The Outlook for 2007

We are now well into the wet season and it is possible to look at the situation and begin to make some assumptions about the outlook for the next 12 months. This could change and in some cases, dramatically, but I think at this point in time the assumptions I have used are reasonable and the estimates made are the best available at this time.

The first assumption I have used is that there will be no significant change in the overall political situation here. Zimbabwe will remain a pariah, failed State with hostile relations with the majority of the rest of the world. The second assumption is that Zanu PF will follow through on their recent policy statements and we will see further hostile actions against the private sector during the year. A third major assumption is that the wet season is going to be inferior to 2005/06.

Reports coming into me from all over the country suggest that crop plantings have been similar or reduced compared to 2005. We know the tobacco crop will fall to below the 50 000 tonne threshold this year (the minimum crop size required to maintain the support infrastructure to keep the industry intact), we also know that plantings of contract crops has declined due to uncertainties in the corporate sector that maintained this activity last year.

In many areas crops have not yet been planted or have not yet germinated. Recent heavy rains affected the southeast and the midlands (the Tokwe and the Lundi are in flood) but in the rest of the country crop development is well behind schedule. This suggests an even smaller outturn in 2007 than in 2006 when only 700 000 tonnes of maize was grown. This is supported by the high prices being achieved for green maize at present. For all these reasons I think that agricultural output will decline again this year by at least 10 per cent – maybe more.

In the mining sector virtually all major maintenance and expansion activity has stopped. Suppliers to this sector report a sharp drop in buying activity throughout the industry. The only expansion taking place is in the platinum sector where special conditions seem to prevail. The main concern being the threat to “take” 51 per cent control of all mines in the country. A statement that the State will use this control to appoint new management has now reinforced this threat. My prediction is therefore that mineral output will continue to fall. Certainly there will be no recovery in sales of gold to the Reserve Bank until monetary policy is rationalized and as the informal sector is now the subject of fresh attacks, this will reduce illegal gold output and sales.

In the industrial sector the outlook is for accelerated decline in local industrial activity. The failure to adjust exchange rates on a regular and systematic basis is undermining the viability of many exporters and the concomitant failure to make available foreign exchange to industry for imports is impeding activity on a broad front. Even the State predicts that industry is going to continue to decline but recent actions by the State not only make this prediction inevitable but have also increased the possibility of even more rapid decline.

The threat that the State will take 51 per cent of all foreign owned firms is finding expression in many different ways. Zanu PF leaders – even at a low level, are approaching owners and managers in industry with the threat that if they do not co-operate they will be forcibly taken over. These threats are being taken seriously.

Foreign owned companies occupy many of the key positions in local manufacture and must be reviewing their activities with this threat in mind. Like the mining industry they may well decide to halt any expansion and major maintenance work. This will inevitably impact on both current and future capacity.

This generally gloomy outlook is compounded by the fact that the region seems to be making no serious attempt to head off a shortfall in electrical energy supplies that has been predicted for the region for some years and is scheduled to start impacting on supply in 2007. In Zimbabwe the shortage of coal and foreign exchange for spare parts and maintenance of existing plants will continue to impede supplies of electrical energy and this together problems in the coal and liquid fuels market will make operating conditions for many companies more difficult.

The one sector that may see a slight recovery in activity is tourism where the regional boom in tourism (growing at 10 to 15 per cent per annum) will result in some recovery in tourist numbers at the major tourist centers. However it is unlikely that hotel occupancy will rise significantly above the levels maintained last year. Income from tourism will remain depressed, as the switch from traditional tourism origins to the newer origins will be at a lower level of per capita spending.

After a turbulent few years, the financial sector will remain reasonably stable but critically dependent on Reserve bank policies. Wild swings in policy in 2006 have seriously undermined confidence and reduced the ability of financial institutions to protect themselves and their viability in an otherwise distorted and declining economy.

The commercial sector of the economy will be maintained by the inflow of funds from the Diaspora now running at in excess of US$100 million per month. These funds are directed mainly at paying school fees and medical costs and supporting the cost of living for the majority of people living in Zimbabwe. Converted at parallel market rates these inflows will continue to have a major impact on consumer spending and it is a pity that local industry will not be able to take advantage of this because of their other constraints. This sector will be hampered by shortages and rapidly rising costs.

As far as inflation is concerned and foreign exchange rates on informal markets, both can be expected to rise even faster than in 2006. Inflation is set to exceed 2000 per cent shortly and will probably rise still further by midyear. If government continues to insist on price controls this will lead to company failures in the retail and manufacturing sector. The main problem being cash flow constraints and an inability to finance new stock levels.

Eddie Cross
Bulawayo January 4th 2007.