Two and a half years after dollarizing its economy, Zimbabwe has recouped about half of the output lost during the disastrous meltdown years from 2000 to 2008.
The cynical, sceptical and pessimistic warn darkly that this is a classic instance of “dead-cat bounce” – a view not entirely inconsistent with that of a senior IMF official who warned last year that exchange rate stabilization programmes, such as Zimbabwe’s, have a habit of hitting a plateau after a brief period of rapid recovery.
It is the latest case in a now familiar debate amongst policymakers over how “growth spells” in Zimbabwe’s case recovery can be transformed into sustained long-run growth.
THE DOLLARIZATION EFFECT
Politicians ascribe the recovery to the truce – it is certainly not the end – in the struggle for political supremacy both within President Robert Mugabe’s Zanu-PF party, which had a monopoly of political power from 1980 to 2008, and between Zanu-PF and Prime Minister Morgan Tsvangirai’s Movement for Democratic Change (MDC).
In fact, while the truce – the establishment of what has proved to be a fractious, dysfunctional coalition government – certainly improved the atmospherics, it was dollarization that kickstarted economic revival.
Within weeks, hyperinflation – 231 million percent at the last official count in mid-2008 – collapsed, and consumer prices fell 7.7% in 2009. Even in July 2011, if official figures are to be believed – and they come with a serious health warning – consumer prices are still some 2% lower than they were at the end of 2008. Growth resumed in 2009 and accelerated in 2010/11, driven primarily by buoyant commodity demand and prices for the country’s main exports (platinum, gold, ferrochrome, tobacco and diamonds), a strong recovery in tobacco and gold output, the increased exploitation of the highly-controversial Marange diamond fields and, above all, surging consumer spending.
FRAGILE FOUNDATIONS
Unfortunately, many of these recovery drivers fall more into the “growth spell” than the “sustained growth” category.
Zimbabwe is currently spending close to 100% of its GDP on consumption, funded by foreign aid of $50 million a month, diaspora inflows ($75 million monthly), a budget deficit estimated in July by finance minister Tendai Biti at $700 million (8% of GDP) and offshore borrowings.
Capital inflows are modest – a mere $132 million in the first half of 2011 – domestic savings were mostly wiped out by hyperinflation, and investment is little more than 12% of GDP. Indeed, in the first half of 2011, the government spent no more than 40% of its capital budget, while Tsvangirai bemoaned the fact that his administration managed to achieve only a quarter of its targets.
INDIGENIZATION ACCELERATION
More importantly, there is broad acceptance that the mining sector, which has underperformed since independence in 1980, is set to drive the economy, provided upwards of $6 billion is invested in capacity expansion and exploration.
This is where politics intrudes in the form of the government’s 2007 Indigenization and Empowerment Act. This stipulates that all foreign-owned firms must dispose of 51% (at least) of their shares to indigenous (black) Zimbabweans within a period of five years.
The responsible minister, Saviour Kasukuwere, upped the ante earlier this year when he shifted the goalposts, telling mining companies, responsible for two-thirds of Zimbabwe’s exports, that they must indigenize not over five years but by the end of 2011.
In August, he ratcheted up the pressure another notch, writing to 13 multinationals telling them that they would lose their business licences if they failed to comply with the law – in this case by submitting proposals for how they would dispose of the majority of their shares – by early September.
Among the foreign firms listed were two major international banks – Barclays and Standard Chartered – major industrial companies (BAT, Nestle, Cargill) and a clutch ofmining companies, including Rio Tinto, which is developing a $300 million diamond mine, and Impala Platinum of South Africa, comfortably Zimbabwe’s largest single exporter.
Other ministers within the coalition oppose Kasukuwere’s plans, which are strongly supported by Mugabe. Economic planning minister Tapiwa Mashakada said in early September that Kasukuwere’s decision to revoke the licences of foreign-owned companies was not endorsed by the rest of the cabinet, while central bank governor Gideon Gomo announced that he would not withdraw the licences of foreign-owned banks. But such is the nature of Zimbabwe politics today that even Tsvangirai himself supports what he calls the “principle” of indigenization, while remaining silent as to how it should be achieved.
CONDITIONS FOR GROWTH
In all probability, the legislation will be watered down in the future, but there are two lessons central to ensuring that the country’s growth spell extends into sustained growth.
The first is that Zimbabwe will not grow rapidly without saving and investing more, including increased FDI, especially but not only in mining.
The second is the dysfunctionality of the coalition. Policy-wise, it is paralyzed, not just on indigenization, but on debt relief, privatization and public-sector reform. The World Bank believes that there are some 75,000 ghost workers being paid by the state, which spends some 60% of the budget on civil service wages – more than double the average for Sub-Saharan Africa.
Finance Minister Biti complains of a “culture of indifference”, so that when he warned in his mid-term fiscal review that the country simply could not afford the civil service pay award that was forced on him by cabinet, no one took any notice. Biti himself could not be more frank: the economy can grow at double-digit rates, he says, but only if the political environment stabilizes and there is a united government in office.
NEW MODEL NEEDED
It is a Catch-22 situation: the country needs a stable political environment, but unless and until there is agreement on a new constitution, currently under discussion, and on the timing of fresh elections, not to mention on the succession to President Mugabe as leader of Zanu-PF, the political climate seems destined to remain investor-unfriendly.
Optimists hope that there may be political clarity and a new popularly-elected government by the end of 2012, but, for this to happen, a number of key issues need to be resolved. If the recent past is any guide, that is unlikely to happen.
Like the US, Zimbabwe must invest more and consume less, but this is a very difficult message for leaders to sell in a country where per capita incomes are lower today than they were 30 years ago.
Yet this is a country that needs a different growth model than the one that drove the economy prior to the protracted 11-year recession. Large-scale commercial farming, closely integrated with manufacturing, has passed its sell-by date as a growth model. Smallholder farming, on a contract basis, which has been in the forefront of the trebling of tobacco output since 2008, is one way ahead. Mining, especially platinum and diamonds, but also gold, coal, chrome, nickel and coal-bed methane gas, is another. Tourism too has enormous potential.
But this massive development potential will remain untapped without unprecedented public investment in infrastructure – electricity, roads, irrigation, air transport. So long as Zimbabwe has a public debt in the region of 100% of GDP, three-quarters of it in arrears, and so long as the donor community’s support is largely confined to humanitarian assistance, this infrastructure deficit will constrain growth.
For 35 years, Zimbabwe has invested no more than 12% of GDP. Biti’s double-digit growth – implying, at the very least, investment of 30% of GDP – looks fanciful. Indeed, the government’s recently-published Medium-Term Programme, which targets growth of around 7% annually, looks more realistic. But even this depends on a quantum leap in investment spending of all kinds, to revamp obsolete and worn-out machinery, to re-equip the productive sectors and to rehabilitate the physical infrastructure.
World Bank figures show that not only have the incomes of Zimbabweans declined, they are now less wealthy than in the 1970s. The failure to save and invest is not a new phenomenon but has all the characteristics of a structural problem that will not be overcome in the short-run.
Tony Hawkins is a professor of economics at the University of Zimbabwe's Graduate School of Management