After a decade of social and economic decline Zimbabwe is on the road to recovery, albeit one constrained by political bickering at home and global recession abroad.
During the dark decade to 2008 income per head fell 45% to an estimated $300 in 2009, formal sector employment collapsed from 1.6 million in the late 1990s to 600,000 people – 236,000 of them in the public sector – while exports of goods and services this year will be worth some $1.3 billion, little more than a third of the peak figure recorded in 1996.
Extrapolating the IMF’s medium-term projection of GDP growth of 6% annually, it would take at least a dozen years to regain the per capita income levels of 1997 – a tough ask given that only during the period of UN mandatory sanctions against the former Rhodesia did the economy achieve such a growth rate, and then for a period of just five years.
A year ago, three political parties under intense pressure from the Southern African Development Community spearheaded by South Africa, signed a so-called Global Political Agreement to establish an “inclusive government” in the country.
It took a further five months to set up the unwieldy interim government that is battling against deep internal divisions to establish a credible administration.
Still riven
Just how difficult a task this is was highlighted when the administration split over last month’s IMF allocation to Zimbabwe of some $510 million in SDRs (Special Drawing Rights) with finance minister Tendai Biti and central bank Governor Gideon Gono in public disagreement over how the money should be used. Eventually the IMF was drawn into the dispute saying that control of the funds rested with the “fiscal agent” – the finance minister, who says he wants the money to be invested in the country’s run-down physical infrastructure.
Zimbabwe desperately needs an IMF programme as a precursor to seeking debt relief – the country is not eligible for Highly Indebted Poor Country (HIPC) debt relief, though in all probability this will change – but for this to happen two main obstacles must be overcome.
The first is political: a full-blooded acceptance of the interim administration by the major donors, who to date have confined their support for humanitarian, or humanitarian-plus assistance. The second is economic. During this month’s visit by the EU Troika to Zimbabwe to meet the two leaders of the government – Mugabe and Morgan Tsvangirai, the prime minister – the visitors reiterated their call for a range of governance reforms as a precondition for the resumption of economic aid. It was a demand that was flatly rejected by Mugabe’s supporters in the interim cabinet.
The best way around this obstacle would be to hold fresh elections under UN supervision that could, in all probability, return Tsvangirai as president and his Movement for Democratic Change (MDC) party with a substantial parliamentary majority.
The agreement stipulates that a new constitution be drawn up, under which elections would be called theoretically before the end of 2010. But like the inclusive government, the constitution drafting process is stuck in the sand, and there is pressure from two of the three parties to the GPA (global political agreement) – Mugabe’s Zanu-PF and Arthur Mutambara’s tiny breakaway wing of the MDC (known as MDC-M) for the inclusive government to fulfil a normal five-year parliamentary mandate.
The two parties fear being obliterated at the polls, believing that the longer the inclusive government holds sway the greater the probability of voter disillusion, given that the Tsvangirai MDC would fail to deliver on its promises. Such an outcome would condemn the country to another four years of near-stagnation as donors, lenders and investors alike sit on their hands awaiting the return of political stability.
The economic obstacle is the need for the interim administration to put together a coherent medium-term economic recovery programme around which donors can coalesce.
Development of a plan
Work is underway on such a plan at the Ministry of Economic Development, amid some criticism that with the UNDP (UN Development Programme) having already published a Comprehensive Economic Recovery Programme for Zimbabwe a year ago along with a number of background working papers, what is really required is a more tightly focused document in the form of an interim Poverty Reduction Strategy Paper.
Whichever form it takes, compilation of a medium-term programme is bedevilled at one level by political infighting, not just between the three parties, but also between some Mugabe-appointed senior civil servants and their MDC ministers, and at another by the sheer lack of administrative capacity within the public service.
A prominent casualty of the 10-year crisis was the middle class – doctors, teachers, administrators, managers, engineers, artisans and IT personnel – which emigrated en masse to South Africa, Botswana, Australia, the UK and North America.
Donors with their penchant for using past strategies for fighting each new war have been slow in coming to terms with this reality. Worse, they repeat the tired mantra of Zimbabwe’s strong educational system. No longer. In the “new” Zimbabwe it is not just skills that are at premium but the capacity to regenerate those skills that have gone – trainers, teachers, lecturers and indeed, much of the institutional fabric of the education and health systems are rare on the ground.
For these and many other reasons, the “new normal” Zimbabwe economy will be very different from that of the 1980s and 1990s. New business models will be needed at both macroeconomic and company level.
Some macroeconomic reforms are already in place. Dollarization in early 2009 – a market-driven event not a policy-managed process – has curbed inflation, which was running at 500,000,000,000% late last year, and which was reversed in the first five months of 2009 when prices fell some 10%.
In the last two months inflation has begun to resurface, with prices up 1.5% in the last two months, but over the year as a whole, inflation is unlikely to exceed 4%.
Along with dollarization, cash-budgeting announced by finance minister Biti put an end to quasi-fiscal operations – what western governments more politely like to call “quantitative easing” – amounting to over 50% of GDP in 2007/08.
While this contributed to the return of price stability, it has also forced the government to live within its means, which meant paying civil servants “allowances” of $100 a month in lieu of “proper salaries”, subsequently increased to between $150 and $300. This necessary adjustment to reality is exacting a heavy cost in terms of actual and threatened industrial action by doctors, teachers and public servants, all demanding monthly salaries of $400 a month and more.
Dollar doldrums
Dollarization has its downsides. A decade of chronic inflation and hyperinflation left the country with an elevated price, cost and wage structure. In this situation, a government would normally resort to currency devaluation, but with no currency to devalue, Zimbabwean businesses have been forced to cut costs, rationalize work forces and curb wage awards in an effort to restore competitiveness.
This will not be easy. In September the World Economic Forum ranked Zimbabwe 132nd out of 133 countries (only Burundi fared worse) on its Global Competitiveness Index, while the country was bottom of the class for macroeconomic stability.
In the late 1990s the country was ranked 45 out of 51 countries. Highlighting what needs to be done too, the World Bank’s Doing Business indicators (2010) rank Zimbabwe 159th out of 183 countries and well behind most of its regional competitors, such as South Africa (34) Botswana (45) and Zambia (90).
At a national level Zimbabwe must find new engines of economic growth. Traditionally the tightly integrated commercial farming and manufacturing sectors drove economic growth. In the early 1990s, manufacturing accounted for over a quarter of GDP while commercial farming’s share was upwards of 15%. Today, the two sectors account for little more than 12%, leaving a gaping hole in the country’s productive fabric.
The sectors most likely to take up the slack are mining and services, especially tourism. Prospects for commercial agriculture are clouded by ongoing land invasions by Mugabe supporters and an estimate from the Commercial Farmers Union that no more than a quarter, and probably less, of the 4,500 white commercial farmers on the land in the 1990s, will return to their properties.
Over the long haul too, Zimbabwe’s smallholder farm sector, heavily reliant on rain-fed cropping, has wasted away, and one land expert recently dubbed the country’s communal lands where the bulk of the country’s million-plus subsistence farmers eke out a living “the grandmother economy”.
This is a reference to the fact that most of the working-age population has moved to the towns leaving the elderly and women and children to till the land – no basis for a strong economic rebound. Corporate agriculture, incorporating contract farming by cotton and tobacco smallholders, is an obvious growth engine along with plantation production of sugar, timber, tea and coffee.
With the world’s second-largest reserves of platinum group metals (PGM) after South Africa, Zimbabwe’s platinum mines –which produced some 170,000 ounces of PGM worth over $400 million last year – are poised for strong expansion. But because there has been very little investment in mining exploration since 2000, the development of possibly as many as eight new mines taking production to a million ounces a year will take decades.
Victor Gapare, president of the Zimbabwe Chamber of Mines, is upbeat abut gold prospects predicting that production, which peaked at 28 tons in the later 1990s before plummeting to less than four tons last year, could reach 50 tons a year over the medium term. Zimbabwe has the potential to increase substantially its diamond production, worth $32 million last year, while ferrochrome, currently the country’s third-largest export after platinum and tobacco, could also be expanded.
But for this to happen, the government must clean up its act in respect of property rights including its controversial indigenization legislation, which stipulates that businesses, including mining companies, must be 51% locally owned. This makes no sense at all, partly because the country’s non-indigenous population (mostly whites) now numbers no more than 25,000 out of a population of over 10 million, but mostly because the country’s savings base – pension funds, household and corporate savings – was wiped out by hyperinflation.
Because further indigenization is not feasible financially, the very opposite is already happening. The country is being de-indigenized as foreigners, mostly so far from South Africa, move in to provide the long-term and working capital that the domestic banking system and capital market cannot provide.
This means that over the next few years manufacturing’s recovery will take the form of restructuring because the old model, based on import substitution and a much larger domestic market of around $12 billion in the early 2000s, is no longer viable in a much more open and smaller economy.
There is another snag. If the IMF’s medium-term projections are right, private consumer spending will fall from its long-term average of around 60% of GDP to 45%. In this situation industrial firms will have to consolidate by taking market share from rivals or from imports and focus on export-driven growth. Given the lack of competitiveness arising from a decade of rampant inflation, the exodus of skills and infrastructural decay, this will be very difficult to achieve.
For most of the last decade, net investment in Zimbabwe has been negative. This and the destruction of the savings base will make the country heavily reliant on foreign capital: foreign direct investment, foreign borrowing and donor funding. The top priority to date has rightly been humanitarian assistance, but this must now give way to debt relief – Zimbabwe’s external debt is 190% of GDP, 130% of it in arrears – and economic assistance, especially targeting the $20 billion needed to rehabilitate the physical infrastructure.
Unfortunately, so long as the comatose, fragile, fractious coalition is in office, but not in power, there is a real risk that robust economic recovery will remain on the back burner. GDP may grow 3% this year accelerating to 5% or 6% in 2010, but the economy could – should – do much better, though this is unlikely to be possible until the political stalemate is settled once and for all.
Tony Hawkins is an economist at the University of Zimbabwe’s Graduate School of Management