Country Report

Zimbabwe at a glance: 2004-05

OVERVIEW It seems increasingly unlikely that the president, , will countenance any serious negotiations between his ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC). Instead, given the powers of incumbency, the government!s control of the election process, and the range of repressive legislation at his disposal, he is confident that his party can win a sizeable majority in the parliamentary elections scheduled for March 2005. Although the government does not have what could be called a coherent economic policy in place, it has put together a strategy that is helping to slow the economic decline. The key to this has been the introduction of a range of exchange rates, which have sharply increased the inflows of foreign exchange passing though official channels. Against the background of a modest increase in maize production, we expect the recent rapid decline in real GDP to slow over the forecast period, real GDP contracting by 8.2% in 2004 and 3.1% in 2005.

Key changes from last month Political outlook • The government has officially announced that it will not apply for international food aid this year and has stressed the success of its land reform programme. Although we do not expect domestic production to meet demand, owing to higher inflows of foreign exchange through official channels the government should be able to import enough food by itself. This will give it absolute control over its distribution in the run-up to the March 2005 elections. Economic policy outlook • The government has increasingly started to assert that its policies are turning the economy around. Although this is clearly not the case, it does seem that the economic decline is now starting to slow. Economic forecast • The stabilisation of the inflation rate in the first quarter of 2004 has led us to revise our inflation forecast. Even if inflation picks up in the second half of the year as food shortages re-emerge, we expect it to average 471% in 2004 and to remain high at 452% in 2005 as higher government spending offsets increased food production.

June 2004

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

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Contents

Zimbabwe

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2004-05 7 Political outlook 9 Economic policy outlook 11 Economic forecast

14 The political scene

22 Economic policy

27 The domestic economy 27 Economic trends 28 Agriculture 31 Manufacturing 32 Mining

32 Foreign trade and payments

List of tables

11 International assumptions summary 13 Forecast summary 26 Foreign-exchange inflows to the Reserve Bank of Zimbabwe 27 Inflation 30 Tobacco auction sales 31 Manufacturing production 33 External debt

List of figures

13 Gross domestic product 13 Consumer price inflation 28 Auction rate 33 Changes in Zimbabwe!s debt stock

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Zimbabwe 3

Zimbabwe June 2004 Summary

Outlook for 2004-05 It seems increasingly unlikely that the president, Robert Mugabe, will countenance any serious negotiations between his ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC). Instead, given the powers of incumbency, the government!s control of the election process, and the range of repressive legislation at his disposal, he is confident that his party can win a sizeable majority in the parliamentary elections scheduled for March 2005. Although the government does not have what could be called a coherent economic policy in place, it has put together a strategy that is helping to slow the economic decline. The key to this has been the introduction of a range of exchange rates, which have sharply increased inflows of foreign exchange passing though official channels. Against the background of a modest increase in maize production, we expect the recent rapid decline in real GDP to slow in 2004-05, with real GDP contracting by 8.2% in 2004 and 3.1% in 2005.

The political scene Zimbabwe!s ruling elite has been shaken by the anti-corruption crackdown launched by Mr Mugabe. The president has sought to restore order within ZANU-PF through the arrest of a number of leading politicians and businessmen. Two by-election defeats have increased the pressure on the MDC as it searches for a new political strategy. The government has started to amend the electoral act, which will further improve its chances of winning the 2005 parliamentary elections. The international community is still struggling to reach a consensus on how best to resolve the country!s deepening political crisis. Economic policy The government has increasingly tried to assert that the new policies it has introduced are beginning to turn the economy around. Although the economic decline may be slowing, there are likely to be significant food shortages again in late 2004 and into 2005, contrary to the claims of the government. The government has re-introduced the tobacco and gold price support schemes as well as a new system to encourage remittances from the Zimbabwean diaspora. The domestic economy Inflation has started to stabilise, but it was still at over 500% in April. The Zimbabwe dollar auction rate has continued to drift down steadily during the first half of 2004. The government has announced plans to nationalise all land, but has set no firm deadlines for the process. Foreign trade and payments New data from the World Bank show that external debt rose to US$4bn at end- 2002, owing to rising arrears and the weakness of the US dollar on international markets.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: June 9th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report June 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 4 Zimbabwe

Political structure

Official name Republic of Zimbabwe

Form of state Unitary republic

Legal system Based on Roman-Dutch law and the 1979 constitution

National legislature House of Assembly with 150 members, 120 of whom represent geographical constituencies and are elected by universal adult suffrage every five years; 8 are provincial governors, 10 are customary chiefs and 12 others are appointed by the president

National elections June 2000 (legislative) and March 2002 (presidential); the next elections are provisionally scheduled for March 2005 (legislative) and March 2008 (presidential)

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

National government The president and his appointed cabinet; last major reshuffle 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 contest elections

President Robert Mugabe Vice-presidents Awaiting new appointment (following death of ) Key ministers Agriculture & rural resettlement Defence Education, sports & culture Energy & power development Environment & tourism Finance & economic development Chris Kuruneri Foreign affairs Stanislas Mudenge Health & child welfare Higher & tertiary education Home affairs Industry & international trade Information & publicity Justice, legal & parliamentary affairs Local government, public works & national housing Mines & mining development State security Transport & communications Chris Mushowe Water resources & infrastructural development Joyce Mujuru Youth development, gender & employment creation Reserve Bank governor

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Economic structure

Annual indicators 1999a 2000a 2001a 2002b 2003b GDP at market prices (Z$ bn) 210.4 320.0 507.8 1,067.6 4,527.5 GDP (US$ bn) 5.5 5.4 4.7 4.5 4.3 Real GDP growth (%) -0.7 -4.9 -8.4 -13.0 c -13.2 Consumer price inflation (av; %) 58.1 55.7 74.5 134.5a 384.7a Population (m) 12.4 12.6 12.8 13.0 13.1 Exports of goods fob (US$ m) 1,932.5b 2,194.7b 1,608.7b 1,418.1 1,389.4 Imports of goods fob (US$ m) 1,675.1b 1,849.0b 1,778.7b 1,822.2 1,704.4 Current-account balance (US$ m) 29.4b 40.8b -391.0b -478.1 -326.0 Foreign-exchange reserves excl gold (US$ m) 268.0 193.1 64.7 83.4a 60.0 Total external debt (US$ bn) 4.6 4.0 3.8 4.1a 4.1 Debt-service ratio, paid (%) 24.0b 17.1b 6.3b 6.5 6.3 Exchange rate (av) Z$:US$d 38.30 44.42 55.05 55.04a 727.88a a Actual. b Economist Intelligence Unit estimates. c Official/IMF estimate. d In February 2003, the government introduced a dual exchange rate system. While the rate of Z$55:US$ is applicable to a range of official government transactions, all other transactions with the Reserve Bank of Zimbabwe will now be conducted at Z$824:US$1 which is the rate now quoted.

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

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

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

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Quarterly indicators 2002 2003 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (Z$ m) Revenue & grants 55,832 66,721 70,618 111,813 n/a n/a n/a n/a Expenditure & net lending 83,732 73,133 94,417 112,383 n/a n/a n/a n/a Balance -27,900 -6,413 -23,799 -570 n/a n/a n/a n/a Total domestic debt (end-period) 247,515 304,171 335,893 346,263 n/a n/a n/a n/a Output Manufacturing index (1990=100) 68.3 72.8 75.7 74.1 61.3 64.9 65.7 64.5 Manufacturing index (% change, year on year) -11.1 -17.0 -18.1 -19.2 -10.2 -10.9 -13.2 -13.0 Prices Consumer prices (1995=100) 1,312 1,559 2,046 3,053 4,189 6,440 10,840 20,904 Consumer prices (% change, year on year) 115 117 133 174 219 313 430 585 Producer prices (% change, year on year) 105.1 94.7 99.0 n/a n/a n/a n/a n/a Financial indicators Exchange rate Z$:US$ (av) 54.95 54.95 54.95 54.95 312.17 826.45 826.45 826.45 Exchange rate Z$:US$ (end-period) 54.95 54.95 54.95 54.95 826.45 826.45 826.45 826.45 Bank rate (end-period; %) 57.2 57.2 57.2 29.7 41.9 56.2 65.0 300.0 Lending rate (av; %) 30.8 33.7 35.8 45.8 47.4 54.8 89.3 197.7 Treasury bill rate (av; %) 31.0 30.3 26.7 26.0 28.6 56.2 55.9 70.2 M1 (end-period; Z$ bn) 159.3 179.6 252.2 356.6 550.1 790.6 1,544.1 2,086.7 M1 (% change, year on year) 136 117 138 170 245 340 512 485 M2 (end-period; Z$ bn) 222.1 263.0 363.1 529.0 757.2 1,122.8 2,017.8 2,803.8 M2 (% change, year on year) 122 114 139 192 241 327 456 430 ZSE Industrial index (end-period; 1967=100) 48,091 77,233 99,521 103,495 179,531 277,302 648,933 401,543 Sectoral trends Tobacco auctions (annual totals; ‘000 tonnes)a ( 167 ) ( 82 ) n/a Gold production (kg) 3,846 4,091 3,920 3,612 3,124 3,080 2,880 3,481 Gold production (Z$ m) 3,018 3,494 4,081 5,701 12,956 28,442 28,364 67,896 Chrome ore production (‘000 tonnes) 180 193 206 171 133 169 176 159 Chrome ore production (Z$ m) 1,118 1,314 2,301 2,640 4,269 5,999 15,272 33,760 Platinum production (kg) 197.7 707.6 678.6 722.4 909.6 1,163.5 964.3 1,232.4 Platinum production (Z$ m) 565 1,277 1,808 3,017 12,192 17,812 14,657 21,119 Foreign trade (US$ m)b Exports fob 215.68 189.84 192.99 172.50 233.79 212.29 n/a n/a Imports fob -446.08 -458.12 -458.41 -471.56 -490.46 n/a n/a n/a Trade balance -230.40 -268.28 -265.42 -299.06 -256.67 n/a n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 79.1 69.9 87.3 83.4 n/a n/a n/a n/a a Provisional data for 2003. b 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 2004-05

Political outlook

Domestic politics Recent public pronouncements by the president, Robert Mugabe, seem to indicate that he is unlikely to countenance any serious negotiations between his ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) and the opposition Movement for Democratic Change (MDC). Instead, it increasingly seems that the president is in no mood to compromise with the opposition or 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 effectively 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 also be used to harass the opposition when it shows any sign of campaigning. Finally, the Mugabe government’s control of voter registration and the voting process is so tight that, when taken with the repressive measures listed 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 free and fair by the international community. However, Mr Mugabe has already shown over the last few years that he can withstand international disapproval. But there remains a possibility that he may even feel confident enough to offer come concessions to the international community in the run-up to the vote. If this is to occur, 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 of the Southern African Development Community (SADC). A more likely outcome is that the president will not agree to any concessions, and will only begin to re-engage with the international community 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 government’s 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

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minority party makes little difference in how Mr Mugabe rules the country. Moreover, this faction argues that the party!s participation would only give the polls legitimacy. On the other hand, some MDC 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 the place of the MDC. The rapid economic decline of the last three years and Zimbabwe!s continued international isolation has made the situation within ZANU-PF more volatile. Although Mr Mugabe still appears to be in good health, many people, both inside and outside his party, expect that he will soon be plagued by physical ailments now that he is 80 year old. Mr Mugabe seems to have a firm grip on the party, but senior party officials 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. It appears that Mr Mugabe has also manipulated the balance within ZANU-PF to hamper ambitious contenders. The anti-corruption campaign has now implicated the speaker of parliament, (considered by many to be the most likely potential successor to Mr Mugabe) and many of his associates. Mr Mugabe has always been skilled in playing the various factions in ZANU-PF off against each other and he is expected to continue to do so 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 Africa’s 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 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-PF"freezing 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 the Western powers have over his country. That will permit ZANU-PF and the youth militia to campaign as brutally as they want 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 also 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 keep the population on hunger rations. This means that 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, it is unlikely that either of these

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leaders will show the high level of commitment needed to encourage Mr Mugabe to allow fully free and fair elections. It is unlikely that they will be prepared to apply the political and economic pressures required to ensure that there is at least some progress on the reform of the electoral laws before the March 2005 parliamentary election.

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 the new central bank governor, Gideon Gono, it has put together a strategy which is helping to slow the economic decline. The key to this has been Mr Gono!s introduction of a range of exchange rates and export subsidies, which have sharply increased 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 to 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, which could be maintained into 2004, it appears that the economy has reached a new, lower economic equilibrium, with the reduced foreign-exchange earnings now 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, although as there is limited new economic data this analysis of the economy must be treated with caution. However, all this is still some way from having a coherent policy that will drive a substantial economic recovery. This will only be possible after the election is held in March 2005 and, even then, it seems unlikely that any real recovery will be possible without international support and substantial new lending. This, in turn, will only be possible if the election results are recognised internationally and the government is willing to make substantial concessions with regard to exchange-rate and land-reform policies, which will take some time.

Fiscal policy The new finance minister, Christopher Kuruneri (appointed in February 2004), faces charges for breaching foreign-exchange controls as part of the president!s anti-corruption campaign. The senior civil servants now controlling fiscal policy in the Ministry of Finance will be unwilling to fundamentally alter the policy of recent years: the government is currently using fiscal creep to keep the budget deficit under control. Essentially, fiscal creep allows revenue to grow in line with inflation, whereas expenditure growth is kept lower than the inflation rate (although high in nominal terms); this allowed the government to run a balanced budget in 2003. The policy will remain broadly unchanged in 2004 and the Economist Intelligence Unit forecasts a fiscal deficit of 3.9%. With elections scheduled for March 2005, the government is likely to use the November budget to announce a series of expenditure increases, notably wage

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rises, that will come into effect early in 2005. We forecast that these will push the deficit up to 5.8% of GDP in 2005. However, although the basic fiscal data seem broadly positive, it should be noted that the government figures exclude expenditure by parastatals. This is substantial and the true extent of the budget deficit could turn out to be substantially 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 because the cost of financing the deficit is much reduced and the value of the domestic debt stock is quickly eroded, this is at the expense of the private sector, which is forced to finance the deficit.

Monetary policy Gideon Gono"who was appointed as the new governor of the Reserve Bank of Zimbabwe (RBZ, the central bank) in late 2003"is now the main driving force shaping economic policy in the country, although monetary policy has changed little since his appointment. The RBZ will continue to try and 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 government!s 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 is set at a higher rate. The RBZ is also keen for commercial banks to charge higher lending rates. However, the temporary rise in commercial lending rates in early January, coupled with the collapse of the stockmarket and property prices, prompted a liquidity crisis for seven leading commercial banks. The RBZ has since provided temporary liquidity to the market and placed two smaller banks (Intermarket and Barbican) under curatorship, which has temporarily resolved the crisis. It has also announced that commercial banks must obtain an international credit rating from a reputable agency by December 2005, which could force many smaller banks to close, but may at least avert a wider run on the banking system. Meanwhile, with inflation hovering around the 600% level in 2004, real interest rates on short-term government debt will remain between -400% and -500%, which will continue to have a hugely distorting effect on the economy as it ensures a major transfer of wealth from the private to the public sector. Moreover, by continuing to fund the government’s fiscal deficit, monetary policy will do little to reduce the rampant inflation.

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Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.9 4.8 4.2 OECD 1.6 2.1 3.5 2.8 EU 25 1.2 1.0 2.1 2.3 Exchange rates ¥:US$ 125.3 115.9 112.3 108.5 US$:€ 0.945 1.132 1.200 1.293 SDR:US$ 0.772 0.714 0.689 0.663 Financial indicators € 3-month interbank rate 3.33 2.33 2.10 2.14 US$ 3-month Libor 1.80 1.21 1.44 3.11 Commodity prices Oil (Brent; US$/b) 25.0 28.8 33.5 26.0 Gold (US$/troy oz) 310.3 362.8 421.3 375.0 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 6.4 2.5 Industrial raw materials (% change in US$ terms) 2.2 12.7 20.3 -2.7 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 4.8% in 2004 and to remain high in 2005, at 4.2%. However, the recovery in the world economy will have little impact on Zimbabwe’s economy given the country’s 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, for example, are much more important in determining the fall in gold exports and the rise in platinum exports, than international prices, which are expected to remain high in both cases in both 2004 and 2005.

Economic growth Economic activity is set to continue its decline during the forecast period, owing to the current political crisis and the lack of coherent economic policy, combined with the disruptions to the economy caused by the rapid implementation of the land reform programme and the adverse impact of drought and AIDS. In addition to the knock-on effects that the slump in commercial agriculture is having on industry and services, all businesses and mining operations are being negatively affected by shortages of foreign currency and fuel. At a time when price controls have been imposed, purchasing power is falling and near-hyperinflation persists. Real GDP contracted by around 40% between 1999 and 2003, but the rate of economic decline will slow in 2004-05, as government policy helps to ease foreign- exchange shortages and because many firms have already scaled back their operations to adjust to lower income levels. We also expect that food production will recover to a limited extent as the remaining commercial and

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small-scale farmers boost maize production. Nonetheless, real GDP is forecast to contract by 8.2% in 2004 and 3.1% in 2005.

Inflation Despite having risen rapidly in 2003 (peaking at 623% in January 2004), the rise in the inflation rate seems to have levelled off in the first quarter of 2004. The latest year-on-year rate is for April, when inflation was 505%. Even if the inflation rate does pick up substantially 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 that price increases had in 2003 and we expect the rate to average 471% for the year. Even with an improved harvest in early 2005, with government spending picking up in the run-up to the election and demand boosted by pay rises, inflationary pressures are unlikely to subside substantially in the first half of 2005. Inflation will, therefore, remain high at a forecast 452% for the year. However, there should be a significant easing of inflation towards the end of 2005 and we do not think that Zimbabwe will descend into hyper-inflation unless the government completely loses control of spending.

Exchange rates In mid-December the recently appointed governor of the RBZ announced a new system for selling foreign exchange. This requires 25% of foreign-exchange earnings to be surrendered to the RBZ at the official exporters’ rate of Z$824:US$1. The remaining 75% has then to be sold at auction within certain time frames. Although this is a more market-oriented system than the previous fixed peg, the auction is being closely controlled"the RBZ can reject bids for foreign exchange, particularly if it believes that the money will be used for non- essential activities"and the RBZ has only allowed the exchange rate to fall slowly so far in 2004. In early June, the auction rate was around Z$5,300:US$1, compared to the black-market rate of around Z$6,500:US$1. The problem, however, is that only allowing a modest fall in the auction rate, compared with the high rate of inflation, has continued to undermine competitiveness, and in April the RBZ once again introduced support price schemes for gold and tobacco exporters and a new minimum exchange rate for migrant remittances. This has made the exchange-rate regime more complex, but 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 therefore forecast that the combined exporters!/auction rate will average Z$4,072:US$1 in 2004, before falling to Z$6,673:US$1 in 2005.

External sector We estimate that export earnings were only US$1.4bn in 2003 and that Zimbabwe 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 in the forecast period). 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, owing to declining tourism earnings the services account will remain firmly in deficit. The income account will follow the same trend: although the government will continue to build up substantial debt- service arrears, it will maintain some debt-service payments. By contrast, the

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current transfers account will continue to show a surplus. Although official transfers will remain low, owing to the 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 that the overall current-account deficit will continue to be substantial, at 7.4% of GDP in 2004 and 7.7% 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 -13.0d -13.2 -8.2 -3.1 Manufacturing production growth -16.8 -11.8 -7.8 -1.7 Gross agricultural production growth -22.0b -12.0 -4.0 1.0 Consumer price inflation (av) 134.5 384.7a 470.7 451.8 Consumer price inflation (year-end) 198.9 598.7a 384.1 295.0 Short-term interbank rate 36.5 97.3a 319.8 532.5 Government balance (% of GDP) -4.4b -0.7 -3.9 -5.8 Exports of goods fob (US$ bn) 1.4b 1.4 1.3 1.3 Imports of goods fob (US$ bn) 1.8b 1.7 1.6 1.5 Current-account balance (US$ bn) -0.5b -0.3 -0.3 -0.3 Current-account balance (% of GDP) -10.6b -7.5 -7.4 -7.7 External debt (year-end; US$ bn) 4.1 4.1 4.1 4.0 Exchange rate Z$:US$ (av)e 55.0 727.9a 4072.4f 6673.4 Exchange rate Z$:¥100 (av)e 43.9 628.0a 3626.3f 6150.6 Exchange rate Z$:€ (year-end) 57.7 1039.4a 5741.3f 9937.5 Exchange rate Z$:US$ (av; parallel market) 1,049.2 3,700.0a 7,375.0f 12,541.7 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Official/IMF estimate. e In February 2003, the government introduced a dual exchange rate system. While the rate of Z$55:US$ is applicable to a range of official government transactions, all other transactions with the Reserve Bank of Zimbabwe will now be conducted at Z$824:US$1 which is the rate now quoted. f 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.

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The political scene

ZANU-PF has been shaken by Zimbabwe’s ruling elite has been visibly shaken by the anti-corruption the anti-corruption crackdown crackdown launched by the president, Robert Mugabe, in early 2004 (March 2004, The political scene). Initially most political analysts assumed that the campaign, rather like all previous anti-corruption crusades, was mainly a publicity effort by the president to improve his image with the public. However, in recent months, and particularly when the police arrested both a leading politician and a range of high-profile business leaders known for their close links with the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF), it has become increasingly clear that the current campaign is far more serious in both its scope and potential impact. Of those arrested by the police, the most prominent has been the recently appointed finance minister, Chris Kuruneri (March 2004, The political scene). He was arrested in May following press reports that he was building a luxurious home in the exclusive Llandudno Beach area of Cape Town, South Africa. Mr Kuruneri was refused bail and held in jail pending trial for illegally trading in foreign currency and holding two passports. In addition to Mr Kuruneri, a range of business leaders have also been held both in South Africa and Zimbabwe. Of these, probably the most high profile was the arrest of Mutumwa Mawere, whose African Resources is reported to employ 19,000 people in Zimbabwe. He was picked up in South Africa at the beginning of June on similar charges to Mr Kuruneri. Mr Mawere is currently fighting extradition to Zimbabwe and says he will renounce his Zimbabwean citizenship (only retaining his South African citizenship). Other prominent business leaders arrested include Philip Chiyangwa, James Makamba (a member of ZANU-PF!s central committee) and Jane Mutasa. Fearing arrest, several other top businessmen, including the heads of two banks, Julius Makoni of NNMB Bank and Nicholas Vingirai, chief executive of Intermarket Holdings, have fled the country with no imminent prospect of returning.

Mr Mnangagwa may be caught The net may also be closing in on the controversial parliamentary speaker, in the anti-corruption net Emmerson Mnangagwa, who most political analysts have long considered to be the most likely successor to Mr Mugabe 2004 (December 2003, The political scene). Mr Mnangagwa has run the party’s opaque, but undoubtedly lucrative, business empire for over a decade, which includes several major manufacturing companies and the duty-free shop at international airport. He also has close links with the commercial operations of the Zimbabwe Defence Force, as well as commercial dealings in the Democratic Republic of Congo and with Mr Mawere. At present Mr Mnangagwa has only been named as a beneficiary of a series of illegal gold and diamond sales; however, the range of charges could probably be widened if Mr Mugabe was willing to consider the move. In this respect, an investigation by the ZANU-PF politburo has been launched into the management of companies owned by ZANU-PF, including Zidco Holdings and M&S Syndicate. The investigation has also prompted Jayant Joshi and Manoo Joshi, two key directors of the ZANU-PF companies and close associates of Mr Mnangagwa, to flee Zimbabwe.

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The fact that Mr Mnangagwa has been named as a potential target in the anti- corruption drive will be a huge obstacle for him to overcome in his quest to be Mr Mugabe’s successor and suggests that the arrests are not simply an anti- corruption clean-up, but reflect a more fundamental settling of scores within ZANU-PF’s ruling elite, with the president and his loyalists making a very real and high profile attempt to crush those who were beginning to challenge Mr Mugabe!s reign at the head of the party. Meanwhile, in a rare interview with the international media in late May, Mr Mugabe told UK-based Sky News that he does not intend to step down from office until his current term expires in 2008, when he will be 84. He also publicly stated that he has no successor in mind, in a move to quell the speculation as to who will succeed him that has mounted steadily in recent months.

By-election setbacks increase As well as putting the spotlight on his own political party, the president has the pressure on the MDC also increased the political pressure on the opposition Movement for Democratic Change (MDC) which, in recent months, has suffered a series of losses in by-elections which has eaten away at the number of members of parliament (MPs) that it has. The two most recent defeats to ZANU-PF will be particularly worrying for the party, as these were in constituencies that were previously considered strongholds of the opposition"Zengeza, a Harare township, and Lupane, which although a rural seat is in a strongly pro-MDC region, Matabeleland North. To give an indication of the scale of defeat, in the 2000 parliamentary election the Zengeza seat was won by the MDC!s Tafadzwa Musekiwa, by 14,814 votes, to 5,330 for ZANU-PF!s Christopher Chigumba, but in the recent by-election Mr Chigumba secured 8,744 votes, compared to 6,706 votes for the MDC!s new candidate, James Makore. Unsurprisingly, ZANU-PF deployed all the political weapons in its armoury to secure victory, including the notorious youth militia known as the Green Bombers, the aggressively partisan police force, blatant vote-rigging and propaganda disseminated by the state media. Weeks of state-sponsored violence, including the shooting dead of one opposition supporter on voting day, was the tactic favoured in the urban Zengeza seat, while in the rural Lupane seat the distribution of food supplies for political ends was more widely deployed against the background of violence. However, the result in both these by-elections clearly shows that when the government throws all its weight, intimidation and vote-rigging into a single by-election, the opposition’s unquestioned support is not enough to win. The losses also mean that the MDC has now lost five by-elections in the past three years, while the gains made by ZANU-PF have now put the ruling party just three seats short of having a two-thirds majority in parliament, a margin that would allow it to change the constitution.

The MDC is in disarray Although some senior members of the MDC, notably the secretary-general, , have claimed that the losses will galvanise the party and its opposition to the government, the reality is that the defeats are a setback in terms of morale. They have also exposed the disarray in the party and the need for it to adopt new tactics if it is to survive. While MDC leaders, including the party!s president, , have continued to make verbal attacks on

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the government, its policies and the level of repression in the country, it has become clear that they have no effective strategy to turn the situation around. One particular problem, which was clearly visible at the recent by-elections, is that the party!s supporters on the ground are increasingly fearful of standing up for the opposition in the face of ongoing state-sponsored violence to which they have no means of responding. This was reflected in the low turnout at recent by-elections and becomes a self-fulfilling prophecy. Meanwhile, the debate within the party as to whether it should participate in the March 2005 parliamentary election under such unfair circumstances has started to gain momentum. Those advocating a boycott of the March 2005 parliamentary election argue that the voting system is so patently rigged against them, that they cannot win even where they have massive support (as witnessed in the recent by-elections). Moreover, they have posed the question as to whether MDC supporters should be made to suffer violence, torture and even death during a potentially futile election campaign. They are also concerned that their participation would probably only confer a high degree of legitimacy on a patently unfair election. On the other hand, other influential MDC members argue that if they do not contest all elections, then other opposition parties will simply step in to fill the vacuum. In particular, there is a real fear within the MDC that ZANU-PF will simply create a number of stooge parties to contest the polls. These will claim that they have had little problem campaigning in the elections and that the MDC is only refusing to contest the vote as it knows it cannot win.

The pressure continues to The sustained pressure on the MDC continues to show on individual MPs. The show on some MPs most recent example was an incident in May in which the MDC MP for Chimanimani, , wrestled with the justice minister, Patrick Chinamasa, in parliament. Mr Chinamasa deliberately provoked Mr Bennett by boasting that the opposition parliamentarian would never set foot on his coffee farm again and calling Mr Bennett’s father and grandfather thieves and murderers. Following the verbal attack, Mr Bennett jumped from his seat and shouted in Shona, “I can no longer take these insults”, grabbed Mr Chinamasa and threw him to the floor. A scuffle ensued between the burly Mr Bennett and other ZANU-PF MPs. The negative impact of such a move for the MDC, and its non-violent image, was visible after this when anti-white and anti-MDC demonstrations broke out in Harare and the eastern border city of Mutare. Meanwhile, the Mugabe government has kept up the pressure on the MDC leader, Morgan Tsvangirai; there has been no announcement of a verdict in the treason case against him, although we had initially expected an announcement in April (The political scene, March 2004). The problem for the government is that there is clearly only weak evidence against Mr Tsvangirai, and a guilty verdict would be widely seen as an overtly political decision. It would also mean that the government would face the difficult decision of whether to impose the death penalty on the opposition leader, as a conviction on charges of treason would seem to require. Delaying the verdict, in contrast, keeps the pressure up on the MDC and continues to divert not only their attention, but also their resources, from preparing for the elections. However, in a ruling on June 11th, Justice Ben Hlatshwayo dismissed the first of the MDC!s legal

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challenges on the results of the 2002 presidential election but gave no reason. A date for the second case, which is based around charges of voter intimidation, has yet to be set.

The government proposes Meanwhile, the government is channelling all its efforts towards assuring a changes to the Electoral Act ZANU-PF victory in the March 2005 parliamentary election. An important step in this direction was made when the government published several changes to the Electoral Act in the government gazette in late March. The proposed changes will have the following effects. • Change voter registration procedures to allow the government to make registration more difficult for urban voters and possible MDC supporters in rural areas. Under the proposed changes, voters will have to meet more stringent requirements over proof of residence, such as providing a receipt or a demand for payment of municipal council rates, or a sworn statement from their employer confirming their place of residence. In rural areas, voters may be required to bring "sworn oral or written statements" from their chiefs. The problem with this for MDC supporters is that many chiefs are now an integral part of the ZANU-PF campaign machinery. • Increase the number of persons eligible to cast postal ballots, notably with respect to the military, which will be under pressure to vote for ZANU-PF. • Increase state control over the drawing up of voter rolls. Critics charge that this will allow the government to maintain a high proportion of ghost voters on the register and then see that they all cast ballots for ZANU-PF. • Ensure that the government-controlled Electoral Support Commission will be the only body allowed to carry out voter education. Non-governmental organisations will be unable to carry out any voter education. The proposed changes will further tighten the government’s control over the electoral process, in a political system which many analysts have already condemned given the high degree of government control. The independent Zimbabwe Electoral Support Network (ZESN) condemned the changes, claiming that they will simply perpetuate an already flawed electoral system and “render the electoral reform exercise nugatory".

Judges are recalled from One of the legacies of the government!s land reform campaign, which involves retirement a large number of court hearings, and its attack on the judiciary, which has forced many judges to leave office, is that a huge backlog of cases has built up in the country!s courts. It is estimated that the High Court is operating with half the number of judges that it should have. As a result, the government has had to recall some judges that it pushed into retirement as recently as last year. George Smith, Rogers Kola, Mohamed Adam and Nicholas McNally have all been recalled to try and help clear the huge backlog of cases that has built up in the courts, even though they are the same judges that the government denounced as “colonial relics” just two years ago. However, legal sources have noted that it is extremely unlikely that any of the recalled judges will be assigned politically sensitive cases.

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45 private schools were shut In yet another attack on what the government claims is a symbol of white down in May privilege, in May the police closed down 45 private schools across the country. The government charged that they had illegally increased their fees without approval. Some headmasters and board members of the schools were arrested and charged. The minister of education, Aeneas Chigwedere, publicly claimed that the schools were racist and had tried to limit the number of black students by raising fees. He told one delegation from St George’s College that the government intended to take over the private schools in the same way it had seized white farms. The main problem with the government’s charges of racism is that, given the decline in the size of the white population in Zimbabwe in recent years, and the fact that those whites who remain tend increasingly to be aged with few young children, the children of the black elite predominate at the schools and it is the parents of these students who dominate the school boards as well. In fact, Robert Mugabe’s son attends St George’s. The response of most of the schools is that with inflation running at well over 500% they need to raise school fees if they are to be economically viable. Currently schools are only permitted to increase fees by 10% and the government has refused to respond to their requests to raise them any higher for a year. Eventually, after much public debate, the private schools reduced their fees and were permitted to re-open. But they desperately need to increase fees if they are to remain financially viable. Meanwhile, the government is probably hoping that by making a public attack on the private schools, it can draw some attention away from the collapse of the government schools attended by working-class and poor blacks. According to UNICEF, all of the gains made in the Zimbabwean education system since independence in 1979" by the mid-1990s Zimbabwe was close to realising its goal of education for all" have been reversed in the last few years owing to the introduction of school fees and the economic decline in the country. As a result, primary school enrolment has fallen from a peak of 90% in 2000 to around 65% at present. Even those attending school receive an inferior education compared to five years ago, with government schools suffering ongoing shortages of teachers, desks, books and all other supplies.

The ICGinternational report on community Zimbabwe As the government clearly sets out the way that it plans to secure victory in the struggles to build a consensus forthcoming parliamentary election, the international community has still failed to make significant headway in encouraging a return to democracy in Zimbabwe, or even in agreeing a plan of action. Following Mr Mugabe’s exit from the Commonwealth in December (March 2004, The political scene) he has refused to speak to any of its officials, or even to allow Commonwealth officials to visit Zimbabwe. The Commonwealth secretary-general, Don McKinnon, and his African advisors are trying to build a consensus amongst other African leaders about how to deal with the Zimbabwean crisis. But the general reluctance of most African leaders to be openly critical of Mr Mugabe was once again very apparent at the inauguration of the South African president, Thabo Mbeki, to a second five-year term on April 27th. At his inauguration ceremony, which was attended by more than 20, mainly African, heads of state, Mr Mugabe received a standing ovation and enthusiastic applause, probably second only to the cheers for the former South African

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president, Nelson Mandela and Mr Mbeki. Many South African VIPs gave clenched fist salutes to Mr Mugabe. The positive reception for Mr Mugabe at the inauguration reflects the fact that within Africa he still has the image of a liberation hero who rid his country of white minority rule. His seizures of white farms have only added to that reputation. The Zimbabwean president has also continued to play to a receptive audience of Africans who dismiss as Western propaganda reports of economic decline, the collapse of the agricultural sector, human rights abuses and repression of the press. In this vein, Mr Mugabe has astutely positioned himself as a radical African leader, who will have no relations with the West, particularly the IMF and the World Bank, and given the popularity of this position, it has become very difficult for fellow African leaders to publicly criticise him.

The South African government Pressure on the Zimbabwean president from his South African counterpart for defends "quiet diplomacy" any sort of reform has subsided during the South African election campaign and little progress has been made in fulfilling the very public pledge made to the visiting US president, George Bush, in late 2003, that by June 2004 South Africa would find a resolution to Zimbabwe’s crisis by facilitating negotiations between ZANU-PF and the opposition MDC (September 2003, The political scene). The June deadline arrived shortly after Mr Mugabe categorically quashed any possibility of negotiations in his interview with Sky News. Since then Mr Mbeki, his foreign minister, Nkosazana Dlamini-Zuma, and deputy foreign minister, Aziz Pahad, have defended their policy of “quiet diplomacy” towards Mr Mugabe and insisted that they will maintain it. The South African government has also sought to block any further international condemnation of the Zimbabwean government as it thinks that this will simply undermine its behind the scenes efforts at ending the crisis. At a meeting in Geneva of the UN Commission on Human Rights (UNHCR) in April, the EU proposed a motion to investigate Zimbabwe following reports of systematic human rights abuses. South Africa led an African bloc that voted against taking any action on Zimbabwe, arguing that only African states should make a motion on fellow African states.

Existing sanctions are shown Meanwhile, the weakness of existing so-called "smart sanctions" against the to be weak government in Harare has been brought into the spotlight in recent weeks. First, the governor of the central bank, Gideon Gono, proposes to visit the UK in mid-June to address expatriate Zimbabweans on the new methods by which they can now remit money to their home country. Despite the fact that Mr Gono has very close links to the president"previously, as head of the Commercial Bank of Zimbabwe, he was referred to as the president!s personal banker"he was somehow not on the list of 98 officials who are barred from travelling to, or holding financial assets in, the UK. In addition, in mid-June the permanent secretary of the Ministry of Defence, Trust Maphosa, confirmed that the government has placed a US$200m order for 12 Chinese fighter jets and up to 100 military vehicles. The jets are the new FC-1, developed to replace the Chengdu F-7, which was widely criticised by military experts as inefficient. Six of the Chinese jets were expected to be delivered to Zimbabwe in mid-June.

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The purchase of the Chinese military equipment highlights the difficulty the EU and the US face in imposing their arms embargo on Zimbabwe given the ready availability of alternative suppliers.

The ICG proposes a new One possible policy option that the international community could consider is strategy on Zimbabwe that proposed by the well respected Brussels-based International Crisis Group (ICG) in its April report on Zimbabwe titled In Search of a New Strategy. The report highlights the lack of progress made by the international community in engaging with Mr Mugabe and his regime to encourage change. In the report, the ICG argues that Zimbabwe is, in effect, “a de-facto one-party state” and says that all of ZANU-PF’s efforts are currently geared towards winning the 2005 parliamentary election. It calls on South Africa, as well as the EU, the US and the Commonwealth, to encourage the Harare government to hold the elections under free and fair conditions, as laid out in the norms and standards for democratic elections of the Southern African Development Community (SADC). Specifically, the ICG calls on the Mugabe government to repeal the Public Order and Security Act (POSA), the Access to Information and Protection of Privacy Act (AIPPA) and the amendments to the Electoral Act. The ICG report also urges the government to allow a full and public audit of the voters! roll and grant freedom to the news media, and calls for an end to partisan rule of law by the police. The ICG focuses on the need for South Africa and other countries in Southern Africa to encourage the Mugabe government to adhere to the SADC standards.

Amnesty highlights human Amnesty International has also highlighted the collapse in human rights in rights abuses Zimbabwe in recent years. In its annual report, it stated that there had been an escalation of serious human rights abuses, including state torture, in Zimbabwe throughout 2003 and 2004. It reported that the Mugabe government had used food as a political weapon and continued the repression of the independent press, resulting in the closure of the only independent daily newspaper, the Daily News. Amnesty also highlighted the Mugabe government’s ongoing training of young people in techniques of violence and torture as a major concern. The youth militias are blamed for spreading violence across the country.

Relations with neighbours are Although the South African government has not stepped up pressure on the also deteriorating Zimbabwean government, it is clear that some other countries in Southern Africa are becoming increasingly irritated by the fallout from Zimbabwe’s economic collapse. Botswana, in particular, has become more vocally critical of the situation in Zimbabwe. With a population of 1.7m, Botswana is struggling to cope with an influx of more than 120,000 Zimbabweans every month, most of them illegal immigrants, desperately looking for jobs, food and safety, and often resorting to theft and prostitution, particularly in the border city of Francistown. The Zimbabwean authorities have accused Botswana of mistreating Zimbabweans arrested on suspicion of crimes. Despite the increasingly strained relations between the two neighbouring countries, the irritation does not yet appear strong enough to encourage the Botswanan authorities to spearhead concerted regional criticism of Mr Mugabe. Instead, it seems increasingly likely

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that it will take considerable diplomatic skill"and some unexpected events"to bring fellow African leaders to put serious pressure on Mr Mugabe. The government arrests mercenaries allegedly on the way to Equatorial Guinea

On March 7th, Zimbabwean army troops stormed a plane at Harare airport containing 69 South African men. According to the authorities, the plane was waiting on the runway for a delivery of arms/equipment, although the ultimate use of these is not clear. According to the authorities, the arms were to be used to overthrow the government of Equatorial Guinea, while according to those seized, they were to be used as part of de-mining operation in the Democratic Republic of Congo (DRC). Since being arrested, the men, plus their leader, Simon Mann, have been held in Harare’s Chikurubi prison as courts in Zimbabwe and South Africa determine their fate (The South African government is opposing a court application to extradite the men to South Africa).

The courts have to address a number of key issues in the case, of which perhaps the most important is whether the accused have actually broken any laws in Zimbabwe. Government officials initially indicated that they would try the men on charges of plotting against the government of Equatorial Guinea. However, such a charge would have been difficult to prove as whatever plans they may have made, including the alleged conspiracy against Equatorial Guinea!s president, Teodoro Obiang Nguema Mbasogo, were made in South Africa, not Zimbabwe. More embarrassingly for the government, when it became clear that no Zimbabwean law can be used to charge them with plotting against foreign governments, it had to change tack yet again, arguing that it was preparing to try them for breaking immigration laws, for which they face limited sentences. Even this may be difficult as the men on the plane had not technically entered Zimbabwe as they had not disembarked from their plane or gone through immigration.

Another problem for the government is that no firearms were found on the plane with the men, although there is evidence that Mr Mann and some of his associates were trying to purchase the arms from Zimbabwe’s state-owned Zimbabwe Defence Industries (ZDI). The Zimbabwean authorities claim that the men were trying to purchase arms illegally. But Mr Mann’s defence lawyers argued that they had purchased arms from ZDI before, under similar circumstances, and they said they have receipts to prove it. This may prove to be very embarrassing for Mr Mugabe’s government, because ZDI has stated that it does not sell firearms or landmines and Mr Mann!s evidence could potentially show that ZDI is actually trafficking illegally in arms.

Unable to prosecute the men under domestic law, the government may simply seek to extradite them to stand trial in Equatorial Guinea. But further serious questions arise as to whether the Zimbabwean government can legally extradite the men to Equatorial Guinea. Extradition is a legal process and the government would have to apply to the Zimbabwean courts for orders to send the prisoners to Equatorial Guinea. Zimbabwe and Equatorial Guinea had no extradition treaty when the men were arrested. Most lawyers agree that the treaty, signed two weeks after the arrest of the men, cannot be effective retroactively. Any judge making a decision on the extradition request must take into consideration whether the men will receive a fair trial and humane conditions.

These are points of crucial importance because Mr Obiang’s government in Equatorial Guinea has a reputation as one of the most brutal and least law-abiding in Africa. It is generally believed that if the 70 men are sent to Equatorial Guinea they will be executed. Several lawyers in Zimbabwe have expressed fears that Mr Mugabe’s government may ignore the points of law at stake in this case. They suggest that pro-government judges will be appointed to hear the case. This fear is all the greater as Mr Mugabe has already discussed the situation of the 70 alleged mercenaries in a lengthy meeting with Mr Obiang, who flew to Bulawayo to talk the case over. Following the meeting, Mr Mugabe subsequently signed the extradition treaty with Equatorial Guinea and it was reported that he intends to send the men to the West African country in return for supplies of oil from Mr Obiang.

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Economic policy

Policy pronouncements stress That the government is obviously preparing for the March 2005 parliamentary the positive election can also be seen in the steady emergence of a new theme to economic policy pronouncements in recent months: that the government’s reform policies are not only starting to work, but that the economy is on the mend. This new trend is most noticeable with respect to a series of claims by senior government ministers that not only has its land reform programme succeeded, but that the maize crop being harvested has surpassed all records and food aid from international agencies is no longer required. In May government officials said the harvest would be 1.7m tonnes of maize, while Mr Mugabe subsequently stated emphatically in an interview with Sky News that Zimbabwe would have a record harvest of 2.4m tonnes of maize and would not need any imports of food. He said that Zimbabwe would “choke” on any further international food aid. Domestic demand is about 1.8m tonnes of maize. Mr Mugabe also denied that his government would import any food on its own. The government!s claims of a turnaround are not confined to agricultural production. Ministers have also tried to accentuate the positive in a wide range of other areas in the economy. They have made the following claims. • Inflows of foreign exchange are sufficiently strong that the Zimbabwe dollar can be expected to strengthen during 2004. Inflows of foreign exchange have been rising rapidly because exporters are successfully increasing production and sales, supported by low interest rates and other incentives. The improved export performance has been helped by generous remittances from Zimbabweans working abroad and a modest recovery in tourism receipts. • Businesses have been sustained by strong consumer demand and domestic producers are not only increasing output, but also employment levels. The government claims that many will seek to reduce prices during the year in order to retain access to low interest rates. • The government has also stressed that if producers do manage to hold prices down, coupled with the improved harvest, it is on the threshold of defeating inflation. In the last few months it has cited the recent decline in the rate of increase in inflation as proof that its anti-inflation policy is working and that the rate of inflation will fall to around 200% by the end of 2004. • The government has also placed considerable emphasis on its claims that it almost ran a balanced budget in 2003 and that the improved macroeconomic performance will help the general turnaround in the economy.

Food production is recovering, Of all the government!s claims, its assertion that food production will reach but the turnaround is slow record levels and that its land reform programme is working is probably the easiest to cast doubt over. Although Mr Mugabe has continued to insist that the country will produce enough food to feed itself this year and has no need to request international food aid, the most recent independent surveys, one by the Civic Monitoring Programme released in March 2004 and the other by the US Agency for International Development-supported Famine Early Warning Systems Network in late May 2004, indicate a complicated and somewhat

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mixed picture. Estimates of the expected maize harvest have proved difficult to assess, particularly as a significant proportion of the maize planted does now seem to have been lost in the lengthy dry spell from January to late February 2004, so that the average yield over the lands planted to the crop seems likely to be below one tonne per hectare. There has also been official obstruction of attempts to assess the harvest. However, both surveys indicate that, as the government has been keen to point out, there has been an improvement in food availability in early 2004. But there are substantial variations by region, with increased food production in some, such as the Midlands and Mashonaland, but little gain in others, especially Matebeleland. There is also a growing problem of food shortages in the cities (March 2004, The domestic economy: Agriculture). Finally, a new theme of the analysis is that even if food is available in markets, the high prices and falling income levels of rural and urban households mean that buyers cannot afford it. This has created a large section of the population that either engages in casual work for food, waits for food aid to be provided, or has to sell assets to fund food purchases.

Current maize production Another problem is that although following the start of the harvest more food should last to October is now available, large quantities were harvested prematurely for consumption as green-roasted corn on the cob. The quantity of maize available to be milled into maize meal for use during the rest of the year could therefore turn out to be less than 800,000 tonnes, at least half of which would be milled and consumed in rural areas by the families who grew it. If 300,000-400,000 tonnes are sold to, or acquired, by the Grain Marketing Board (GMB) on behalf of the government, this plus the balance of stocks remaining would appear to be sufficient to ensure maize meal supplies until only about October. However, past experience suggests that the distribution of maize meal across the country will not be left to the commercial sector when shortages become evident. As a result, some regions might start to experience severe shortages even earlier. Given that the next harvest will not come in until March 2005, in general this would mean that food shortages could mount steadily for a period of at least six months. Rejecting international food aid serves a political goal

Although it would seem illogical for the government to reject international food aid given that it is likely to face food shortages towards the end of 2004 with elections just around the corner, the main reason why the government has adopted this stance is that although it has managed to exert some control over the distribution of international food aid, this has still been limited. As shown by the 200,000 tonnes of maize the government is reported to have purchased in early 2004 (March 2004, The domestic economy: Agriculture), even with the economic problems it has faced in the last 12 months it has been able to secure large quantities of food supplies itself, over which it has absolute control. If current economic policies do allow the government to capture a greater proportion of the foreign exchange coming into the country in the next six months, this will fund yet further purchases of food aid over which it will have absolute political control. Moreover, it will be distributing these supplies just as the shortages start to really come into play, which will give the government even more political leverage over voters than normal.

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Despite Mr Mugabe!s vehement claims that the country will not import food, there is already some evidence that supplies are being obtained from South Africa, and Argentina, according to the records of the South African Grain Information Service. The imports from Zambia are particularly ironic as the maize has been grown by white Zimbabwean farmers who have resettled in Zambia after their farms in Zimbabwe were seized by Mr Mugabe’s regime. Africa Confidential has also reported that it has seen details of a deal in which the Grain Marketing Board has received credit of up to US$700m to buy maize from two American companies, Sentry Financial International and Dimon Incorporated. Dimon is the world’s second-largest tobacco trader and, as part of the deal, the Zimbabwean government will provide Dimon with preferential access to purchases of the 2005 tobacco crop. Other claims of economic Similar caveats should also be placed over the government!s other claims. For recovery should be treated example, some businesses and consumers have been able to secure bank loans with caution at extremely low rates of interest in real terms, giving the impression that credit and spending are booming. However, it is far from clear whether this money has been invested productively. There are many examples of companies that have used the borrowed money simply to close the gap between revenue and the rising costs of production. Similarly, while some have access to loans at massively subsidised rates, the government makes no reference to the savers who have to bear the full costs of the subsidies (March 2004, Economic policy). The value of their savings has dwindled owing to a lack of alternative options, which has meant that many individuals and companies are having to make use of the services of banks, despite the hugely negative interest rate on offer. In addition, because much of the borrowed money has been used speculatively, there is the problem that if interest rates were to rise, many companies and individuals would struggle to service their debts, as shown in the banking crisis early in the year. Meanwhile, production figures have not yet been published for the second half of 2003, making it difficult to reach a true understanding of the state of the economy. The financial sector is still being forced to lend to the government through the statutory reserve ratio imposed on banks by the Reserve Bank of Zimbabwe (RBZ, the central bank) and the prescribed asset ratio requirements imposed on pension funds and savings institutions by the government, even though it is paying rates of interest hugely below the inflation rate. This reflects a huge transfer of resources from the private sector to the government. The RBZ!s response to continuing pressure on interest rates has been to advise the financial institutions that it will be enforcing the prescribed asset ratio requirements with more vigour to capture the 45% of total institutional assets to which it lays claim. Similarly, as demand for low-cost loan funds exceeded the amounts collected by the RBZ in the form of statutory reserves, it has also advised the banking sector that it will take action against any banks found to be in default on meeting their obligation to release 50% of total deposits to the Reserve Bank. Although low interest rates and the forced transfer of resources have helped the government to improve its fiscal position"one of its key claims of success"this alone has been insufficient. The government has also had to drastically cut

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expenditure in real terms, causing a subsequent collapse in the provision of key services such as health and education and lower wages.

The government does seem to Despite these caveats about the extent of the economic recovery, it does seem have an economic strategy that under the guidance of the new central bank governor, Gideon Gono, the government does at least have an economic policy of sorts. Essentially Mr Gono has managed to engineer a devaluation"without actually calling it a devaluation"through the introduction of a foreign-exchange auction in mid- January (March 2004, Economic policy). In late April Mr Gono supported the auction system by re-introducing gold and tobacco support prices. The following details on the support prices were given in the Monetary Policy Statement: First Quarter 2004. • A tobacco support price of Z$750/kg (18 US cents/kg) will be re-introduced and administered by the RBZ. It will be financed by increased import duties owing to the use of the auction rate to determine the value of imports. • A gold support price of Z$71,000/g(US$17.4/g) will be introduced. This will be available on total production if the mining company elects to sell all its production to the RBZ for Zimbabwe dollars, or for 25% of production if the mining company wants to retain 50% in a foreign current account (the other 25% is to be sold to the government at Z$824:US$1). In addition, Mr Gono announced that the government will offer a minimum exchange rate of Z$5,200:US$1 for Zimbabweans living overseas who repatriate their remittances through officially licensed money transfer agencies. If the auction rate falls below this rate, which it did from late April (see The domestic economy: Economic trends), then the auction rate will be used to convert the transfers. The new system, which is to be called "Homelink", should attract considerable interest given the low commission rates and the attractive exchange rate. With the RBZ officially estimating that 3.4m Zimbabweans now live overseas, even if only 10% used the scheme to remit US$100 a month, this would still provide the government with US$408m per year, far more than it will earn from either gold or tobacco.

Foreign-exchange inflows have The impact of the introduction of the auction system is already visible in the already picked up official inflows passing through the RBZ, which in the first quarter of 2004 already surpassed the total achieved in 2003. Even if the surge in the first three months of the year represents inflows delayed from 2003"when the official exchange rates were so poor that some companies and individuals delayed bringing money back into the country"the new measures should ensure that inflows remain strong throughout 2004. All this points to the fact that the government should have enough foreign exchange 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 which could be maintained into 2004-05, what seems to be happening is that the economy has reached a new, lower economic equilibrium, with the reduced foreign-exchange earnings now much closely in line with the reduced level of demand for foreign exchange. Meanwhile, the

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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 it is also generating a false impression of economic stability, although because of limited new economic data this analysis of the economy must be treated with caution.

Foreign-exchange inflows to the Reserve Bank of Zimbabwe (US$ m) Gold Governmenta Other Total 2003 Jan-Mar 39 10.6 13.5 63.1 Apr-Jun 41.1 8.5 48 97.6 July-Sep 37.6 15.1 36.7 89.4 Oct-Dec 34.6 6.3 10.7 51.6 Total 152.3 40.5 108.9 301.7 2004 Jan-Mar 67.3 45.3b 218.1c 330.7 a 50% of foreign currency earnings had to be surrendered to the government at Z$824:US$1. b From 2004, only 25% had to be surrendered to the government at Z$824:US$1. c Includes auction funds, and the liquidation of various foreign currency accounts. Source: Reserve Bank of Zimbabwe, Monetary Policy Statement, First Quarter 2004.

The impact of current policies However, it is important not to get too carried away with the idea that there is will be visible in the long term some sort of economic recovery under way. What is happening is that the economic decline is being stopped. Moreover, a major problem with current economic policies is that much of their negative impact will only really be visible in the long run. Although there are ongoing concerns about the decay in the country!s infrastructure and the lack of repairs, the real cost of this will only become clear when funds for reconstruction are needed and the loss of domestic savings becomes apparent owing to a lack of domestic capital to finance such rebuilding. Instead, Zimbabwe will have to borrow significant sums externally in order to finance any major reconstruction effort, a far more costly option.

ReformsExchange of rate banking policy regulation becomes The new governor of the RBZ is also in the process of putting in place some more complicatedare proposed again important measures to try and ensure that there is not another banking crisis in the country, such as the one that forced the central bank to close two banks in February. As part of the RBZ!s monetary policy statement for the first quarter of 2004, Mr Gono outlined proposed changes to the regulation of banks, which will require all banks in Zimbabwe to obtain a rating from a reputable international rating company from January 1st 2005. The central bank is also planning to ensure that by the end of September 2004 there are a higher proportion of independent non-executive directors on the boards of banks and that no shareholder with more than a 10% stake in a bank will be allowed to have a management role in a bank. The decision that banks should be required to obtain an international credit rating benefits Mr Gono, in that although the central bank could have taken the steps required to regulate banks more stringently, forcing some to close down and others to merge, this move takes the decision somewhat out of its hands. Zimbabwean banks now have to decide whether to seek a rating and meet the

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requirements of this, or not to do so. This is important, as the rise of the Zimbabwean banking sector in the 1980s and 1990s had close links to the policy of indigenisation and the closure of banks will have important political implications, especially if, as the Economist Intelligence Unit has argued, it is foreign-owned banks, led by those from South Africa and the UK, that emerge as the main players in the market in any major shakeout (March 2004, The domestic economy: Financial markets). Meanwhile, the main beneficiary of the proposed new policy is likely to be the Johannesburg-based, Global Credit Rating Company (GCRC), which specialises in rating banks and firms in emerging markets. GCRC already rates 12 banks in Zimbabwe and others have shown an interest in being rated, but it is worth noting that Rapid Discount House received a positive rating from GCRC but has now been closed as a result of the banking crisis earlier in the year. Meanwhile, the need to rationalise the banking sector in Zimbabwe was highlighted by the IMF in its Article IV consultations. The visiting mission estimated that an economy the size of Zimbabwe probably needs only seven commercial banks, compared to the 17 currently registered.

The domestic economy

Economic trends

Inflation stabilises, but is still Owing to the modest improvement in the country!s food supplies and the over 500% government!s ongoing attempts to limit other price increases, against the background of the large increases in the consumer price index last year and the fiscal squeeze, the relentless rise in Zimbabwe!s inflation rate in the last 12 months does seem finally to have slowed. Having reached 623% in January 2004, inflation had fallen back to 505% in April. However, the fall-back is modest and by any measure inflation is still very high and could easily accelerate, especially towards the end of this year, if new significant food shortages were to re-emerge and as the government!s efforts to control expend- iture weaken in the run-up to the March 2005 parliamentary election. In particular, the government is likely to bow to growing pressure for substantial, above-inflation wage increases, although it may not introduce these until January, even if they are announced in the November 2005 budget presentation.

Inflation (% change) 2003 2004 Oct Nov Dec Jan Feb Mar Apr Year on year 525.8 619.5 598.7 622.8 602.5 583.7 505.0 Month on month 25.3 33.6 11.2 13.7 6.0 5.9 4.8

Source: Central Statistics Office.

The auction rate continues to The RBZ has continued to allow the auction rate to drift down slowly during drift down the last few months. Having opened in mid-January at Z$4,197:US$1 and then strengthened until mid-February, the rate has slowly moved down to cross the Z$4,500:US$1 level in the second week of April. It then crossed the

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Z$5,000:US$1 level in late April and by early June the rate was trading at around Z$5,350:US$1. The future trend of the auction rate, however, remains uncertain. Although logically it should continue to fall, the introduction of price support for gold and tobacco has complicated the picture. Recent comments by government ministers that the rate could strengthen in 2004 may mean that at least the rate does not fall much further in the second half of the year.

Agriculture

Winter wheat production Government officials have continued to highlight estimates produced by the looks set to be low Agriculture Rural Extension Services (AREX) that 100,000 ha of land will be allocated to the country!s winter wheat crop this year, which will yield a 420,000 tonne harvest. The complete lack of realism in the forecast is clear from the fact that even in a good year prior to the country!s controversial land reform programme and with inputs readily available, the maximum land under wheat was 60,000-65,000 ha. According to independent sources, at best only around 30,000-35,000 ha were prepared in good time for wheat planting, which should have been completed by mid-May. According to the Commercial Farmers! Union, another problem has been a major delay in disbursing funds from a Z$50bn (US$12.3m) loan by the Agriculture Development Bank of Zimbabwe, even though the official planting season should have been completed. The government had introduced the new lending facility to try and boost wheat production this year; wheat has to be grown by commercial farmers as it requires irrigation. According to independent estimates, a wheat crop of about 60,000 tonnes is thought to be more realistic.

The WFP winds up its food Part of the difficulty of getting a complete understanding of the recent maize delivery programme harvest and of expected agricultural production in the coming year, lies in the fact that the government has, in effect, tried to stop all independent assessments of agricultural production. The president, Robert Mugabe, apparently directly ordered a team from the UN World Food Programme (WFP) to halt the crop assessment that it began in late May (although some of the early work for this has been released by the Civic Monitoring Programme). Despite acknowledging the complexity of the situation, on the basis of what

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they had already seen, the WFP team dismissed the government’s crop forecasts as “fantasy”. The WFP has been informed that it must wrap up its operations in Zimbabwe, but some WFP officials say that they will continue a skeleton programme to feed AIDS orphans and other vulnerable groups. By preventing the WFP survey, the Mugabe government has, in effect, prevented the agency from providing any substantial food aid in the coming year, as donors require an official WFP assessment of needs before pledging contributions. If, by some chance, the Mugabe government makes a late decision to seek help, it will face a major problem in that the railways and transport system may not have the capacity to transport the grain from the ports of South Africa and Mozambique. A shortage of 900,000 tonnes, for example, would have to be delivered in 30,000 30-tonne lorries, or 110 lorries every day for nine months. Allowing for loading, travelling, off-loading and returning times, this would involve about 700 lorries for the full period to handle just the maize, assuming the food supplies and lorries can be found at short notice.

The government announces it Just as it seemed that agricultural production might be about to start to recover may nationalise all farmland again, the sector could potentially be dealt another blow, the minister of land reform and resettlement, , having announced on June 8th in an interview with the state-owned Herald newspaper that the government intends to nationalise all of the country!s farmland. According to Mr Nkomo, "all land shall be state land and there will be no such thing called private land". Although Mr Nkomo did not outline a timetable for the proposed nationalisation of the country!s land, he did indicate that the government!s preferred option would be to issue 99-year leases"referred to as "in perpetuity""for productive farmland and 25-year leases for wildlife and conservation areas. He also called upon all remaining landowners to offer their land to the government so that they could be considered for the leases. Although controversial, such a system is not unusual in the African context: it is usually seen as a way of conferring land rights to private owners in a situation where all land is already owned by the government or has tribal ownership, rather than a system to be used in preference to private land ownership. Perhaps more importantly in this case, the government does not seem to be offering any compensation for the land it will acquire, which will further undermine confidence in the system and which has raised concerns that leases could easily be terminated as and when the government sees fit. There are also concerns that the process will not be confined to farmland, but that residential, commercial and industrial properties will all become subject to state seizures.

The annual tobacco auctions The annual auction of Zimbabwe’s flue-cured tobacco crop began in April have opened under a new system. The Tobacco Industry and Marketing Board is now operating the auctions under a new dual production and marketing system, which has just nine contractors offering the crop for sale while three traditional auction floors will buy the crop. The Board hopes that the new system will boost the indigenisation of the auction floors, as well as helping to support the price, given the substantial fall in production in recent years, which has reduced the supplies to the floor and the interest of international buyers. In 2000 237m

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kgs of tobacco were sold at the auctions, dropping to 167m kgs in 2002 and then 80m kgs in 2003. Zimbabwe has now fallen from being the world’s second- largest exporter of tobacco, a ranking it held for years, to being below the top six which are: Brazil, the US, India, , Italy and China.

Tobacco auction sales 1999 2000 2001 2002 2003 Amount sold (m kg) 192 237 202 167 80 Average price obtained (US$/kg) 1.74 1.69 2.68a 2.40 2.00 a The price was significantly boosted in this year by illegal currency trading. Sources: Robertson Economic Information Services; Zimbabwe Tobacco Growers Trust.

According to the Zimbabwe Tobacco Association (ZTA), the number of Zimbabwe’s large-scale growers of tobacco has decreased from 1,738 in 2000 to 700 in 2004, although this has been partially offset by an increase in the number of small-scale producers, who have nearly doubled from 8,535 in 2000 to 16,700 in 2004. The problem is that the small-scale producers are not as productive and the national yield per hectare has dropped from 2.8 kgs/ha in 2000 to 1.48 kgs/ha in 2004. This means that the crop expected to be sold at the auction looks set to fall to only 55m-60m kgs. However, the changes to the auction system do seem have provided some support to the price, with the average price, as of June 8th, close to US$2/kg, similar to that in 2003.

Horticulture suffers a blow One of Zimbabwe’s largest remaining producers of horticultural products, with the seizure of Kondozi Kondozi Fresh Produce, was violently seized by government supporters over the Easter holiday. More than 4,500 workers were thrown out of the farm by government agents and left in the open by the roadside without food. There had been a long wrangle over the Kondozi property in Odzi, in eastern Zimbabwe, which the minister of agriculture, Joseph Made, first seized during Christmas 2003. Following the Easter seizure, the majority shareholder in Kondozi, Edwin Moyo, announced in May that the company will liquidate all its operations in Zimbabwe and relocate its operations to Mozambique and Zambia. Kondozi operations director, Piet De Klerk, stated that the seizure of the firm had resulted in the loss of more than Z$60bn (US$14.7m) in terms of lost business and equipment. He said that his organisation had lost over Z$20bn of movable assets alone, which included 48 tractors, four Scania trucks, five UD 90 trucks, several T35 trucks, four vehicles that were used by management and over 26 motorbikes. Kondozi Fresh Produce was one of Zimbabwe!s biggest horticultural exporting concerns supplying produce to supermarkets in the UK, Europe and South Africa. The company!s outgrowers also face imminent closure owing to a lack of financing and markets after the seizure. Highly placed sources in Odzi said that the 35 outgrowers who depended solely on Kondozi Fresh Produce for the financing of their agricultural business and the marketing of their produce were winding up their operations owing to financial problems. Meanwhile, Mr Moyo announced that he has secured a lease for 800 ha of land in Mozambique and purchased 2,000 ha in the Gwembe Valley area of Zambia, where the newly re- established Kondozi intends to operate state-of-the-art irrigation equipment including 20 centre pivots, on which it has deployed management teams from

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the invaded Kondozi farm. An additional boost to the company comes from the fact that the areas acquired are more tropical than those in Zimbabwe, which will allow all-year production. Mr Moyo also announced that he had stopped construction of a packhouse that had been earmarked for Mutare, Zimbabwe, and that the packhouse will now be built in Manica, Mozambique. The packhouse will serve as the hub of all export activities and will be used to house handling facilities for horticulture and fresh produce being prepared for shipment to export markets. Mr Moyo also announced that he had secured US$30m in loans to help the transfer from a range of backers including the Industrial Development Corporation of South Africa, PSOM of the Netherlands, Tescos of the UK and Barclays Bank.

Cotton production shows According to the Zimbabwe Commercial Cotton Growers! Association (ZCCA), some growth in 2004 cotton will replace tobacco as Zimbabwe!s main agricultural export, bringing in a total of US$120-150m in the year, compared to the US$50m that tobacco will earn. Cotton production has picked up in the last few years, despite the problems in the agricultural sector, as around 80% is grown by small-scale farmers, coupled with the fact that the crop is relatively drought resistant. According to the ZCCA, total production in 2004 could be as much as 300,000 tonnes of seed cotton, compared to 250,000 tonnes in 2003, of which just under 10% is used domestically. However, the sector faces a crisis, with farmers being offered Z$1,800/kg (33 US cents/kg) while the ZCCA estimates that production costs are around Z$2,000/kg. If prices remain at current levels, they will act as a major disincentive to production in 2005.

Manufacturing

Manufacturing output fell Faced with rising production costs, falling demand and major foreign-exchange sharply in 2003 shortages, most manufacturing companies continued to see a fall in production in 2003, according to data from the Central Statistics Office. Overall, manufacturing production fell by 11.8% in 2003, compared to 2002, with the largest decline in textile production and the wood and non-metal industries. In only one sector, drinks, did output rise, but output in this sector had contracted by 35.9% in 2002 compared to 2001. The particularly large fall in production in the non-metal industries category was due to severe cuts in cement production from March to June because of reduced coal deliveries. However, improved output in the second half of the year meant that the index fell by only 29.8% compared to 2002.

Manufacturing production (Index 1990=100) Food Drink Textiles Clothing Wood Paper Chemicals Non-metals Metals Transport Other All Jan-Dec 2002 65.2 61.8 49.4 108.4 205.8 69.5 79.1 85.5 65.8 41.2 52.1 72.6 Jan-Dec 2003a 48.5 62.0 32.0 104.4 162.9 61.2 68.0 60.0 65.4 38.6 33.4 64.0 % change -25.6 0.3 -35.2 -3.6 -20.8 -11.9 -14.1 -29.8 -0.6 -6.4 -35.9 -11.8 a November and December data are still provisional. Source: Central Statistics Office.

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Mining

Changes are made in the One of the few sectors of the Zimbabwean economy to have grown in recent management of Zimplats years has been platinum mining. However, the main player in the Zimbabwean platinum-mining sector, Zimplats, has been shaken by the resignation of its chief executive officer, Roy Pitchford. Mr Pitchford, who is well respected in the mining field, has signed on as the chief executive of a South African firm, Southern African Resources. It is believed they offered him a package equal to the one he was receiving at Zimplats, but in hard currency, which makes it much more appealing. Other senior executives at Zimplats expressed surprise at Mr Pitchford’s move and said they did not believe he was encouraged to leave by the board, although mining analysts did note that Mr Pitchford has rarely stayed at any job for more than three years. Whatever the reason for Mr Pitchford’s departure, Zimplats took advantage of the change to restructure its board. Liz Chitiga, former chief executive of the state’s Minerals Marketing Corporation of Zimbabwe, is expected to be named chairperson of the board of the Zimplats-controlled Makwiro Platinum Mines. Makwiro operates the Hartley and Ngezi platinum mines as well as the Selous metallurgical complex. Previously Ms Chitiga was a non-executive board member at Zimplats, but it is expected that she will now play a much more active role in the company. Her promotion will also help Zimplats withstand any possible criticism from the Mugabe government about not having enough black Zimbabweans in top positions. Despite the changes, Zimplats is expected to complete its financial feasibility study on developing the Ngezi underground mine and to move ahead with plans to issue new shares to fund the min and its planned indigenisation programme.

The government urges further In addition to the government!s apparent plans to nationalise all agricultural indigenisation of mining land, senior members of the government have also made several statements urging the mining sector to speed up ownership of the sector by indigenous, or black, Zimbabweans. A plan currently under discussion with the Chamber of Mines is based around the principle that mining companies will seek to transfer 49% of their existing operations to indigenous mining firms. However, it should be noted that the mining sector has been carrying out such a policy for some time and that there has been a substantial transfer of ownership in the last few years, to the extent that local mining analysts estimate that a majority of the mining firms are already controlled by black investors.

Foreign trade and payments

External debt arrears mount According to the World Bank!s recently published Global Development Finance rapidly 2004, Zimbabwe!s external debt rose moderately in 2002, to end the year marginally back over US$4bn. Having fallen from a peak of nearly US$5bn in the mid-1990s, the country!s external debt fell steadily to reach only US$3.91bn at the end of 2000. This reflected the fact that external debt repayments were maintained against the background of only limited new lending. This trend continued in 2001 with the external debt stock falling to only US$3.7bn by the end of the year. However, in 2002 the stock actually rose to US$4.07bn.

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However, the increase in the external debt stock does not reflect any fundamental change in lending patterns. In fact, new lending to Zimbabwe has continued to fall sharply in the last few years and is unlikely to pick up substantially over the outlook period. Instead, the modest increase in the debt stock is the result of two factors, First, the country!s repayment record has deteriorated in the last three years, causing a build-up of interest arrears to be added to the country!s external debt stock. From having no interest arrears in 1999, these rose to US$156m at the end of 2001 and doubled to US$287m at the end of 2002. Similarly, principal arrears have escalated rapidly in recent years to US$967m at the end of 2002. The second factor driving up the debt stock in US- dollar terms was the appreciation of the euro against the US dollar: just over 30% of the country!s external debt is denominated in euros. However, with some repayments and very limited new lending, these factors should be offset leaving the debt stock broadly unchanged in 2004-05.

External debt (US$ m) 1998 1999 2000 2001 2002 Debt stock Total debt stock 4,669 4,440 3,911 3,726 4,066 Long-term debt 3,494 3,325 3,065 2,936 3,269 IMF credit 407 369 281 262 280 Short-term debt 768 746 565 528 517 Debt flows Disbursements 570 437 171 40 25 Principal repayments 763 454 292 72 33 Net flow on debt -402 -38 -354 -174 -150 External debt arrears Interest arrears 0 0 52 156 287 Official 0 0 39 127 239 Private 0 0 13 30 47 Principal arrears 9 13 163 519 967 Official 1 13 106 388 757 Private 8 0 57 131 210

Source: World Bank, Global Development Finance, 2004.

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Despite the claims of the RBZ, One of the few new pieces of data to be published by the Reserve Bank of tourism is not recovering Zimbabwe (RBZ, the central bank) in its monetary policy statement for the first quarter of 2004 was on tourism. The RBZ was keen to put a positive spin on developments, pointing out that the number of tourists rose from 739,284 in 2002 to 1,089,256 in 2003 and that earnings from the sector were up by 40.4%, from US$11.4m in 2002 to US$16m in 2003. However, the supposed recovery in tourism turns out to be a hollow claim when the performance in 2003 is compared to years other than 2002. The number of tourist arrivals was nearly 2m in the late 1990s, so at best tourist numbers have halved in recent years. Moreover, the current numbers appear to include cross-border traders up to November 2003, who have been counted as tourists because they spent more than 24 hours in Zimbabwe. The data for tourism earnings show a decline from US$203m in 1999 to US$32m in 2001 and only US$11m in 2002, before a modest recovery to US$16m in 2003.

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