growth (%) -10.4 -3.8 -7.2 -4.1 -2.5 Consumer price inflation (av; %) 384.7 381.4 266.8 1,033.5 a 6,133.3a Population (m) 12.9 13.0b 13.1 b 13.1 13.1 Exports of goods fob (US$ m) 1,670.3b 1,679.7b 1,638.9 b 1,649.2 1,760.5 Imports of goods fob (US$ m) 1,778.2b 1,988.5b 2,104.4 b 2,040.2 2,183.4 Current-account balance (US$ m) -307.9b -395.8b -567.5 b -366.2 -409.0 Foreign-exchange reserves excl gold (US$ m) 92.0 254.0 155.0 135.0 115.0 Total external debt (US$ bn) 4.5 4.8 4.3 4.6 a 4.9 Debt-service ratio, paid (%) 2.6b 4.2b 10.3 b 6.0 5.3 Exchange rate (av) Z$:US$c 0.70 5.07 25.32 162.07 a 17,562.50 a Actual. b Economist Intelligence Unit estimates. c In 2003 a rate of Z$55:US$1 was used for all official government transactions. All other transactions with the Reserve Bank of Zimbabwe (RBZ, the central bank) were conducted at Z$824:US$1. In January 2004 the RBZ introduced an auction exchange-rate system, coupled with a series of export subsidies for key producers. The rate quoted here is the auction rate. In October 2005, the RBZ abandoned the auction exchange-rate system. It was replaced by the interbank rate. However, exporters must also surrender 30% of their export earnings to the RBZ. In August 2006 the RBZ redenominated the currency. After a 60% devaluation of the exchange rate to Z$250,000:US$1, it removed three zeros, and the new interbank rate was set at Z$250:US$1. In April 2007, the central bank introduced an "accelerator factor" of 60 to the official exchange rate for firms and individuals who qualified for access to foreign exchange through the Drought Mitigation and Economic Stabilisation Fund. The currency was devalued from Z$15,000:US$1 to a rate of Z$30,000:US$1 in September 2007.

Origins of gross domestic product 2001a % of total Components of gross domestic product 2003a % of total Agriculture, hunting & fishing 25.1 Private consumption 112.6 Mining & quarrying 1.5 Public consumption 2.2 Manufacturing 14.0 Gross fixed capital formation 3.2 Transport & communications 10.6 Change in stocks -16.2 Distribution, hotels & restaurants 17.1 Net exports of goods & services -1.8 Education 6.7

Principal exports 2004b US$m Principal imports cif 2004a US$ m Tobacco 235 Fuels 413 Gold 276 Chemicals 401 Platinum 78 Machinery 271 Ferro-alloys 185 Manufactured goods 269

Main destinations of exports 2006c % of total Main origins of imports 2006c South Africa 38.7 South Africa 46.1 China 7.6 China 5.9 7.4 Botswana 4.8 Japan 7.1 Zambia 4.1 a Reserve Bank of Zimbabwe data/estimates. b Economist Intelligence Unit estimates. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2005 2006 2007 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (Z$ m) Revenue & grants 7,479 16,858 45,594 162,579 n/a n/a n/a n/a Expenditure & net lending 8,908 12,969 49,850 188,148 n/a n/a n/a n/a Balance -1,429 3,889 -4,256 -25,569 n/a n/a n/a n/a Total domestic debt (end-period) 12,979 15,886 15,021 46,131 n/a n/a n/a n/a Output Manufacturing index (1990=100) 61.7 56.0 n/a n/a n/a n/a n/a n/a Manufacturing index (% change, year on year) 4.9 -9.5 n/a n/a n/a n/a n/a n/a Prices Consumer prices (2001=100) 21,349 40,350 72,480 133,258 249,903 509,953 1,437,264 7,321,732 Consumer prices (% change, year on year) 295 503 773 1,147 1,071 1,164 1,883 5,394 Financial indicators Exchange rate Z$:US$ (av)a 36 68 98 101 201 250 250 15,000 Exchange rate Z$:US$ (end-period)a 61 85 99 101 250 250 250 15,000 Parallel exchange rate Z$:US$ (av)b 61 90 157 320 1,068 2,567 10,333 79,333 Bank rate (end-period; %) 280 540 750 850 300 500 n/a n/a Lending rate (av; %) 248 363 488 666 432 400 n/a n/a Treasury bill rate (av; %) 225 297 455 509 259 66 n/a n/a M1 (end-period; Z$ bn) 20,621 44,746 60,355 115,115 331,984 n/a n/a n/a M1 (% change, year on year) 264 553 521 771 1,510 n/a n/a n/a M2 (end-period; Z$ bn) 26,795 58,425 82,150 158,005 434,002 n/a n/a n/a M2 (% change, year on year) 256 533 559 781 1,520 n/a n/a n/a ZSE Industrial index (end-period; 1967=10,000) 618 1,848 3,105 5,487 – – – – Sectoral trends Tobacco auctions (annual totals; '000 tonnes)c ( 58 ) ( 53 ) n/a n/a Gold production (kg) 3,165 3,058 2,788 2,556 2,990 2,904 2,334 n/a Gold production (Z$ bn) 922 2,895 4,854 6,286 13,035 29,569 27,735 n/a Chrome ore production ('000 tonnes) 183 n/a 174 173 177 176 176 n/a Chrome ore production (Z$ bn) 256 n/a 1,047 1,662 4,019 8,541 19,643 n/a Platinum production (kg) 1,312 1,270 1,172 1,183 1,434 1,210 1367 n/a Platinum production (Z$ bn) 679 2,140 3,519 4,016 10,400 10,377 11,761 n/a Foreign trade (US$ m)d Exports fob 421.4 432.2 442.5 529.7 547.4 529.0 520.9 n/a Imports cif -597.8 -570.3 -600.1 -598.7 -620.1 -696.4 -728.4 n/a Trade balance -176.4 -138.1 -157.6 -69.0 -72.6 -167.4 -207.6 n/a a From September 2006 the exchange rate series has been revised to reflect the redenomination of the currency carried out in August 2006. This changed the rate by a factor of one thousand, from Z$250,000:US$1 to Z$250:US$1. b Approximate average. c Provisional data for 2006. d DOTS estimates. Sources: Central Statistical Office, Quarterly Digest; Reserve Bank of Zimbabwe, Monthly Review; IMF, International Financial Statistics; Direction of Trade Statistics; Robertson Economic Information Services.

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Outlook for 2008-09

Political outlook

Domestic politics Although political and economic pressure will continue to build on the president, Robert Mugabe, he remains an extremely astute political operator who has proved adept at outmanoeuvring challengers from the opposition and civil society and!perhaps more pertinently!from within the ruling party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF). One of Mr Mugabe"s most vociferous critics within Zimbabwe, Pius Ncube, has in effect been silenced by a campaign in the state media to expose the former Archbishop of Bulawayo as an adulterer; this is designed to act as a very public warning to others in civil society considering criticism of the regime. The Zimbabwean president also seems to have outmanoeuvred the main opposition party, the Movement for Democratic Change (MDC), in talks over a new constitution. These were designed to lay the basis for free and fair elections in 2008, but while the government has tabled some concessions!sufficient to persuade both factions of the MDC to vote in favour of the amendments!these appear to be comparatively minor, dealing with the delimitation of constituencies, the appointment of MPs and the concurrent holding of elections, rather than vital issues such as the establishment of an independent electoral commission and the use of proportional representation. The advantage of this approach is that it may well persuade regional mediators, led by the South African president, Thabo Mbeki, under a mandate from the Southern African Development Community (SADC), to endorse the 2008 election, as was the case with the blatantly violent and rigged parliamentary elections of 2000 and 2005 and the presidential poll of 2002. Mr Mugabe will almost certainly be ZANU-PF"s candidate in the presidential election. Despite his advanced years!he will be 84 in February!Mr Mugabe lives a fairly ascetic life and should easily be fit enough to contest the poll, having been selected as the party"s candidate. Mr Mugabe clearly enjoys exercising power and is not expected to consider putting in place some sort of exit strategy. Many diplomats suggest that he be offered a "retirement package" that would include some form of assurance that he will not be prosecuted for any crime on leaving office. It is unlikely that Mr Mugabe would ever agree to voluntarily step down from power, even if he were granted an amnesty!he has already stated that he fully expects to win a further five-year term in 2008. The real question is whether Mr Mugabe will be toppled by the divisions within ZANU-PF and the deepening economic collapse. These factors may undermine Mr Mugabe"s election campaign and his ability to rig the polls sufficiently to ensure yet another victory. In order to win the election, the president will continue to clamp down on all forms of opposition to his regime, while continuing to play off factions within ZANU-PF to ensure that none becomes too powerful or ambitious. In addition, he is likely to use corruption charges as a political tool to divide party loyalties.

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Once Mr Mugabe is declared winner, he may well make a show of national unity by including a couple of the more amenable members of the MDC in any new government, allowing Mr Mbeki to declare his negotiations a success. The deep divisions in the MDC are likely to facilitate this strategy. While one faction, led by its long-time leader, , is more willing to consider aggressive opposition to the government!notwithstanding its recent support for the constitutional amendments!the faction headed by , and largely run by , is expected to continue on the path of parliamentary opposition and would arguably be more susceptible to being co- opted into the government. However, with the inflation rate potentially spiralling out of control, widespread underemployment, and ongoing shortages of food and fuel, the speed at which living standards are declining means that even Mr Mugabe"s most stalwart supporters are questioning their loyalty. Coupled with the growing political repression, this means that a number of alternative political scenarios could be played out. First, there is still the possibility that one of the various factions of ZANU-PF will eventually conclude that it must act if it is to remain a political force in the future. In this event, a faction could leave the party to contest the polls on its own ticket. One possibility is that a powerful faction, such as that led by Joyce Mujuru, the senior vice-president, and her husband, Solomon Mujuru, a retired army commander, would have its own strong power base. This could create a new, fractious political landscape, in which the outcome of the 2008 election would become very uncertain. The most benign outcome would be that an inconclusive election leads to the establishment of a government of national unity involving various disaffected ZANU-PF factions uniting with the MDC. However, more radical outcomes are possible. The Mujurus could rally junior members of the military who feel increasingly alienated from their senior officers to stage some sort of coup. It is also possible, despite the deep repression, that the general population might eventually reach a point where it spontaneously rises up in opposition to the government, leading to potentially bloody clashes on the streets of various cities in the country. For this to happen, however, the opposition would have to show substantially more unity than it has to date and provide much stronger leadership in the face of major government repression.

International relations Mr Mugabe has never really co-operated with efforts at international mediation, usually dragging the talks out with vague promises of co-operation and reform while maintaining a strident anti-Western posture on any international platform available. He will continue to blame Zimbabwe"s economic collapse on the combination of a regional drought and sanctions. Even Mr Mugabe"s supporters are aware that his arguments do not stand up to any scrutiny. Zimbabwe has experienced relatively good rains in the past year and the sanctions that Mr Mugabe rails against are actually extremely limited travel bans and financial restrictions imposed against a small number of senior members of the ruling party.

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There will be little constructive dialogue between the government and the international community on ways to end the current economic and political crisis, although donors will seek to ensure that the UN World Food Programme continues to distribute food aid in Zimbabwe so as to avert a humanitarian crisis. African leaders and a few European countries will continue to pressure the EU to lift its travel sanctions in order to allow Mr Mugabe to attend the African-EU summit in Lisbon in December. However, whether or not Mr Mugabe attends the summit, a real improvement in Zimbabwe"s relations with the US and the EU will be possible only if human-rights abuses are halted and the government initiates a credible transition towards the holding of free and fair elections!neither is likely over the forecast period. The inability of the international community to resolve the crisis in Zimbabwe will be compounded by the continued divisions among other African governments, including Zimbabwe"s neighbours in SADC. Mr Mugabe will remain adept at appearing to co-operate with Mr Mbeki"s mediation efforts! while ensuring that no real changes are effected!and at portraying himself as the victim of colonialist oppression. Meanwhile, the government will continue to divide the international community by cultivating relations with East Asian states, led by China, as part of its "Look East" policy. This has brought some gains in terms of promises of investment and limited humanitarian aid, but relations often involve more rhetoric about potential co-operation than detailed programmes, and those implemented have been insufficient to replace the major Western investors and donors that have been lost.

Economic policy outlook

Policy trends Economic policy will continue to be driven by political dictates. In the run-up to the March 2008 election, for example, government spending will rise, banks will come under intense pressure to hold (or reduce) interest rates and step up lending to distressed businesses, and the administration will persist with efforts to tackle the symptoms, if not the root cause, of inflation. Thereafter, much will depend on the complexion of the new government. There is no realistic chance that ZANU-PF will lose the elections, but it is possible that there will be political change after the poll, if!for example!the president decides, or is forced, to retire. In this eventuality donors would seek to introduce a three- to six-month staff-monitored programme, with standard attempts to return Zimbabwe to an orthodox policy path. It is more likely, however, that economic policy will remain chaotic and piecemeal, with price and wage controls imposed and then lifted, and the dollar periodically "revalued".

Fiscal policy Introducing a supplementary budget in September 2007, the finance minister, Samuel Mumbengegwi, sought to portray a recovery in the Zimbabwean economy, claiming that the agriculture sector would grow by 7.3% in 2007 and that tourist arrivals were up 34% in the first half of the year. In truth, however, his options remain limited because of the ongoing collapse of revenue in real terms!a result both of continuing economic disintegration and, more recently, a sharp downturn in profit and value-added tax revenue because of the imposition of price controls. In fact, the only area that might generate genuine

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revenue growth in 2008-09 is the mineral sector. Given the highly negative real interest rates paid on domestic debt and the lack of access to substantive foreign lending, the Economist Intelligence Unit expects that the government will, moreover, struggle increasingly to raise enough from domestic debt markets to fund substantial deficits. This will eventually force it to raise nominal interest rates, although such increases are unlikely before the March 2008 election. Given the difficulty of raising revenue, we expect that the government will have to continue to rein in spending in real terms, in an attempt to keep the deficit in single-digit figures. However, this will mean that all government services, particularly healthcare and education, will continue to collapse in terms of the level of service offered. One major problem with the government"s fiscal data in recent years is that they have excluded quasi-fiscal expenditure: this comprises various subsidies paid out, mainly to parastatals; losses on foreign-exchange dealings; and various interest payments. The September supplementary budget is no different: the finance minister said nothing about the government’s quasi-fiscal spending, and made no attempt to explain how interest charges of some Z$13.5trn (US$450m) will be funded. This suggests that Fiscorp Private!a government subsidiary that is supposed gradually to repay all outstanding quasi-fiscal debt! is making little progress, unsurprisingly given the current political climate, and the fact that it is far from clear whether the policy of providing quasi-fiscal spending has stopped.

Monetary policy Despite Mr Mugabe"s adamant opposition to devaluation, it has proved impossible to maintain the Zimbabwe dollar at the official rate of Z$250:US$1. Thus the main measure in the September supplementary budget was a 99%- plus devaluation of the dollar from Z$250:US$1 to Z$30,000:US$1. Both the official rate of Z$250:US$1 and the incentive "drought stabilisation rate" for exporters introduced in April have been abolished, and all taxes and customs duties will now be levied at the new rate. This should boost tax income, but even with such a substantial devaluation, there is a huge discrepancy between the official and parallel-market rates: as of September 2007 the parallel-market rate was some Z$220,000:US$1, and de facto devaluation is likely to continue across the forecast period, while ongoing foreign-exchange shortages will continue to undermine all economic activity. Meanwhile, the government will persist with attempts to reduce inflation. It is trumpeting the success of the price cuts and freeze across goods and services imposed in the first half of 2007, but official figures are dubious at best. With the government also struggling to bring its quasi-fiscal spending under control, and food production showing no signs of recovering quickly, there is a very real concern that over the forecast period hyperinflation will continue, notwithstanding the devaluation of the official exchange rate. If the practical problems of financing the deficit force the government to scale back spending, and the agricultural sector manages to stage a modest recovery, inflation may start to fall back slowly in 2008, followed by a sharper deceleration in 2009! although inflation will remain in triple digits.

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Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2006 2007 2008 2009 Real GDP growth World 5.3 5.1 4.8 4.7 OECD 3.1 2.5 2.4 2.6 EU27 3.0 2.7 2.4 2.3 Exchange rates ¥:US$ 116.2 116.8 106.3 96.5 US$:€ 1.256 1.356 1.378 1.320 SDR:US$ 0.680 0.653 0.642 0.648 Financial indicators € 3-month interbank rate 3.08 4.12 4.40 4.38 US$ 3-month Libor 5.19 5.33 4.87 4.97 Commodity prices Oil (Brent; US$/b) 65.3 69.4 69.0 63.3 Gold (US$/troy oz) 604.5 667.5 685.0 606.3 Platinum (US$/oz) 1135.0 1232.5 1192.5 1052.5 Food, feedstuffs & beverages (% change in US$ terms) 16.1 19.3 4.1 -1.1 Industrial raw materials (% change in US$ terms) 49.6 12.2 -5.8 -12.4 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Although world GDP growth is set to slow to 4.8% in 2008 and 4.7% in 2009 (calculated on a purchasing power parity basis), it will remain robust and compare favourably with the rates achieved for much of the 1990s. Apart from high global oil prices, which will be a problem for an economy with acute shortages of foreign exchange, developments in the world economy should benefit Zimbabwe. Notably, they will support steady economic growth in South Africa, Zimbabwe"s largest trading partner, while prices for many of the country"s key exports, particularly gold and platinum, will remain high. However, economic developments will be much more strongly influenced by domestic economic policy, macroeconomic instability and the ongoing foreign- exchange crisis than by international economic developments.

Economic growth While the economic decline of the past five years will continue over the forecast period, it is likely to slow. Thus while real GDP fell by an average of just over 6% a year between 2002 and 2006, we expect it to decline by only 2% in 2008 and 1.6% in 2009. Continued strong international prices, and some changes to the exchange-rate regime, should drive some recovery in gold mining and base-metal production, as well as some growth in platinum mining as existing mines increase output modestly. This, in turn, should lead to a moderately higher level of exports. Against that, food production remains well below the level of national demand, and any recovery in the agricultural sector will be constrained by the limited availability of inputs, the destruction of the commercial farming sector and the adverse impact of the country"s HIV/AIDS pandemic. Economic recovery will also be held back by the ongoing collapse in private and government consumption. Local businesses are also likely to remain

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cautious. Most have already scaled back their operations and developed techniques to survive despite the difficult operating environment; they will start to expand their operations only once they sense that a real economic turnaround is under way and employment and consumption start to pick up. The service sector will remain constrained by the ongoing foreign-exchange shortages, the deliberate destruction of a large number of informal-sector businesses and dwellings in urban areas, and the lack of tourist arrivals.

Inflation Ongoing food and foreign-exchange shortages, the collapse of the parallel exchange rate, and rapid money supply growth as the government has struggled to rein in its quasi-fiscal operations all combined to drive up inflation to a record high of more than 7,600% in July 2007. The government"s response! to institute a series of price controls and wage freezes!may have helped to reduce the official figures somewhat, but it has actually exacerbated the problem by cutting supplies of essential goods still further. With state spending likely to rise in the run-up to the March 2008 election, inflation is set to remain at four-digit levels in 2008, albeit moderating somewhat from the 2007 average of 6,133% thanks to a degree of fiscal discipline after the polls and the lessening of the gap between the official and parallel-market rates of exchange.

Exchange rates The increasingly untenable exchange-rate system!under which the Reserve Bank of Zimbabwe (RBZ, the central bank) introduced a series of price subsidies for key exports so as to bolster key foreign-exchange earners without devaluing the currency across the board!has finally been abandoned. The official rate of Z$250:US$1 and the incentive "drought stabilisation rate" for exporters that was introduced in April have both been abolished, and the dollar devalued to a rate of Z$30,000:US$1. However, even this new rate is less than 15% of the parallel- market equivalent of some Z$220,000:US$1, and it is questionable whether the devaluation will bolster exporters, as the government hopes. Given Mr Mugabe"s well-known opposition to devaluation, it is unlikely that the dollar rate will be changed again before the March 2008 polls. However, the parallel-market rate for the currency will continue to diverge from the official rate as individuals and institutional buyers seek to escape inflation-induced losses on local-currency holdings. In real terms, the Zimbabwe dollar is thus likely to depreciate still further, from an average of Z$75,250:US$1 in 2008 to Z$96,500:US$1 in 2009. The ongoing devaluation of the dollar casts further doubt over reports that SADC could include Zimbabwe in the Common Monetary Area (CMA) in exchange for political concessions by Mr Mugabe. Bringing Zimbabwe into the CMA!shared by South Africa, Lesotho, Namibia and Swaziland!would involve harmonising its currency with those of countries where the inflation rate averages around 6%. Such currency convergence would take years, rather than months or weeks.

External sector High world prices and a ten-fold increase in the local price should lead to a continued modest recovery in gold exports in 2008-09, provided that the government does not seek to interfere too much in ownership structures via its indigenisation legislation. Coupled with a rise in other metal exports, this

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should slowly push export earnings towards the US$2bn level during the forecast period, although the recovery will be constrained by the poor outlook for the tobacco crop and for non-commodity exports. Given the fallback in oil prices the cost of oil imports should decline, but because of the ongoing need for substantial maize imports to offset the shortfalls in domestic food production, imports will remain high, and the trade deficit will rise slightly to around US$500m-600m in 2008-09. With no prospect of a significant recovery in tourism, we expect the services account to remain in deficit. The income account is also set to remain in deficit, even though there will be only limited repatriation of profits and debt-service payments. This means that, in terms of the invisible trade account, only the current transfers account will be in surplus, as private transfers are expected to hold up as the estimated 3m Zimbabweans who live abroad continue to send money home to support relatives. In US-dollar terms, the current account will rise slowly, to US$0.6bn in 2009. As a percentage of GDP, however, it will shoot up to 35.7%!from 13.5% in 2006!as overall GDP continues to shrink.

Forecast summary (% unless otherwise indicated) 2006 a 2007 a 2008b 2009b Real GDP growth -4.1 -2.5 -2.0 -1.6 Manufacturing production growth -1.8 c 0.4 1.3 3.3 Gross agricultural production growth -4.0 -1.0 1.2 1.4 Consumer price inflation (av) 1,033.5 c 6,133.3 c 4,182.5 728.6 Consumer price inflation (year-end) 1,281.1 c 10,301.6 c 1,439.6 394.2 Short-term interbank rate 496.5 c 224.0 c 231.3 215.3 Government balance (% of GDP) -11.3 -8.4 d -5.3 -4.8 Exports of goods fob (US$ bn) 1.6 1.8 1.8 1.8 Imports of goods fob (US$ bn) 2.0 2.2 2.3 2.4 Current-account balance (US$ bn) -0.4 -0.4 -0.5 -0.6 Current-account balance (% of GDP) -13.5 -21.6 -31.0 -35.7 External debt (year-end; US$ bn) 4.6 c 4.9 5.1 5.2 Exchange rate Z$:US$ (av) 162.07 c 17,562.50 c 75,250.0e 96,500.0 Exchange rate Z$:US$ (year-end) 250.00 c 45,000.00 c 95,000.0 110,000.0 Exchange rate Z$:€ (av) 203.51 c 23,821.78 c 103,656.9e 127,380.0 Exchange rate Z$:US$ (av; parallel market) 1,027.82 191,583.33 685,000.0 745,000.0 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. d When he presented the 2007 budget, the minister of finance included quasi-fiscal expenditure in his estimate of the budget outturn for 2006. He estimated that it was Z$373bn, which would push the deficit up to around 50% of GDP. The data are not included. e In April 2007, the central bank introduced an "accelerator factor" of 60 to the official exchange rate for firms and individuals who qualified for access to foreign exchange through the Drought Mitigation and Economic Stabilisation Fund. The currency was devalued from Z$15,000:US$1 to a rate of Z$30,000:US$1 in September 2007.

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Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Zimbabwe Sub-Saharan Africa Zimbabwe Sub-Saharan Africa 8.0 7,000 6.0 6,000 4.0 2.0 5,000

0.0 4,000 -2.0 -4.0 3,000 -6.0 2,000 -8.0 1,000 -10.0 -12.0 0 09 04 05 06 07 08 04 05 06 07 08 09 2003 2003

The political scene

Robert Mugabe introduces bill In early September the government of the president, Robert Mugabe,

to choose successor introduced a bill to parliament that would give the latter the power to elect a new president should the incumbent fail to serve a full term. The Constitutional Amendment Bill would also allow the president to choose a successor if he were to retire. Unsurprisingly, the opposition Movement for Democratic Change (MDC) has described the bill as an attempt to tighten Mr Mugabe"s grip on the country in the run-up to presidential and parliamentary elections, due to be held in 2008. The MDC also claimed that the bill threatened to undermine talks between the government and opposition brokered by the South African president, Thabo Mbeki. The creation of a new constitution prior to next year"s elections is a key topic in the talks, which got off to a shaky start in July when the two representatives of the ruling Zimbabwe African National Union- Patriotic Front (ZANU-PF)!Patrick Chinamasa (the justice minister) and (social welfare minister)!failed to attend the start of negotiations in Pretoria. At the same time, Mr Mugabe stated that he saw "no need" to create a new constitution. The MDC"s position was not helped by the splits in the party. The faction led by Morgan Tsvangirai was calling for the use of proportional representation in the polls, while that led by Arthur Mutumbara was apparently prepared to back the continued use of the first-past-the-post, Westminster constituency system, as sought by ZANU-PF, so that it could focus its energies on winning other concessions, such as getting a truly independent electoral commission to run the elections. Some analysts took Mr Tsvangirai"s insistence on proportional representation as a sign of recognition by the party leader that the MDC is not going to win the elections.

Agreement breaks out However, in an unexpected sign of progress, the MDC stated in mid-September that, as a result of positive developments at regional talks in Pretoria, the government would table some amendments to the Constitutional Amendment Bill. Even more unexpectedly, the government did so, and both factions of the

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MDC stated that they would not seek to block these. The main amendments are as follows: • All 210 members of the lower house will be directly elected. Previously, ten MPs were appointed to the House of Assembly by the president; • The Senate will be composed of 93 members, five of them appointed by the president. At present the Senate has 66 members; it was previously suggested that the number of upper-house legislators should rise to 84. Provincial governors and traditional chiefs will also be appointed to the Senate; • All four elections!for local government, the presidency and both houses of parliament!will be held on the same day; and • The variation in the delimitation of constituencies will be restricted to 20%, rather than 25% as at present, to prevent the rearrangement of electoral district or constituency boundaries for electoral advantage. According to the MDC, "this should be regarded as a first step in resolving the national crisis". However, there are continuing doubts about the government"s commitment to reform: few believe that Mr Mugabe and ZANU-PF would win genuinely free-and-fair polls, and it is thus hardly in the government"s interests to accede to opposition demands. It is notable that the amendments agreed do not cover items such as the establishment of a genuinely independent electoral commission, or the use of proportional representation. It is possible, therefore, that the Mugabe administration has agreed to make these comparatively minor changes on the assumption that this will persuade Thabo Mbeki to endorse the 2008 elections!as he did in the case of the 2000 and 2005 parliamentary polls, and the presidential election of 2002.

The government may also be banking on a breakdown in MDC unity. This is a not unreasonable assumption. In July, , the secretary-general of the Morgan Tsvangirai faction, and Welshman Ncube, his equivalent on the Arthur Mutambara side, initialled an agreement stating that Mr Tsvangirai would not be opposed by the rival MDC in his run for president. In return, the Mutambara faction could select Mr Tsvangirai’s vice-president. The agreement also stated that neither side would oppose current members of parliament who would stand for re-election. In early August, however, Mr Tsvangirai refused to sign the agreement, saying that he would have to appoint a vice-president from his side and that the Mutambara faction would only be able to have a second, and junior, vice-presidential post. It was also reported that Mr Tsvangirai wanted his side to run against several members of parliament from the Mutambara faction, especially and . The talks collapsed in animosity and, prior to the agreement on the constitutional debate in parliament, the MDC appeared even more bitterly divided.

Repressive new legislation is The government"s apparent constitutional concessions are in strong contrast to

passed its continued passage or preparation of new legislation that, critics believe, will deepen the president"s hold on power. In July Mr Mugabe signed into law the Interception of Communications Act, which gives the government sweeping powers of surveillance over all post, telephones, mobile phones and the internet. The law sets up a monitoring and interception centre which will be

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used to search for communications it deems subversive, and authorises the department of National Security, the police and the Zimbabwe Revenue Authority to request surveillance. This is the logical next step for the administration, which already seeks to restrict public criticism of its actions. A 2003 law gave it strict control over the media, and it has used this to close all privately owned daily newspapers, while it has also sought to ban demonstrations and rallies by opposition parties. By opening the way for interception of private communications, it presumably hopes to encourage self-censorship among those it accuses of undermining the regime.

Archbishop Pius Ncube is The risks of being a public critic are all too apparent. Pius Ncube has resigned

accused of adultery as Catholic Archbishop of Bulawayo after being accused of adultery. The state- owned Zimbabwe Broadcasting Corporation repeatedly aired secretly filmed video footage of what appeared to be Archbishop Ncube having sex with his married secretary. The former archbishop has refused to comment on the accusations, while Catholic bishops have issued a statement of support, saying that the allegations have not yet been substantiated; nonetheless, this is a serious blow against one of the most outspoken domestic critics of the Mugabe regime. Mr Ncube!who says his resignation is intended to save the Church from further attacks and enable him to challenge the adultery charge in court in his private capacity!is credited with having transformed the Catholic bishops association into a group strongly critical of the president. The archbishop has proven to be a particular thorn in the government"s side, as it is difficult for the administration to resort to its usual tactic of describing critics as pro-Western colonialists.

Human Rights Watch says state The government also uses other, still less palatable tactics, however. In May US-

violence is on the increase based Human Rights Watch (HRW) issued a 39-page report, "Bashing Dissent: Escalating Violence and State Repression in Zimbabwe", which alleges that there has been a significant increase in police beatings of activists and ordinary citizens suspected of supporting the MDC. The group urged Zimbabwe’s police and security forces to halt the violent intimidation!an unofficial curfew is in operation, according to HRW!and called on the South African president to condemn the human-rights abuses being committed in Zimbabwe.

US ambassador steps up his The US Ambassador to , Christopher Dell, stepped up his criticism of the

criticism of the regime Mugabe regime prior to leaving for a new post, in Afghanistan, in late July. Predicting that inflation will reach an unsustainable level by year-end, Mr Dell commented that Mr Mugabe is "committing regime change upon himself" with his misguided economic policies. Mr Dell is likely to be succeeded by James D. McGee, who is currently ambassador to Madagascar and Comoros. The US Senate must confirm the appointment and the Zimbabwean government, as is customary, must also agree to the proposed ambassador. A diplomatic service officer since 1981, Mr McGee has served in Nigeria, Pakistan, the Netherlands, India, Barbados, Jamaica, Côte d’Ivoire, Swaziland and Madagascar, and has been ambassador to Comoros since March 2006.

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Mr McGee is no stranger to controversy. During his tenure in Swaziland he was particularly outspoken on the issue of democracy. According to Wilton Mamba, deputy editor of the Times of Swaziland, "No other word exists for Mr McGee except democracy, and I really foresee serious clashes between himself and the Zimbabwean government." Unfortunately, it is questionable how productive such clashes will be. If anything, the Mugabe administration is likely to use disagreements with the US ambassador to substantiate its position that the country"s multiplying political and economic problems are the result of attempts by the West to oust a government committed to the equitable distribution of land and wealth.

US and Australia issue strong In a July 12th advisory, the US State Department asked Americans to minimise

travel advisories travel to and around Zimbabwe and, where practical, avoid public places and gatherings. The US warned of state-sponsored violence, adding that the government"s attempt to hold down prices raised "security concerns". Later in the month the US"s assistant secretary of state for Africa, Jendayi Frazer, commented that the Bush administration is considering deepening sanctions against the Mugabe government!a tacit admission that the "smart sanctions" in place since 2000 have had little impact.

Australia deports children of The US is not the only Western government to have such concerns: Australia ZANU-PF elite has also warned that rapidly worsening economic conditions could lead to civil unrest "at any time". According to the Australian Department of Foreign Affairs, high levels of criminal activity in the absence of the rule of law, combined with poor economic conditions, mean that the security situation could "deteriorate quickly and without warning".

The Australian government has also stepped up its targeted sanctions against the Mugabe regime, deporting eight students who are children of high-ranking members of ZANU-PF. Australia"s foreign minister, Alexander Downer, commented that the suspension of student visas, an extension of existing sanctions against Zimbabwe, was provoked by Mr Mugabe"s disregard of democratic principles and human rights. Among those affected were the children of the police commissioner, Augustine Chihuri; the rural affairs minister, ; the governor of the Reserve Bank of Zimbabwe (RBZ, the central bank), Gideon Gono; the economic planning minister, Sylvester Nguni; the science and technology minister, ; the local government minister, Ignatius Chombo; and Harare"s provincial governor, David Karminzira. Students unions and others welcomed the move, pointing out that few Zimbabweans are able to benefit from university-level teaching: in 2005, just 4% of the relevant age group participated in tertiary education, with university places increasingly going to the politically well- connected. Southern African support for Mugabe

If Western nations are stepping up their criticism of the Mugabe administration, regional leaders continue to give tacit support to the Zimbabwean president. Robert Mugabe received an enthusiastic ovation at the opening of the mid-August Southern African Development Community (SADC) summit, for example, while the SADC

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chair, Zambian president Levy Mwanawasa, commented: "We ... feel that the problems in Zimbabwe have been exaggerated. We feel they will solve their economic problems." Mr Mwanawasa also claimed to be "quite satisfied" with the report from the South African president, Thabo Mbeki, on the situation in Zimbabwe!something of a turnaround from March 2007, when the Zambian leader likened Zimbabwe to a "sinking Titanic".

Likewise, South Africa and a number of other key African nations have insisted that Mr Mugabe must be invited to attend the long-delayed summit between the EU and Africa, to be held in Lisbon in December this year. Diplomatic sources in Pretoria say that, as a result of such pressure, Portugal has decided to issue an invitation to Mr Mugabe, notwithstanding EU measures, in force since 2002, which ban Mr Mugabe and more than 100 of his top officials from travelling to EU member states. The UK and several other EU members will be able to block the invitation to Mr Mugabe, insisting that the travel ban cannot be lifted for the summit, but Mr Mbeki"s support has inevitably raised questions as to whether the South African president can act as a neutral mediator in the talks between Mr Mugabe and the Zimbabwean opposition.

UNICEF says children need Inevitably, it is not just older children who are affected: in a mid-July report by

urgent help the UN Children"s Fund (UNICEF), Zimbabwe and Gaza were singled out as the areas of most critical need in the world. Dan Toole, director of emergency programmes for UNICEF, commented: "The children of Zimbabwe deserve better. They have the right to go to school and be educated, drink clean water and go to bed without being hungry." Aid funding for UNICEF programmes in Zimbabwe is at just 29% of the targeted level, in part because of international opprobrium of government policies. However, additional funds were crucial, according to Mr Toole, because "quality healthcare and schools have all but collapsed," while the shortages in basic goods caused by the imposition of price controls have hit children especially hard. As it is, at least 10% of all schoolchildren in Harare’s working-class areas are suffering from chronic malnutrition or stunted growth, according to a report released in early August by Harare City Council (HCC). The report estimates that cases of kwashiorkor (severe malnutrition caused by lack of protein) increased by 43.7% between 2005 and 2006, while there was also a substantial rise in cases of acute under-nutrition and stunted growth. According to the HCC, most of the cases of kwashiorkor were recorded in Harare’s townships, such as Dzivarasekwa, Kuwadzana, Mabvuku and Mbare. Up-to-date national data are extremely hard to obtain, but an estimated 45% of Zimbabwe"s population was deemed undernourished in 2001-03 according to the UN Development Programme, and ratios have clearly deteriorated substantially since then.

FEWS NET declares emergency Underscoring the seriousness of the problem, the Famine Early Warning

in Zimbabwe Systems Network (FEWS NET) has issued an upgraded warning on the national food security situation, describing it as an "emergency". The US-funded organisation, which operates across Southern Africa, estimated that cereal harvests this year would meet just 55% of national needs. It said the state monopoly Grain Marketing Board (GMB) has received just 70,000 tonnes of

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maize from domestic sources since the recent harvest, plus 115,000 tonnes brought in from Malawi, while expressing "serious concern" about the GMB’s ability to distribute maize efficiently across the country.

Bulawayo warns of diseases Meanwhile, residents of Zimbabwe’s second-largest city, Bulawayo, have been

from water shortages warned to guard against outbreaks of disease after local authorities decommissioned one of Bulawayo"s three remaining dams because water levels were too low. With only two of the city’s five dams remaining in operation to supply about 1m people, the city council stated that water would only be available for seven hours every two days. Bulawayo has faced water problems before, but this is the first time the council has had to issue a health warning. Cities are struggling to provide services due to ageing infrastructure, including burst sewer pipes, and because foreign-currency shortages have hampered imports of raw materials such as water-treatment chemicals.

Economic policy

Mr Mugabe orders drastic Zimbabwean economic policy remains chaotic, and driven almost entirely by

price cuts political dictates. In June, for example, the government ordered sweeping price cuts on all goods including food and fuel, in apparent recognition of warnings that spiraling inflation posed a huge threat to the hold on power of the ruling party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF). Thus price cuts of at least 50% were mandated, with police, army and youth militia seeking to enforce this across the major cities. However, problems with this policy emerged almost immediately: in many cases, police and ZANU-PF supporters bought out the entire supply of shops, later putting them up for sale!at much higher prices!on the black market. Even where this was not the case, many shopkeepers were forced to sell goods for less than the price it took to produce them, let alone replace them. As a result, the goods, once sold, were not replaced, fuelling demand and, therefore, price rises. Illustrating the problem, Tafadzwa Musarara, chairman of the Grain Millers Association, was quoted in the state-controlled Herald as saying that the government’s price for maize meal, the country’s staple food, was half the cost of producing it. Mr Musarara added that members of the group!which between them process 75% of the nation’s maize meal!face ruin because of the price restrictions. However, Mr Mugabe accused manufacturers, suppliers and profiteers of "mistreating" consumers with inflated prices and forcing the government to intervene, and by the end of July more than 5,000 businessmen and shop managers had been arrested and charged substantial fines for defying the government edict. The failure of the approach became apparent in August, when Zimbabwe issued its first official inflation statistics in three months. These showed the inflation rate reaching a new high of more than 7,600% (see The domestic economy: Economic trends).

Dollar is devalued again Nonetheless, introducing a supplementary budget in early September, the finance minister, Samuel Mumbengegwi, did his best to portray a recovery in the Zimbabwean economy. Mr Mumbengegwi’s main measure was a 99%-plus devaluation of the Zimbabwe dollar from Z$250:US$1 to Z$30,000:US$1. Both

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the official rate of Z$250:US$1 and the incentive "drought stabilisation rate" for exporters that was introduced in April have been abolished. All taxes and customs duties will now be levied at the new rate, which will boost tax income that has been hard hit by the June price controls, as a result of which profit tax and value-added tax (VAT) revenue have collapsed. Of course, the finance minister did not say as much. Instead he repeated the party line that price controls had been imposed because businesses were deliberately fomenting inflation as part of a political agenda designed to force "regime change". Now!he says!price controls have "settled in" and there will be a return to "normalcy", which in reality means a system of centrally imposed price and wage controls operated by a government-appointed National Incomes and Pricing Commission. However, there is nothing in the supplementary budget that is going to tackle the problem of commodity shortages, or of falling exports: the Z$30,000:US$1 exchange rate is a mere 14% of the parallel-market rate of about Z$220,000:US$1. One exporter comments: "Had he devalued to Z$130,000:US$1, not Z$30,000:US$1, then exports might respond, but this is far too little, far too late." Making matters more complicated, there are serious discrepancies between the figures in the September budget and those published in the annual measure in December 2006, but the minister said nothing about the government’s quasi- fiscal spending, and made no attempt to explain how interest charges of some Z$13.5trn (US$450m) will be funded. Given all the uncertainties surrounding the figures, it is difficult to take the budget seriously. Revenue is now projected to be almost ten times the original budget forecast in December 2006. The GDP forecast has also been upped by a factor of ten while spending is up seven-fold (without taking interest charges into account). If the revenue and spending targets are met!and few analysts believe that they will be!the budget deficit will be 33.5% of GDP, still way above the minister’s target of 10%. The main reason for this is the omission of interest charges, which are left off the balance- sheet to make the overall figures look better. Despite this, Mr Mumbengegwi did his best to remain upbeat. Agriculture, he said, would grow by 7.3% this year despite severe drought, while tourist arrivals were up 34% in the first half of 2007. Private-sector economists disagree: some believe that agriculture could decline by as much as 25%, and overall real GDP contract by 12%!if so, this would be the largest such decline since the onset of the crisis in 1999.

Government backtracks on Further evidence of the contradictions in government policy had come earlier

some prices and on wages in the month, when the price freeze affecting hotels, restaurants and bars was lifted, with officials citing "viability" problems in the tourism sector, despite the alleged 34% increase in tourist arrivals in the first half of the year. The affected sectors were nonetheless allowed to increase their prices by 50%. Five-star hotel room rates were listed at the equivalent of US$60 a night for Zimbabweans, but remained at about US$200 for foreign visitors under a long-standing two-tier system. The new regulations also raised the price of beer and liquor by about one-third in hotels, bars and restaurants, but not in shops or liquor stores. The government also backtracked on a wage freeze, days before trade unions were due to hold a national strike against the measure. In late August the

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administration introduced a six-month freeze on wages, school fees and service charges. The main labour organisation, the Zimbabwe Congress of Trade Unions (ZCTU), called a national two-day strike to protest at the wage controls, pointing out that many goods were only available on the black market, at up to ten times the official fixed prices, and adding that the wage freeze meant that workers remained "engulfed in poverty". In mid-September, however, the Sunday Mail newspaper reported that there would be amendments to the decree freezing wages to allow for negotiations between employers and workers and subsequent pay increases. The ZCTU has pledged to proceed with the two-day strike, but previous such actions have been poorly supported: with formal unemployment running at about 80%, workers do not want to risk losing their jobs, while state harassment of employers and trade unions remains widespread.

Indigenisation legislation is The Indigenisation and Empowerment Act, under which all Zimbabwean tabled companies and enterprises will have to be majority-owned by black Zimbabweans, has been put before parliament. It calls for all government bodies, statutory bodies, local authorities and companies to procure 50% of their goods and services from companies with a controlling stake held by indigenous Zimbabweans. In addition, it states that no projected or proposed investment in the country will be approved unless indigenous Zimbabweans hold a controlling stake in that investment. Such indigenisation legislation is not unusual in Africa: countries including South Africa have set out plans to ensure that historically disadvantaged communities gain shareholding in key industries. However, most of these programmes set out a series of targets to be attained over time. The Zimbabwean legislation appears to envisage an immediate transformation, and given concerns about the rule of law in the country!not to mention a number of government threats to nationalise industries!it is likely to act as a major deterrent to investors.

SADCRand wants stabilisation rand to prop plan up is The Southern African Development Community (SADC) developed a plan to

Zimbabwedismissed economy bolster the Zimbabwean economy by making the country a member of the Common Monetary Area (CMA) in exchange for political concessions by Robert Mugabe, according to a South African newspaper, the Sunday Independent. However, Zimbabwean and South African officials rapidly dismissed the reports. Zimbabwe"s information minister, Sikhanyiso Ndlovu, described the plan as "wishful thinking", adding that replacement of the Zimbabwe dollar with a foreign currency would infringe national sovereignty, while South African state radio called the mooted rescue plan "unfounded". Even without these denials, there are good reasons to question whether a link to the rand would have solved Zimbabwe’s problems. Crucially, the crisis is as much about governance as the economy, which is in free fall because of, not despite, government policies. Throwing a lifeline to Mr Mugabe would achieve nothing unless his administration was forced to change its stance on electoral rules, the constitution, media freedoms and security legislation, as well as the economy, and there are few signs of this happening. As well as being politically unacceptable to the Mugabe government, the mooted SADC plan had serious technical shortcomings. Bringing Zimbabwe

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into the CMA!shared by South Africa, Lesotho, Namibia and Swaziland! would involve harmonising currencies from countries where the inflation rate averages around 6% (South Africa) and more than 7,600% (Zimbabwe). Normally such currency convergence would be expected to take place over several years, not a month or a few weeks as in Zimbabwe’s case. In addition, such shock therapy, unless backed by a substantial rand loan, could devastate Zimbabwe’s already crumbling economy. It is also questionable whether South Africa, which is currently running a current-account deficit of 6% of GDP and is faced with very high levels of poverty and unemployment, could take on the financial burden of bailing out Zimbabwe.

The domestic economy

Economic trends

Inflation hits 7,600% Zimbabwe issued its first official inflation statistics in three months on August 22nd, with the rate attaining a new high of more than 7,600%. Figures from the Central Statistical Office (CSO) showed year-on-year inflation reaching 7,634.8% in July!the highest figure in the world, and a clear demonstration of the failure of the government"s price-control programme. In July alone prices rose by an average of 31.6%, and independent economists, major accounting firms and retailers all believe that the actual inflation figure is more than double the official rate. Devaluation, ongoing growth in the money supply, the increasing scarcity of key commodities such as wheat and the relaxation of price controls!in late August increases of the cost of several basic goods including sugar, cooking oil and transport fares were approved!suggest that prices will rise further: the IMF has suggested that inflation could reach 100,000% by year- end, while the outgoing US ambassador, Christopher Dell, mooted a rate of 1.5m%. Even the official rate is expected to rise above 10,000% by end-2007. This is all a long way away from the "protocols" on incomes and pricing stabilisation, signed on June 1st. These were initially designed to keep price, wages and government demands on the economy constant from March 1st. However, signing the protocols!which required the agreement of government, business and the unions!took longer than expected, and the policy was almost immediately derailed by rising demand for foreign exchange, which pushed up the US dollar"s cost on the parallel market. Moving from Z$35,000:US$1 in mid- May to Z$200,000 by June 20th, the rapid slide prompted most traders to factor the rising figures into their replacement cost forecasts and the prices charged to customers. Rapidly rising fuel prices, in particular, drove up the prices of all goods, whether imported or locally produced. This apparently panicked the government into ordering a 50% cut in the prices of basic commodities in June, and the following month all manufacturers and traders were ordered to reduce prices to those ruling on June 18th. Companies expressing unwillingness to comply!and there were many!were accused of trying to discredit the government and were threatened with nationalisation. Many consumers were able to take advantage of the lower prices forced upon businesses through the supply chain; however, it now appears that formal

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traders are not replacing their stocks once sold!unsurprisingly, since they would in effect be forced to sell at a substantial loss, even assuming they could find the goods in the first place. Thus for many goods the black market has become the only source of supplies, and this too is driving up prices. Several independent price comparison exercises suggest that monthly inflation rates remain above 100%. Money supply growth is also having an impact. Official figures show that M3 money supply increased by an average of 49.6% per month during the first four months of 2007, and the April 2007 figure for M3 was 4,112% higher than its year-earlier equivalent.

Inflation, 2007 Jan Feb Mar Apr May Jun Jul Aug (% change, year on year) 1,593.6 1,729.9 2,200.2 3,713.9 4,530.0 7,251.1 7,634.8 6,592.8

Source: Central Statistical Office, Harare. Is Zimbabwe moving towards 100,000% inflation?

The IMF warned on July 31st that prices in Zimbabwe could be 1,000 times higher at the end of 2007 than they were at the beginning of the year. Abdoulaye Bio Tchane, director of the IMF"s Africa department, commented that "if recent monthly trends continue, [IMF] staff project that year-on-year inflation could well exceed 100,000% by year-end." Mr Bio Tchane added that the price cuts instituted earlier in the year had worsened shortages of most basic goods such as the staple maize-meal, cooking oil, meat and sugar, and were thus likely to fuel inflation further.

On July 31st the Reserve Bank of Zimbabwe (RBZ, the central bank) announced that it would issue a new higher-denomination note, of Z$200,000!double the previous highest denomination. However, even before the September devaluation of the currency, the Z$200,000 bill was worth just US$1 on the illegal but thriving black market. Agriculture

WFP makes urgent appeal for In early August the UN World Food Programme (WFP) made an urgent appeal

more aid to Zimbabwe for funds. Amir Abdulla, the WFP"s regional director for Southern Africa, stated that "WFP plans to feed more than ten times the current number of beneficiaries over the next eight months to avert the threat of widespread hunger, but to do this we need more donations and we need them immediately." The agency currently assists 300,000 Zimbabweans each month, suggesting that it believes that 3m people will be reliant on humanitarian assistance by year-end. The cost of expanding WFP"s operations to this degree is estimated at US$118m; without additional funds, the agency expects serious shortages in its food stocks in September, and their complete exhaustion by year-end. The situation is already serious!"hundreds of thousands" of Zimbabweans are starting to run out of food, according to the agency!but could become "desperate" if no additional assistance is forthcoming. The WFP warns that vulnerable families will be forced to adopt risky survival measures, including eating potentially poisonous wild foods, selling their remaining household assets, exchanging sex for food and crossing illegally into South Africa.

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The impact of land reform The WFP figures underscore the damaging impact of the Mugabe government"s fast-track land-reform programme. Seven years after it was launched, total agricultural output in Zimbabwe has slumped by some 44%, with commercial (large-scale) production down 55% from its 2000 peak. On the small-scale (mostly communal) farms that were supposed to benefit from the redistribution of land taken from white producers, output has declined by some 22%. The steepest absolute production decline has been in maize, where output is down from a peak of 2m tonnes in 2000 to around 600,000 tonnes this year. Wheat production has collapsed from more than 300,000 tonnes in 1998/99 to an estimated 110,000 tonnes in 2007, while tobacco output has fallen from its 2000 peak of 230m kg to around 75m kg this year. Sugar production, which reached 580,000 tonnes in 2002, is projected at less than 400,000 tonnes this year, while dairy output has halved and beef is down by three-quarters. Horticultural production, once seen as a major future foreign-currency earner, has slumped by one-quarter to less than 60,000 tonnes from nearly 80,000 tonnes in 2003.

The government continues to According to a report by the country’s Commercial Farmers Union (CFU), some

issue eviction notices 90% of the 4,500 commercial (mostly white) farmers who were on the land seven years ago have been evicted, while "the overwhelming majority" of the 500-600 still in business are running "much reduced operations". And despite repeated claims that the land reform programme is complete, the government continues to issue eviction notices, sending out 112 of these in the first half of 2007. No group of farmers has been spared, since evictions have been served on farms covered by international bilateral investment-protection agreements and even properties with licences issued by the government’s own Investment Promotion Centre. Eviction notices continue to be issued on an arbitrary basis, according to the CFU, although most of those forced off the land have been white and/or perceived as supporters of opposition political parties. Remaining farmers face serious viability problems, largely resulting from inflation!currently running at 7,630% and set to rise further!an exchange rate that remains hugely overvalued despite the September devaluation, state- controlled prices, erratic availability of critical inputs (including stock feed, seed, fuel and electricity) and the breakdown of law and order that has left farms vulnerable to repeated thefts of vehicles and farm equipment. Thus while better rains in 2007/08 may help to reverse the downward trend in output, the CFU sees little scope for a sustained recovery without major policy changes. With both confidence in property rights and farm viability at very low levels, there is little sign of reinvestment, and new projects are "rare". Farmers believe that success or growth will attract attention and possibly lead to their farms being taken over. "Consequently new developments are few and far between," the CFU says.

RegionalMalawi maize exporting imports 400,000 begin, Zimbabwe is attempting to address the maize deficit!put at 1.2m-1.4m tonnes buttonnes wheat of importsmaize to are Zimbabwe on hold this year!via imports from regional states. It is, for example, importing 400,000 tonnes of maize from Malawi and 200,000 tonnes from Tanzania. Imports have a clear advantage over food aid, as far as the government is concerned, in that

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they allow it to maintain the fiction that Zimbabwe"s food shortages are caused by outside agents and the vagaries of the weather rather than the government"s land-reform policy. The disadvantage!in theory, at least!is that they have to be paid for. This can prove problematic. Top officials admitted in early September that the government failed to pay for 36,000 tonnes of imported wheat needed to ease a severe shortage of bread (exacerbated by the sweeping price cuts instituted in June). According to the national security minister, Didymus Mutasa, the order of wheat is being held at Mozambique"s Beira port until the government comes up with the full amount to pay an international grain supplier. Domestic demand is put at some 450,000 tonnes of wheat a year, but local wheat farmers are expected to produce less than 80,000 tonnes in the October harvest, largely because of power shortages which disrupted irrigation.

Tourism

Tourism sector continues to Tourism was at one time Zimbabwe"s third-largest source of hard currency after

suffer tobacco exports and mining, but the sector has been badly affected by the country"s political and economic crisis. Despite attempts by the state-run Zimbabwe Tourism Authority (ZTA) to talk up the industry, the ZTA"s own figures show that the hotel occupancy rate dropped from a poor 38% in the first nine months of 2005 to an even worse 32% in the same period of 2006. The ZTA also concedes that arrivals from traditional markets in Europe and North America have fallen by one-fifth. In April 2007, for example, it was announced that operators in tourism would benefit from the use of an "accelerator factor", under which they would be able to sell their hard currency at an exchange rate of Z$15,000:US$1, rather than the official exchange rate of Z$250:US$1. However, this has had little impact, as other problems!such as shortages of fuel, electricity and other necessities!continue to make Zimbabwe an unattractive tourist destination.

Mining

Gold price is raised On July 25th the Reserve Bank of Zimbabwe (RBZ, the central bank) raised the local price of gold nearly ten-fold from Z$350,000/gram to Z$3m/gram in an attempt to restore some confidence and momentum in the gold-mining sector. The price increase, backdated to July 1st 2007, was deemed necessary to tackle smuggling by miners seeking a better rate of return outside Zimbabwe. Under existing legislation, the RBZ is the sole purchaser and refiner of gold in Zimbabwe, and it pays producers mostly in Zimbabwe dollars. However, fixed gold prices and fixed official exchange rates have not been adjusted sufficiently often to allow for rising production costs; as a result gold-mining deliveries are at their lowest levels in more than 100 years. Indeed, in mid-year the Chamber of Mines warned that most gold producers were operating at below 20% capacity and that some had suspended operations entirely because of the low local gold price and the impact of electricity cuts. It is questionable whether the new rate will address these problems. When the increase was announced, producers were thought to be seeking around Z$4.3m

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for a gram of gold!taking into account the international price and the then parallel-market exchange rate of about Z$200,000:US$1. The increase to Z$3m/gram was therefore thought inadequate, and has been rendered even more so by the official devaluation of the Zimbabwe dollar to Z$30,000:US$1 (a mere 14% of the parallel-market rate of about Z$220,000:US$1). It is likely, therefore, that deliveries of gold, which have been falling since the beginning of the year, will continue to decline. The Chamber of Mines estimates that gold output will total some 8,700 kg this year!23% down on the 2006 total of 11,354 kg. This will have a serious impact on the balance of payments, since gold is currently Zimbabwe’s main source of hard currency, accounting for one-third of its export earnings. The government has responded in characteristic fashion, with the president, Robert Mugabe, accusing some producers of smuggling gold in an effort to sabotage the economy. He has again warned that the government may nationalise mines!further undermining the confidence of foreign investors, and reducing the likelihood that they will invest in their assets.

Gold production, Jan-Jun (tonnes) 2006 2007 Jan 1,067.20 819.1 Feb 857.2 768.1 Mar 978.6 746.9 Apr 820.2 567.3 May 827.9 730.2 Jun 908.4 n/a

Source: Chamber of Mines.

Zimplats appoints a new CEO The situation is slightly better in the nickel, ferro-chrome and platinum sectors, since high international base-metal prices have encouraged producers to sustain fairly consistent output levels despite the country’s lengthy periods at fixed exchange rates. Thus South Africa-based Implats is persisting with its plan to boost annual output at its Zimbabwean unit, Zimplats, from 90,000 oz at present to 160,000 oz by 2010 and!ultimately!1m oz. The programme will be carried out under a new chief executive, since Alex Mhembere is due to take over at Zimplats from October. Mr Mhembere is currently the managing director of Mimosa Mining Company, a Zimbabwean joint venture between Implats and Aquarius Platinum. Implats did not comment on the rationale for Mr Mhembere"s appointment, in place of Greg Sebborn (who remains a non- executive director); there can be little doubt, however, that having a black Zimbabwean as head of operations is a useful public symbol given Mr Mugabe"s repeated comments on the need to indigenise mines. As it is, Implats" chief executive, David Brown, believes that the firm is "well placed" to comply with planned legislation requiring companies to sell 51% stakes to local Zimbabwean investors. In 2006 the firm agreed a deal under which it would receive credits towards the 51% requirement by giving up some unused mining claims in Zimbabwe, which has the world’s second richest resources of platinum after South Africa.

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The Zimbabwe government has also agreed to give credits for the building of roads and other infrastructure. According to Mr Brown, the exact value of the credits still needs to be finalised, although it is clear that they will not fulfill the full 51% requirement. Impala Platinum Holdings thus plans to sell a stake to local investors.

Platinum production, Jan-Jun (kg) 2006 2007 Jan 370.1 464.7 Feb 390 426.3 Mar 412.1 475.7 Apr 402.2 344.9 May 390.6 533.6 Jun 390 n/a

Source: Chamber of Mines.

Concerns arise about power For all its bullishness, Implats has a number of concerns about its Zimbabwean

supply to mines operation. In July the South African firm said that it was working to ensure a steady power supply for its Zimbabwean mines, and it is not the only foreign operator to be making contingency plans. Canada’s Caledonia Mining Corporation is negotiating an agreement to pay foreign currency to the Zimbabwe Electricity Supply Authority (ZESA) for a secure power supply to its gold mine. A contract was drafted in late August. This will be submitted to the RBZ for approval and Caledonia"s chief executive, Stefan Hayden, has said he hopes that approval will be granted in September. According to Mr Hayden the electricity will be paid for in US dollars, "at prevailing rates", adding that "five or six mines" were adopting the same method to ensure a secure electricity supply. Caledonia operates the Blanket gold mine in Zimbabwe, which recently resumed underground operations following the stripping and re-equipping of its main production shaft, No 4 shaft. Further shaft re-equipment is ongoing, and is due to be completed by end-September. Caledonia expects the mine to return to its previous production level of 600 tonnes/day (t/d), but concedes that, because of ongoing power outages, output is currently running at around 400 t/d. Caledonia has targeted production of 1,000 t/d by end-2007, and Mr Hayden acknowledges that power is the "single most critical" factor in meeting this target. Like many other mining companies, Caledonia already relies in part on standby generators. However, these are not sufficient to allow winders to be hoisted during power cuts, meaning that production suffers. The company could face further challenges, however, if the Indigenisation Bill does require that miners sell a 51% stake to local investors. According to Mr Hayden, Caledonia plans to put 30% of the mine into a trust for employees, but says that any greater shareholding would be "excessive". Mr Hayden claims that the draft legislation is "very ambiguous", and adds that the firm will wait and see how the legislation is implemented before making any decision on the employee shareholding, or indeed future investment plans.

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Infrastructure

Econet is in a US$15m Zimbabwe"s largest mobile phone operator, Econet Wireless, has signed a

expansion programme US$15m deal with China"s ZTE Corporation and Sweden-based Ericsson to expand its network. In 2006 Econet secured a US$20m loan from the African Export-Import Bank (Afrexim) to finance network expansion, and it had boosted its subscriber base from 500,000 people to 850,000 by February 2007, giving it a 61% share of the mobile-phone market and 45% of the overall telecommunications market. Econet now aims to increase the number of its subscribers to 1.2m by end-2007. Recession and severe foreign-currency shortages have tended to constrict expansion of the Zimbabwean mobile phone sector; for example, pre-paid outgoing international calls from Zimbabwean networks have been restricted since early 2007 because of a lack of foreign currency to pay termination charges to foreign networks. Operators face a number of other problems. In July, for example, Econet Wireless, Telecel and NetOne were all ordered to reduce call charges by up to 1,000% as part of the wide-ranging government initiative to combat inflation. Following the directive Econet commented: "We were charging Z$7,000 per minute. The price has been reduced to#Z$700 after tax." State-owned NetOne had been charging pre-paid users Z$7,200/minute for intra-network domestic calls since May 2007, compared with Z$76/minute in January 2006, and is thought to have reduced its charges to around Z$72/minute. It is unlikely, however, that operators" costs have been reduced by a similar amount, putting a substantial squeeze on their margins.

Mobile phone company loses This is no longer an issue for Telecel Zimbabwe, the smallest of Zimbabwe"s

licence three mobile phone providers, since its operating licence was cancelled in August. Announcing the decision, the Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz) said that under Telecel"s licence foreign ownership should be restricted to 49% at most, whereas 60% of Telecel Zimbabwe"s shares are held by Egypt"s Orascom (via Telecel International). According to Potraz, Telecel was granted an operating licence in 1997 and allowed to operate with a majority foreign shareholding "on condition that the ownership structure was regularised within five years from the commercial date of the licence". The regulator gave Telecel until June 30th to reduce its foreign shareholding. However, while a group of local companies and individual investors under the name of Empowerment Corporation controls the remaining 40%, and has the right to buy a further 11% stake in Telecel, it does not have the funds to do so. There are persistent rumours that Leo Mugabe, the president"s nephew, is keen to take over the firm. Whether or not this is the case, Telecel"s subscribers are in a difficult position. It is possible that state-owned Net*One will take over Tel ecel "s customer base, but equally likely that they will be left without a service. The decision is also likely to worry Econet. Although its chairman and primary owner, Strive Masiyiwa, is Zimbabwean, Mr Masiyiwa runs the company from offices in South Africa, having had disagreements with various members of the Mugabe regime. It is possible, therefore, that it too could face government interference.

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Industry

Heinz pulls out US food giant H J Heinz, one of the first major foreign investors in Zimbabwe, sold its interests to a government-controlled cotton company in early September. The Cotton Company of Zimbabwe (Cottco), the country’s main purchaser and processor of cotton, paid US$6.8m for Heinz"s 49% stake in Olivine Industries, which makes soaps and cooking oil from locally grown crops including cotton seed. The government already holds a 51% stake in Olivine. Industry executives have dismissed reports in the state media that the Heinz deal was the first step in a much-publicised government programme to take over white-controlled businesses, insisting that the deal was being negotiated months before Mr Mugabe announced plans to ensure that black Zimbabweans own at least 51% of all companies. Heinz has also dismissed claims in the pro-government Herald newspaper that the US government had ordered Heinz to scale down production as part of its sanctions against Zimbabwe. In fact, the divestment by Heinz underscores the growing difficulties of running a profitable operation in Zimbabwe. Heinz was one of the first major foreign investors after independence in 1980 and, in addition to producing the Olivine vegetable oil for cooking, used locally grown crops to produce its tomato sauce and canned baked beans. However, because of the decline in Zimbabwe’s agricultural and industrial sectors, Heinz factories were operating at less than 30% capacity. Nonetheless, the Olivine transaction is likely to speed up moves by major companies to prepare for the pending Indigenisation and Empowerment Act. The proposed law has triggered some corporate deals to ensure compliance, with insurance giant Old Mutual planning to transfer a 20% stake in its Zimbabwean operations to local staff. Hotel and retail group Meikles Africa! founded during colonial times!has announced a deal to merge its Zimbabwean operations with a black-run financial group, Kingdom Financial Holdings, while keeping a separate listing on the London Stock Exchange.

Foreign trade and payments

Zimbabwe is still looking to The minister of transport and communications, Christopher Mushowe, and Air

buy Russian planes Zimbabwe"s chief executive, Peter Chikumba, visited Russia in late August to revive a deal to buy five Ilyushin and Tupolev planes, according to the Zimbabwe Independent newspaper. The US$382m deal is believed to involve the purchase of three IL-96-400 P (passenger) and two IL-96-400 M (cargo) planes, and requires the Zimbabwean government to make a 30% (US$114.5m) cash down-payment. The remaining 70% will be in the form of a loan, financed by Ilyushin Finance Co, one of two state-run Russian companies involved in domestic aircraft construction and sales programmes. Ilyushin Finance Co focuses on financing IL-96-300, IL-96-400, Tu-204-300 and An-148 aircraft. Deliveries from the Voronezh Aircraft Construction Company plant are due to start next year.

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However, Air Zimbabwe technicians have expressed serious misgivings about the deal. Russian planes are notoriously prone to technical faults and failures! to the extent that they are being labelled "flying coffins"!and the four-engine aircraft involved in this latest deal are believed to be unsuitable for Air Zimbabwe’s mainly overland, north/south routes. In addition, it is likely to prove difficult to source spare parts since no other country in Southern Africa flies the Russian planes, and while the Ilyushin are cheaper to buy than Boeing or Airbus aircraft, they are expensive to maintain and require higher amounts of fuel to operate. The fact that the Zimbabwean government is persisting with the deal!initially agreed in April 2006!suggests that cost and political considerations are now predominant, and that Harare has not learnt the lessons of its recent acquisition of Chinese planes, which have proved prone to technical problems.

Country Report September 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007