Zimbabwe at a Glance: 2004-05

Country Report

Zimbabwe

Zimbabwe at a glance: 2004-05

OVERVIEW Recent public pronouncements by the president, Robert Mugabe, indicate that he is unlikely to countenance any serious negotiations between his ruling Zimbabwe African National Union-Patriotic Front and the opposition Movement for Democratic Change. Instead, it seems increasingly clear that the president is in no mood to compromise with the opposition or the international community and is confident that his party can win the parliamentary elections scheduled for March 2005 and that he will see out the rest of his current term in office. Meanwhile, under the guidance of Gideon Gono, the governor of the Reserve Bank of Zimbabwe (RBZ), the government has put together a strategy that is helping to slow the economic decline. However, the economic climate will remain difficult and, with triple-digit inflation, shortages of foreign currency and the ongoing impact of the collapse of the commercial agricultural sector, the Economist Intelligence Unit expects real GDP to contract by 8.2% in 2004 and 3.1% in 2005.

Key changes from last month Political outlook • There has been no change to our political outlook. Economic policy outlook • To further improve export incentives, the RBZ has announced minor modifications to the conduct of its foreign-exchange auction procedures, including a reduction from 25% to 15% in the percentage of export proceeds that must be surrendered to it. The changes are effectively a devaluation in the auction rate of around 4%. Economic forecast • New data presented by the finance minister, Herbert Murerwa, show that government expenditure grew more rapidly than revenue in the first half of 2004. With expenditure likely to remain high in the second half of the year, in part because elections are to be held in March 2005, we now forecast a budget deficit of 5.2% of GDP for the year.

August 2004

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Outlook for 2004-05

Political outlook

Domestic politics Recent public pronouncements by the president, Robert Mugabe, indicate that he is unlikely to countenance any serious negotiations between his ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) party and the opposition Movement for Democratic Change (MDC). Instead, it seems increasingly clear that the president is in no mood to compromise with the opposition or the international community and is confident that his party can win the parliamentary elections scheduled for March 2005. This confidence is supported by the fact that there is little that the opposition can do to counter what is likely to be a hardline campaign by ZANU-PF, based on the use of scarce food as a political tool, violence by the youth militia, the highly politicised police force and intensified propaganda in the state news media. Repressive legislation will be used to harass the opposition when it shows any sign of campaigning. Finally, the governmentrs control of voter registration and the voting process is so tight that, when coupled with the repressive measures above, the ruling party expects to win a sizeable majority of the 120 elected parliamentary seats. The problem for Mr Mugabe is that, if the elections are held under these conditions, they are certain to be condemned as not being free and fair by the international community. However, he has shown over the last few years that he can withstand international disapproval. Nonetheless, he may feel confident enough to offer some concessions to the international community in the run- up to the vote. If so, the most likely route is through negotiations led by the South African president, Thabo Mbeki, who is likely to press Mr Mugabe to agree to some of the norms and standards for free and fair elections agreed by the Southern African Development Community (SADC). A more likely outcome is that he will not agree to concessions, and will begin to re-engage with the international community only from a position of relative strength, namely when ZANU-PF has won the elections with a larger majority than at present and is even more firmly in control of the domestic political situation. Meanwhile, the government will continue to use the repressive legislation that it has passed in recent years to keep up the pressure on the MDC in the run-up to the polls. This will seek both to weaken the party as a political force and to dent its bargaining position in any talks. Central to this strategy is the governmentrs campaign of arbitrary arrests of MDC members of parliament and activists, often on spurious charges, and its willingness to continue to use controversial legislation such as the Public Order and Security Act to suppress any form of opposition to its rule. That this policy has the potential to divide the MDC is already apparent. Although the MDC has now stated that it is preparing for the elections, there are divisions within the leadership as to the best strategy. Many leading MDC members urge a boycott of the 2005 polls, arguing that they stand no chance of winning them and that experience has shown that a minority party makes little difference in how Mr Mugabe rules the country.

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Moreover, this faction argues that the partyrs participation would only give the polls legitimacy. On the other hand, some of the MDC’s leaders maintain that to boycott the elections would leave them with no political representation in parliament and open the way for another opposition party to take its place. Although Mr Mugabe appears still to be in good health for a man of 80, he has recently experienced a spate of health scares. This, together with the rapid economic decline of the last three years and Zimbabwers continued international isolation (which have made the situation within ZANU-PF more volatile), has increased speculation both within and outside Mr Mugabers party that he may seek to hand the presidency to a chosen successor. Senior party officials in particular have become increasingly obsessed with the question of who will succeed him as party leader. Mr Mugabe has tried to quell the speculation by stating that he intends to stay in office until his presidential term ends in 2008 and by launching an anti-corruption campaign that has targeted senior members of ZANU-PF who have been too openly ambitious in the succession battleit has even implicated the speaker of parliament, Emmerson Mnangagwa, who is seen by many as his most likely successor. This campaign, coupled with Mr Mugabers political skill in playing off the various factions in ZANU-PF against each other, means that the Economist Intelligence Unit expects him to maintain his firm grip on the party up to and beyond the polls.

International relations Mr Mugabe has also played a clever hand on the international front and, as a result, world opinion is divided as to how best to respond to his regime. He has successfully kept the focus on the issue of land redistribution, thereby shifting attention away from the conduct of the 2002 presidential election, human rights abuses and the undermining of the rule of law and democracy. He has also proved adept at offering concessions and then failing to implement them when political pressures subside. Mr Mugabe has also been successful at promoting himself as Africars greatest fighter against colonialism. He is able to neutralise African opinion on Zimbabwe by branding all critics of his regime as white racists or the puppets of racists. Consequently, no African leader has publicly been prepared to take a firm stance against him. Relations with the US and the EU will continue to be tense, as both have adopted targeted sanctions against senior members of ZANU-PFfreezing their assets and limiting their ability to travel. By declaring that Zimbabwe will be self-sufficient in food and declining any international food aid, Mr Mugabe has significantly reduced the influence that Western powers have over his country. This will permit ZANU-PF and the youth militia to campaign as brutally as they wish to in the 2005 election campaign, without any international witnesses. Once the election is over, it is possible that Mr Mugabe will once again request international food aid. However, it is very likely that, in order to maintain the fiction that his land seizures have been a success, he will not ask for international assistance and will keep the population on hunger rations. The main impetus for negotiating an end to the crisis will have to come from other African leaders, led by Mr Mbeki and the Nigerian president, Olusegun Obasanjo. However, neither is likely to show the commitment needed to encourage Mr Mugabe to allow fully free and fair elections. It is also unlikely

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that they will apply the political and economic pressure required to ensure progress on reform of the electoral laws before the March 2005 elections.

Economic policy outlook

Policy trends Although the government does not have what could be called a coherent economic policy in place, since the start of 2004, under the guidance of Gideon Gono, the new governor of the Reserve Bank of Zimbabwe (RBZ, the Reserve Bank), it has put together a strategy that is helping to slow economic decline. The key to this has been Mr Gonors introduction of a range of exchange rates and export subsidies that have helped to maintain the inflows of foreign exchange passing though official channels. Because of this, the government should have enough foreign exchange to be able to fund substantial imports of food during the year and keep the economy functioning. In addition, the inflows will help to slow the economic decline of the last few years. Against the background of a modest increase in maize production in 2004, it appears that a new, lower, economic equilibrium has been reached, with the reduced foreign-exchange earnings much more closely in line with the reduced level of demand for foreign exchange. Meanwhile, the substantive emigration of the last few years has created an additional source of income for a large proportion of the population. This is supporting local production and sales volumes but is also generating a false impression of economic stability. However, with only limited new data to support it, this analysis must be treated with caution. All this is still some way from being a coherent policy that will drive a substantial economic recovery. Such a recovery would be possible only after the elections in March 2005 and, even then, is unlikely without international support and substantial new lending. This, in turn, would be possible only if the election results were recognised internationally and the government was willing to make substantial concessions with regard to exchange-rate and land- reform policies. This will take some time.

Fiscal policy Provisional data for the first half of 2004, released by the finance minister, Herbert Murerwa, show that government revenue has picked up this year. The increase stems from gains in income tax due to fiscal creep and more importantly, buoyant customs revenue from the use of the auction exchange rate to value imports. But expenditure has picked up at a faster rate, although it is still within the government’s targets. We thus expect the budget deficit to substantially in 2004, to 5.2% of GDP. Revenue levels should fall marginally in 2005 as inflation slows, and the government struggles to reduce expenditure until well after the March polls, but the deficit will remain high at 5.6% of GDP. Although the deficit does not appear excessively large, it should be noted that the government figures exclude expenditure by parastatals. This is substantial, and so the true extent of the deficit could turn out to be much greater. The data also conceal the fact that expenditure is falling drastically in real terms, which is leading to a massive reduction in the quality of spending, notably on health and education. Finally, although high inflation and profoundly negative real interest rates are benefiting the government, as they reduce the cost of financing

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the deficit and quickly erode the value of the domestic debt stock, this is at the expense of the private sector, which is forced to finance the deficit.

Monetary policy Mr Gono is now the main force shaping economic policy in the country, although monetary policy has changed little since his appointment in late 2003. The RBZ will continue to try to retain a multiple-interest-rate policy throughout 2004-05. This aims to keep interest rates on 91-day Treasury bills as low as possible, in order to limit the governmentrs domestic debt repayments, while exporters can continue to borrow from the Reserve Bank at heavily subsidised rates. However, the RBZ is keen to push up other interest rates. In late February it introduced a new government debt instrument, financial bills. These are similar to T-bills, but the interest is paid by the Ministry of Finance and Economic Development and is set at a higher rate. The RBZ is also keen for commercial banks to charge higher lending rates, though their temporary rise in early January, coupled with the collapse of the stockmarket and property prices, led to a liquidity crisis for seven leading commercial banks. The RBZ provided liquidity to the market and placed four banks in a quickly established “Troubled Bank Fund”, which temporarily resolved the crisis. It also announced that commercial banks must obtain an international credit rating from a reputable agency by December 2005. This could force many smaller banks to close, but may avert a wider run on the banking system. The dual interest-rate policy will remain until after the March poll. With inflation at around 400% in 2004, real interest rates on short-term government debt will remain between -200% and -300%. This will continue to have a hugely distorting economic effect, as it ensures a major transfer of wealth from the private to the public sector. Moreover, by continuing to fund the fiscal deficit, monetary policy will do little to reduce rampant inflation.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.9 5.0 4.3 OECD 1.6 2.1 3.5 2.8 EU25 1.2 1.1 2.3 2.4 Exchange rates ¥:US$ 125.3 115.9 111.7 108.8 US$:€ 0.945 1.132 1.226 1.293 SDR:US$ 0.772 0.714 0.682 0.662 Financial indicators € 3-month interbank rate 3.33 2.33 2.10 2.14 US$ 3-month Libor 1.80 1.21 1.49 3.11 Commodity prices Oil (Brent; US$/b) 25.0 28.8 33.5 28.0 Gold (US$/troy oz) 310.3 362.8 421.3 375.0 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 10.6 -0.7 Industrial raw materials (% change in US$ terms) 2.2 12.7 19.2 0.9 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

A steady recovery in the world economy looks set to take hold in 2004, led by the rapid pick-up in growth in the US since the third quarter of 2003, as well as in Asia. World GDP growth, calculated on a purchasing power parity basis, is forecast to reach 5% in 2004 and to remain high in 2005, at 4.3%. However, this will have little impact on Zimbabwers economy, given the countryrs incoherent economic policies and political crisis. Instead, economic developments will be much more strongly influenced by domestic factors, notably the availability of foreign exchange and rapidly rising domestic production costs. These factors are, for example, much more important in determining the fall in gold exports and the rise in platinum exports than are international prices, which are expected to remain high in both 2004 and 2005.

Economic growth Real GDP contracted by around 40% between 1999 and 2003, but the rate of economic decline will slow in 2004-05, with government policy helping to ease foreign-exchange shortages, with many firms having scaled back their operations to adjust to lower income levels, and with food production expected to recover to some extent as the remaining commercial and small-scale farmers boost maize production. However, inflation remains in triple digits, foreign- exchange shortages persist and declining incomes are reducing consumption. We therefore forecast that real GDP will contract by 8.2% in 2004, above the government’s recent estimate of 5%, and by 3.1% in 2005. The rate of decline is expected to slow but, even if the current political crisis is resolved and a more coherent economic policy is introduced after the March 2005 elections, it will take decades for the economy to recover. The rapid implementation of the land reform programme (which has had major knock-on effects in the services and industrial sectors) has caused huge disruption, HIV/AIDS has had an increasingly adverse impact and the hugely negative interest-rate policy of recent years has led to a devastating erosion of national savings.

Inflation Despite having risen rapidly in 2003 (peaking at 623% in January 2004), the increase in the inflation rate seems to have levelled off in recent months. The latest available year-on-year rate is for June, at 395%. Even if inflation does pick up in the second half of the year, as food shortages start to re-emerge and administrative prices are raised, the recent slowdown in the rate of increase does seem to have broken the momentum seen in 2003 and we expect the rate to average 420% for the year. Even with an improved harvest in early 2005, with government spending picking up in the run-up to the elections and demand boosted by pay rises, inflationary pressures are unlikely to subside substantially in the first half of the year. Inflation in 2005 will hence remain high, at a forecast 383%, although it should ease significantly towards the end of the year. We do not think that Zimbabwe will descend into hyperinflation unless the government completely loses control of spending.

Exchange rates The Reserve Bank of Zimbabwe (RBZ) has continued to manipulate the various exchange-rate regimes that it operates. Changes announced in July now mean that 15% of foreign-exchange earnings must be surrendered to the RBZ at the official exportersr rate of Z$824:US$1 (down from 25%). The remaining 85% has then to be sold at auction within certain timeframes. The RBZ also announced a minor devaluation of the auction exchange rate, although it has continued to

maintain close control over the auction through its ability to reject bids if it believes that the money will be used for non-essential activities. It is also unwilling to let the auction rate fall too sharply: in early August the rate was around Z$5,400:US$1, compared with the black-market rate of around Z$7,000:US$1. The problem, however, is that allowing only a modest fall in the auction rate, against a backdrop of high inflation, has continued to undermine competitiveness. In April the RBZ reintroduced support price schemes for gold and tobacco exporters and a new minimum exchange rate for migrant remittances. These changes have made the exchange-rate regime more complexand have had to be subsequently revisedbut have meant that the RBZ has avoided a major devaluation (to which the president is firmly opposed). We expect only modest further falls in the auction rate in the next two years and forecast that the combined exportersr/auction rate will average Z$4,245:US$1 in 2004 and Z$6,924:US$1 in 2005.

External sector We estimate that Zimbabwe’s export earnings were only US$1.4bn in 2003 and forecast that the country will continue to face a major foreign-exchange shortage in the outlook period, owing to falling gold and tobacco exports against a background of stagnant tourism receipts (only platinum exports should continue to perform well). Foreign-exchange shortages and falling real GDP mean that imports will continue to contract, although substantial maize imports will still be required to offset shortfalls in domestic food production. On the invisible trade account, the services account will remain firmly in deficit, owing to declining tourism earnings. The income account will follow the same trendalthough the government will continue to build up substantial debt-service arrears, it will maintain some debt-service payments. By contrast, the current transfers account will continue to show a surplus. Although official transfers will remain low, owing to a lack of donor support, private transfers are expected to hold up as the estimated 3m Zimbabweans who live outside the country send money home to support relatives in economic need. We forecast a continued substantial current-account deficit, amounting to 6.4% of GDP in 2004 and 8.6% of GDP in 2005. The government will continue to build up arrears on external debt repayments and to seek unorthodox ways of meeting its financing requirement.

Forecast summary (% unless otherwise indicated) 2002a 2003b 2004c 2005c Real GDP growth -5.6 -13.2 -8.2 -3.1 Manufacturing production growth -12.0 -11.8 -7.8 -1.7 Gross agricultural production growth -7.0 -12.0 -4.0 1.0 Consumer price inflation (av) 134.5 384.7a 420.2 383.3 Consumer price inflation (year-end) 198.9 598.7a 279.7 309.8 Short-term interbank rate 36.5 97.3a 319.8 532.5 Government balance (% of GDP) -4.1 -0.6 -5.2 -5.6 Exports of goods fob (US$ bn) 1.5b 1.4 1.3 1.2 Imports of goods fob (US$ bn) 1.8b 1.7 1.5 1.4 Current-account balance (US$ bn) -0.4b -0.3 -0.3 -0.3 Current-account balance (% of GDP) -9.1b -6.9 -6.4 -8.6 External debt (year-end; US$ bn) 4.1 4.1 4.1 4.0 Exchange rate Z$:US$ (av)d 55.0 727.9a 4,245.0e 6,923.6 Exchange rate Z$:¥100 (av)d 43.9 628.0a 3,799.5e 6,366.5 Exchange rate Z$:€ (year-end) 57.7 1,039.4a 6,346.2e 11,426.3 Exchange rate Z$:US$ (av; parallel market) 1,049.2 3,700.0 6,625.0 11,791.7 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d In February 2003 the government introduced a dual exchange rate system. While the rate of Z$55:US$1 was applicable to a range of official government transactions, all other transactions with the Reserve Bank of Zimbabwe were conducted at Z$824:US$1, the rate quoted. e On January 12th the government introduced a foreign-exchange auction for exporters. The rate quoted here is a combination of the official rate of Z$824:US$1 and the auction rate.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: August 1st 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule