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ZIMBABWE: It takes two

By Tony Hawkins
25 May 2010

A political solution is the only way of stemming Zimbabwe’s crisis after a decade of economic freefall. Without it, the fragile recovery now underway will prove short-lived, argues University of Zimbabwe economist Tony Hawkins

After 10 years of decline during which per capita incomes halved, Zimbabwe’s economy is on the recovery path, but progress is slow and the patient remains in intensive care. Those optimists who predicted a powerful short-term recovery have been proved wrong, in part because they neglected the political dimension, but also because they overlooked the difficulties inherent in turning the economy around in a “new normal” situation.

For Zimbabwe, the new normal is a dollarized economy, unprecedented levels of poverty and unemployment, acute scarcity of blue-collar and other technical skills, a seriously damaged infrastructure, and a fragile banking system. Against this difficult background, policy-makers must find new growth engines to replace large-scale commercial agriculture and come to terms with unprecedented levels of dependence on foreign capital of all kinds.

Even in a benign socio-political environment these challenges would be formidable, but where government is in the hands of a fragile, fractious and dysfunctional coalition, recovery takes on the dimensions of a Mission Impossible film.

The two main political parties in the coalition, president Robert Mugabe’s Zanu-PF and prime minister Morgan Tsvangirai’s Movement for Democratic Change (MDC) could hardly be further apart on a wide range of issues, including at least two core elements of economic policy.

Finance minister Tendai Biti from the MDC is working hard to convince the country that it must have a debt forgiveness agreement under the Highly Indebted Poor Country (HIPC) initiative. But many in the Mugabe party reject this out of hand because, they say, the conditions of such a deal would be “humiliating”. They refuse to acknowledge that the country, which was rated as a middle-income state when they took power in 1980, is now classified by the IMF as a fragile, low-income economy.

The second issue is foreign investment, where Tsvangirai’s party opposes Mugabe’s new indigenization and empowerment regulations that require foreign-owned companies and those owned by racial minorities within Zimbabwe, to cede 51% of the equity to disadvantaged Zimbabweans within five years. Companies with assets in excess of $500,000 were given until mid-April to submit their proposals for meeting this target.

Intra-party squabbling on the issue does not instil investor confidence.

When Tsvangirai’s spokesman announced that the cabinet – chaired by Mugabe – had suspended the regulations which were “null and void”, he was promptly slapped down by Mugabe himself and the minister and officials responsible for the programme. Subsequently it was announced that over 100 firms had submitted proposals by the mid-April deadline, but two banks – Barclays of the UK and Standard Bank of South Africa – were accused of being uncooperative.


The regulations are deeply ironic, coming at a time when recovery is being stifled by a savings drought, and when many businesses have “de-indigenized” by selling equity to foreigners.

To raise new money, the Merchant Bank of Central Africa increased its foreign ownership to 74% from 49%; one of the country’s largest blue-chip industrial firms, Delta Corporation, sold additional equity to its South African associate SAB-Miller to finance a new bottling line; retailer OK Bazaars is also selling equity to a South African investment bank; and NMB Bank is selling 25% of its shares to a UK investor.

These and numerous other unreported deals highlight not just the “de-indigenization” of the Zimbabwe economy but the growing South African influence, some would even call domination.

In the light of the battering that the corporate sector in Zimbabwe has taken over the past decade, such reliance on foreign savings is no surprise. But the Mugabe camp, whose policies are to blame for this situation, seems oblivious to economic reality in respect of both the country’s unsustainable foreign debt and its inability to finance the investment needed to reboot the economy.

The table (p.16) illustrates the problem. It shows that according to official figures, Zimbabwe ran a balance of payments deficit on current account in 2009 of over $900 million or about 22% of GDP, while on overall account, the deficit exceeded $1.9 billion or 47% of GDP. Even more alarming is the manner in which it was financed – from the accumulation of arrears of a further $1.4 billion, taking total cumulative arrears to 115% of GDP along with an extra $330 million in fresh or rescheduled borrowings.

In the light of these numbers, it is astonishing that not just politicians with a fragile grasp of economics but some serious business people argue that Zimbabwe does not need debt relief. Some optimistic bankers and investment advisers insist that the country will attract more than enough foreign loans and foreign direct investment to blow away the debt problem.

Yet in 2009 the country attracted just $105 million in FDI (foreign direct investment) and a further $67 million in portfolio inflows during the short-lived boom on the Zimbabwe Stock Exchange .

GDP grew some 4.5% last year, though the actual figure is disputed since two years of hyperinflation have left the official statistics in disarray.

Consumer prices fell 7.7% – another disputed figure – while exports declined modestly, but imports surged on the back of official inflows and fresh short-term offshore borrowing. In mid-April the government downgraded its 2010 growth forecast to 4.7% from 7%, blaming the donor community for failing to deliver desperately needed support.

Finance minister Tendai Biti said that only $3 million of the $810 million in his budget to be funded from foreign assistance had been provided.

Business people blame the first quarter of 2010 slowdown on the poor agricultural season with both erratic and insufficient rainfall, and also on very tight conditions in money markets along with the seemingly-endless political infighting within the Government of National Unity.

For many in business, inadequate money market liquidity is the most serious problem. The banks that are currently lending about half of their deposit bases are under fire from both business and government for failing to lend enough, but this is less than fair. The Reserve Bank of Zimbabwe says 98% of bank deposits are short term, and in the absence of a lender of last resort – a casualty of dollarization – banks are acutely aware of the necessity to manage liquidity cautiously.

Not only that, but while most banks meet the statutory capital requirements, they are wary of expanding their lending at a time when capital reserves are being reduced because of the downward revaluation of the commercial properties in which they invested, and when it is very difficult – and very expensive – to raise new capital in the marketplace.

Even triple-AAA – by Zimbabwe standards – borrowers have been forced to pay upwards of 15% for short-term loans (90 to 120 days), while some deposit-taking institutions are paying savers between 15% and 20% for deposits.

This is happening at

a time when businesses desperately need to recapitalize, update plant and equipment and strengthen their working capital positions. It is therefore hardly surprising that, like it or not, firms are being forced to look abroad for fresh capital in the process – making a mockery of Mugabe’s indigenization plans.


Costs and wages have been distorted by a decade of chronic inflation and hyperinflation, and with low volumes and low levels of capacity, utilization unit costs are high right across the economy. The situation is exacerbated by plant breakdowns, power outages and lengthy periods of downtime, while the very high real interest rates of the last year have made local manufacturers less competitive.

In recent months a number of corporates have appealed to the government for greater protection from cheap imports – especially those from South Africa and from Asia, particularly China. Food manufacturers say they cannot compete with South African imports; clothing firms are hard hit by low-cost Asian imports; and the local motor vehicle assembly industry says it has lost market share to new and second-hand imports from Japan.

The government is in a quandary because, while it is keen to protect industry, much to the dismay of the Bretton Woods institutions, anything that exacerbates inflation and elevates the cost-of-living of the man in the street is political dynamite.

This is particularly so now that the country has dollarized.

If dollarization is going to stick, Zimbabwe must keep its inflation rate close to that of the US, which means in the region of 2%. But consumer prices rose 2.8% in the first quarter of this year and are set to increase some 11% to 12% during 2010, mostly due to cost rather than demand pressures. Cost push inflation is being driven by the strong South African rand – most of Zimbabwe’s imports come from or through South Africa – rising fuel and drought-related food prices, high real interest rates and wages.

Fiscal policy is loose – the budget deficit is put at 18% of GDP – and while this will be funded by donors and drawdowns from last year’s special IMF SDR (special drawing rights) allocation of some $500 million, the authorities have been advised by the fund to trim public spending, especially on wages, while using the SDRs to rebuild reserves.

Ministers say this is just not practical politics at a time when public-sector trade unions are demanding a minimum wage of $500 a month against current incomes of less than $200. It is a similar story in the private sector, where wage pressures are intensifying at a time when employers are retrenching workers, including many at middle and senior management levels.

Given these pressing difficulties, the country could do without policy-makers squabbling over debt relief and indigenization, but this is the heavy price exacted by coalition politics.

Urgent political and economic reforms include establishing a genuinely independent central bank, cutting through the country’s morass of bureaucratic red tape that is stifling business enterprise and private investment, and above all, ensuring that policy-makers sing from similar, if not the same, hymn sheets.

The harsh reality is that, unless and until there is a genuinely free and fair election – which today seems a distant pipedream – Zimbabwe will just have to muddle through. The recovery will continue, but unless the binding constraints on growth – liquidity, savings and capital – can be loosened, the 4.7% growth target for 2010 could prove elusive; the brain drain will continue; unemployment will increase further; and foreign capital will seek a home elsewhere.

For at least a decade it has been obvious that the solution to the Zimbabwe crisis would have to be political, not economic. Donors, diplomats and official lenders like the IMF and the World Bank, which believe that pulling the right economic levers will change the political environment, are fast losing credibility.

The new economic dispensation that Zimbabwe needs depends on getting the politics right first.

Tony Hawkins is an economist at the University of Zimbabwe’s Graduate School of Management

By Tony Hawkins
25 May 2010