Zimbabwe Zimbabwe at a Glance: 2001-02

COUNTRY REPORT

Zimbabwe Zimbabwe at a glance: 2001-02

OVERVIEW Zimbabwe is in a rapidly escalating economic and political crisis that will continue until at least the presidential election, expected to be held in April 2002. If President Robert Mugabe wins he is likely to moderate some of his more controversial policies such as land reform and his opposition to devaluation and economic reform. If he loses, as is possible, then the real question is whether he will accept defeat or whether the country will be dragged into a constitutional crisis, only to be resolved by military intervention. Although the economy is in a steep decline, current economic policy will ensure that a total collapse does not occur prior to the presidential election. While economic reform will be gradually introduced after the election regardless of who wins, the negative impact of the current strategy will serve as a major drag on the economy for years to come. Key changes from last month Political outlook • The Zimbabwe African National Union-Patriotic Front (ZANU-PF) candidate, Elliot Manyika, won the Bindura parliamentary by-election. Violence and intimidation towards supporters of both the opposition Movement for Democratic Change (MDC), and the ZANU-PF, clearly highlights the strategy of intimidation that Mr Mugabe will continue to use up to the presidential election in 2002. • Another High Court judge has resigned. Three pro-Mugabe judges have been appointed to the Supreme Court as the government steps up its pressure on the judiciary. Economic policy outlook • Private trade in maize has been banned as Zimbabwe faces both a maize and wheat deficit and will need to import supplies in coming months. • Simba Makoni, the finance minister, seems increasingly isolated as he stresses the need for devaluation, as the cabinet has rejected his advice. Economic forecast • Driven by the increase in domestic fuel prices in early June, the year-on- year inflation rate increased sharply in June, to 64.4%.

August 2001

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Outlook for 2001-02

Political outlook

Domestic politics State-sponsored political violence will continue to be the central element of President Robert Mugabe’s strategy to try to win the forthcoming presidential election, likely to be held in April 2002. Despite violent intimidation of the opposition, and possible vote rigging by Mr Mugabe and his party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF), the Economist Intelligence Unit believes that Morgan Tsvangirai, the leader of the opposition Movement for Democratic Change (MDC), may win the election. If this happens, the question remains whether Mr Mugabe and his supporters will accept defeat.

The main feature of the election campaign will be the ZANU-PF’s policy of suppressing all forms of opposition to Mr Mugabe’s rule and of intimidating its own supporters, especially in rural areas. This strategy was clearly evident in the Bindura by-election in July, and will continue to be used in the series of parliamentary by-elections that are due in the coming nine months. The government will also seek to undermine Mr Tsvangirai’s candidacy by continuing with his trial, on terrorism charges, and by using the state media to portray the MDC as a violent party. In addition, the government will attempt to win back urban voters through the militant activities of the Zimbabwe Federation of Trade Unions, created by the ZANU-PF in opposition to the Zimbabwe Congress of Trade Unions, which supports the MDC. The government will seek to suppress the independent news media and the judiciary, and will be afforded a powerful voice by its dominance of the daily newspaper market and monopoly on broadcasting.

The MDC will continue to discourage its supporters from openly confronting the government, for fear of provoking the suppression of all public opposition. There is also fear that any civil unrest would give Mr Mugabe an excuse to impose a state of emergency and to rule by decree. Given the political climate in which the election will be conducted, it is likely that the MDC will hold few mass rallies and marches during the campaign. Instead, it will conduct something resembling an underground campaign, relying on small meetings, pamphlet distribution and word of mouth to convey its message. This will probably work quite effectively, especially as the climate of repression is likely to harden voters’ attitudes against the government.

However, there are several factors that may alter this scenario considerably and lead to a rapid escalation of the current political crisis. The National Constitutional Assembly has stated that it will hold mass demonstrations if the government does not accept its proposed changes to the constitution. With shortfalls in the maize and wheat crops, food riots are also possible unless the government manages to import these staple grains—the minister of finance recently appealed to the international community for food aid. Other potential flashpoints include parliamentary by-elections, and the court cases (or possible

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jail sentences) of Morgan Tsvangirai and other MDC leaders, charged with treason and inciting violence.

Election watch If Mr Mugabe wins the April 2002 presidential poll he will continue to repress opposition to his government. However, he is also likely to moderate some of his more extreme policies, most notably the violent seizure of land and other examples of the breakdown of the rule of law, in order to win back donor support to help halt Zimbabwe’s economic decline. If Mr Tsvangirai manages to win the presidential race, it is not certain that Mr Mugabe will accept the result; the outcome may then be decided by the military and the police. Optimists claim that the army is professional and will support whoever wins the vote, but to date it has strongly supported the Mugabe regime and may refuse to accept Mr Tsvangirai as president—top ZANU-PF officials have openly stated that they would go “back to the bush” if Mr Mugabe lost the election. If that happens, widespread unrest may ensue. However, if Mr Tsvangirai wins and this result is accepted by Mr Mugabe and the army, considerable changes can be expected, notably a new parliamentary election and a return to even- handed enforcement of the rule of law. Unfortunately, Mr Mugabe’s history suggests that he will retain power through the use of force, although this will be only a temporary solution, delaying a more dramatic, potentially violent change of power in the future.

International relations Since the assassination of Laurent Kabila, the president of the Democratic Republic of Congo (DRC), on January 16th 2001, the Zimbabwean government has sought to protect its own interests in the DRC and to establish its influence over Mr Kabila’s son and successor, Joseph Kabila. At present we do not expect Zimbabwe to withdraw the majority of its forces from the DRC until a comprehensive peace agreement, along the lines proposed in the 1999 Lusaka Accord, is implemented. However, the number of Zimbabwean troops in the DRC is likely to be reduced to about 13,000 by the end of 2001.

Economic policy outlook

Policy trends The government is committed to reviving an updated version of its New Millennium Economic Policy in the second half of 2001, to help tackle the country’s deepening economic crisis. However, this is unlikely to have any real impact, and policy will instead continue to be driven by ad-hoc crisis management, which, despite producing some odd outcomes, should stave off economic collapse prior to the presidential election, due in April 2002. So far the finance minister, Simba Makoni, a respected businessman, has handled the crisis with skill, but it is clear that he does not have sufficient political weight to push through real changes or stand up to the president’s unrealistic economic demands, and he may find himself increasingly sidelined within the cabinet.

The IMF and the World Bank are keen to reach an agreement with Zimbabwe and to maintain dialogue, but because of Mr Mugabe’s lack of genuine commitment to reform and his intransigence over the land-seizure issue, an agreement is unlikely before the presidential election. However, if he were to

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give minimal ground on these issues, progress thereafter could be quite quick. It may take longer for an MDC president to reach an agreement with the IMF, if the party wins the election, but it is clear that the IMF and the World Bank would support the MDC’s proposed economic policies.

Fiscal policy The root cause of Zimbabwe’s current economic crisis lies in the president’s unwillingness to bring the fiscal deficit under control. The steep decline in the economy—combined with large salary increases prior to the general election in June 2000, rapidly mounting internal debt and Zimbabwe’s costly involvement in the conflict in the DRC—caused the budget deficit to balloon to 22.7% of GDP in 2000, according to official data (although it was probably considerably higher owing to off-budget allocations). The sharp fall in interest rates in the first half of 2001 has reduced the debt-service burden, and, combined with the limit placed by the government on public-sector wage increases, this allowed the finance minister to bring the deficit under control in the first half of 2001. In fact, a surplus was recorded in March. However, even if the government can keep interest rates low and wages under control, a proposed cut in military expenditure is now unlikely to occur. Coupled with the potential cost of some food imports, this leads us to expect a budget deficit of at least 16.4% of GDP in 2001. Having held public wages at well under the rate of inflation in 2001, the government is likely to sanction a salary increase in the 2002 budget, prior to the election, which will be accompanied by a gradual rise in interest rates in the second half of that year. Therefore, even if a comprehensive economic reform programme is introduced after the election, we forecast a budget deficit of 19% of GDP in 2002. With such a huge fiscal deficit, and with little external financial support forthcoming, the government has had no choice but to finance the imbalance from domestic sources and the extremely rapid growth of domestic debt in the past few years will prove a huge burden on the economy for years to come.

Monetary policy Even though inflation may well be heading towards 100% by the end of 2001, monetary policy in 2001-02 will continue to be driven by the government’s need to finance the fiscal deficit, mainly by local borrowing through Treasury bills and by printing money. Although the government has so far been successful in manipulating monetary policy, pushing interest rates down to levels well below the rate of inflation in the first half of 2001, it is not clear how long it can continue with this strategy. At present there are indications that the domestic financial markets expect interest rates to remain negative until the election, although they may increase modestly. After the election a more conventional (and tighter) monetary policy will be introduced, as part of a post-election reform package, which will push interest rates up.

Economic forecast

International assumptions The outlook for the world economy has become increasingly bearish in the past six months as growth in the US has slowed very quickly in 2001. Although we still expect the US to rebound in 2002, pushing global growth up from 2.7% in 2001 to 3.7% in 2002, there is a considerable risk of a more prolonged

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recession. From a regional perspective, the pick-up in growth in South Africa— Zimbabwe’s largest trading partner—in 2000-02 is a positive development that, in normal circumstances, would benefit the Zimbabwean economy. However there is a danger that Zimbabwe could get caught up in an emerging markets crisis if Argentina were to default or devalue.

It is clear that Zimbabwe is not in a position to benefit from developments in the prices of many of its main commodity exports, but early prices at the 2001 tobacco auctions seem promising and should lead to a small rise in tobacco export earnings. Base-metal and platinum prices are also on an upward trend and are forecast to remain strong into 2001, which would normally help Zimbabwe’s export earnings.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.7 3.7 OECD 3.1 4.0 1.4 2.4 EU 2.5 3.4 2.0 2.5 Exchange rates (av) ¥:US$ 113.9 107.8 122.7 123.5 US$:¤ 1.07 0.92 0.88 0.96 US$:SDR 1.37 1.32 1.26 1.30 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.04 4.75 Commodity prices Oil (Brent Dated; US$/barrel) 17.9 28.5 26.8 25.5 Gold (US$/troy oz) 278.8 279.3 263.0 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 1.2 15.0 Industrial raw materials (% change in US$ terms) –4.6 13.4 –3.5 3.8

Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Economic growth Zimbabwe’s real GDP is estimated to have contracted by 6% in 2000, and with signs that any recovery will be delayed until early 2002, it is forecast to contract by 5.6% in 2001. Initially, the main factor behind the slowdown was the overvalued exchange rate, which caused foreign-currency shortages, made many imports unobtainable and prevented producers from recouping their production costs in domestic currency terms. However, these problems are now being compounded by the ongoing political crisis, rising inflation and fuel shortages, all of which are placing severe constraints on the economy as a whole. Most businesses and factories are working only a two- or three-day week, and the agricultural sector is suffering a crisis of confidence, limiting the planting of a range of crops.

None of these factors is likely to be addressed fully while Mr Mugabe remains in power. Eventually, however, the sheer scale of the current economic crisis is likely to force whichever government is in power after the presidential election to modify the land redistribution programme and implement reforms in order

to win the backing of the IMF and World Bank, and regain desperately needed international support. Although current policies can be sustained up to the election in April 2002, they are storing up huge problems that will have to be addressed thereafter. Thus, even if comprehensive economic reforms are introduced in 2002, growth will remain only moderate, at a forecast 0.5%, and may remain low for several years afterwards.

Inflation Zimbabwe’s year-on-year inflation rate has stood at 55-60% for the past nine months. However, the 70% increase in petrol prices in early June led to a sharp increase in the June 2001 inflation rate to 64.4%. Coupled with likely increases in food prices during the rest of the year, we forecast that the rate of inflation will be pushed to 100% by the end of the year, although it will average 71.7% for the year. Inflation will ease off towards the end of 2002 as a more comprehensive programme of economic reform is introduced, but it will still remain very high, averaging 78.8% for the year.

Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 0.1 –6.0 –5.6 0.5 Industrial production growth –7.7 –7.6a –8.7 0.6 Gross agricultural production growth 6.6 –2.0 –6.5 1.0 Consumer price inflation Average 58.1 55.7a 71.7 78.8 Year-end 56.9 55.2 a 99.1 53.1 Short-term interbank rate 55.4 68.2 a 31.0 79.8 Government balance (% of GDP) –11.9 –22.7a –16.4 –19.0 Exports of goods fob (US$ bn) 2.1b 2.1 2.1 2.1 Imports of goods fob (US$ bn) 1.8b 1.5 1.5 1.9 Current-account balance (US$ bn) 0.0b 0.0 0.0 –0.2 % of GDP 0.8b –0.6 –0.8 –2.1 External debt (year-end; US$ bn) 4.6 5.1 5.4 5.5 Exchange rates Z$:US$ (av) 38.30 44.42a 57.23 77.97 Z$:¥100 (av) 33.62 41.22 46.63 63.13 Z$:¤ (year-end) 38.31 51.70 58.39 103.96 Z$:SDR (year-end) 52.35 71.75 81.89 136.83

a Actual. b EIU estimates. c EIU forecasts.

Exchange rates Although official government policy is to adjust the exchange rate in line with inflation differentials with the country’s major trading partners, the rate has been fixed against the US dollar at Z$55:US$1 since October 2000. Because of the high level of inflation in Zimbabwe, this has meant that the official exchange rate has become steadily overvalued. Instead of addressing the issue, however, the government has offered concessions to various interest groups, such as gold producers, airlines and exporters, and this has created a series of exchange rates, ranging from the official rate to the parallel market rate. The latter had fallen to over Z$200:US$1 by early August 2001.

Although the government is facing considerable pressure to devalue the currency, with the concessions granted to gold producers and strong international tobacco prices, it is likely to allow only a small fall in the exchange rate—of around 15-20%—probably late in 2001 before the election takes place. After the election in early 2002, the government is likely to introduce a crawling peg in the second half of 2002. This will produce a gradual fall in the value of the dollar, although it will remain substantially out of line with the parallel rate. We forecast average exchange rates of Z$57.23:US$1 in 2001 and Z$77.97:US$1 in 2002.

External sector Zimbabwe’s foreign-exchange earnings have fallen sharply in 2000 and 2001, owing to falling tobacco and gold production, the collapse of tourism receipts and the suspension of foreign aid. However, the scarcity of foreign exchange and the lack of access to most lines of credit has severely limited the country’s ability to import. Because of this sharp contraction in imports we estimate that Zimbabwe ran only a modest current-account deficit in 2000, at 0.6% of GDP. This will remain broadly unchanged in 2001, when we forecast another small deficit of 0.8% of GDP. Exports will remain depressed in 2002, but a pick-up in imports following the resumption of aid inflows in the second half of the year should produce a current-account deficit of 2.1% of GDP for the year.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: August 8th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule