The Zimbabwean Economy in 2005

After a brief attempt at real reform of the monetary and fiscal situation in 2003, the Ministry of Finance and the Reserve Bank of Zimbabwe have reverted to the old formula that has failed in the past. As a consequence all indicators in the Zimbabwe economy are again strongly negative.

Inflation has started to accelerate and most commentators expect this trend to continue for some time. The GDP has shrunk in the first quarter of the year and I expect negative growth in the order of about 5 per cent this year. The main reasons for this being continued stagnation in the tourism, service and mining sectors and a sharp reduction in manufacturing output as well as agriculture.

The main immediate crisis is being brought about by a severe shortage of foreign exchange. The authorities are attempting to correct this by forcing all available resources into the Reserve Bank and to this end severe penalties are being imposed on any who violate strict Reserve Bank controls on foreign exchange inflows. This is unlikely to be successful but has had the effect of curbing the rapid decline in the value of the currency on parallel markets. Most traders expect the decline to continue once traders have arranged how to avoid the new restrictions imposed by the recent monetary statement.

The foreign exchange crisis has been exacerbated by considerable expenditure on military hardware in recent months. The full extent of this is not known because the transactions are shrouded in secrecy, but arms already delivered have a face value of at least US$400 million. There is talk of further orders with East European manufacturers and the Chinese arms industry but this is not confirmed.

In an environment where we expect formal sector exports to decline to US$1,1 billion, down from US$1,35 billion in 2004, this expenditure on weapons has made an already serious foreign exchange crisis unmanageable - as a result fuel and food supplies are at an all time low.

Almost all indictors point to a disastrous agricultural season - tobacco sales are expected to reach a maximum of 65 000 tonnes (down from 85 000 tonnes in 2004), maize output has fallen to one third of national demand, oilseed crops are down very substantially and other major agricultural sectors are all showing a downturn in output - fruit, sugar, tea, coffee, horticulture, meat products and milk are all in very short supply. With the likelihood that winter cropping will be also very disappointing it is likely that imports of food and other products will take up at least US$800 million in the next 12 months. This is simply not available and a real food crisis is now almost inevitable.

In the liquid fuels sector, even though demand has declined from about 5,5 million liters a day to about 3 million liters a day, the State is simply unable to meet demand or even a small proportion of demand. Transporters are now finding their fleets grounded for lack of fuel and exports are building up without transport to move them to their markets. Public transport is almost non-existent and if this situation continues for any length of time it will have devastating consequences in the wider economy.

On the more technical front, we have seen the largest expansion of public debt in the history of the country in the past 5 months. The domestic borrowing of central government has risen from Z$2 trillion at the end of 2004 to over Z$10 trillion today. Even in hard currency terms this is an astonishing figure. National debt now exceeds annual GDP by a wide margin and there is no sign of Government curbing its appetite for borrowing.

It is impossible to estimate the current account deficit in government expenditure. Some economists put it at over 30 per cent. Whatever the real figure it is completely out of control and carries with it the very real threat of a collapse of state finances. The parastatals sector is also reporting massive losses that are not being accounted for by the authorities.

The Railways total revenue is now insufficient to cover the wage bill and the management is calling on the State (often the Reserve Bank) to fund salaries. Hwange Colliery is unable to meet demand and there is a serious shortage of coal throughout industry and mining. This is now being compounded by the fuel shortage.

The Grain Marketing Board is still selling maize at Z$600 000 a tonne when the actual cost of imported maize is over R1000 per tonne (Z$1500 000 per tonne) and local maize prices to farmers are over Z$2,5 million per tonne. With GMB sales running at about 1500 tonnes a day this implies direct subsidies to the Board of billions of dollars. The same applies to wheat and to other products such as rice being handled by the Board.

Fuel from the State sector is being sold at 16 per cent of its real cost and this partly explains its scarcity - long haul transporters buy as much fuel as they can in Zimbabwe where the official pump price is below Z$3500 a liter (US38 cents at official exchange rates, 16 cents at a realistic exchange rate). This compares to over US$1.00 per liter in most other countries in the region. The recent actions of the Reserve Bank have closed the door on private sector initiatives to fund the supply of fuel and to secure deliveries from South Africa and this is the main reason for the present crisis.

The major energy supplier called ZESA is also in deep crisis. Despite major adjustments to local tariffs the organisation continues to accumulate debt and is unable to properly maintain its infrastructure. Shortages of foreign exchange are compounding these problems and there is an increasing deficit in domestic electrical energy supplies.

All of these difficulties will be made much worse by the recent decision of central government to destroy much of the informal sector. This sector supports over 3 million families and makes a very substantial contribution to the national economy. Its destruction will impact on human welfare across the country, damaging food supplies and markets and plunging millions into increased poverty and deprivation.

E G Cross
Bulawayo, 16th June 2005