It is the Economy, stupid

We are about to start out on the next five years in Zimbabwe’s convoluted history. They are not going to be easy years but we are used to that and have faced worse conditions in the not too distant past. Zanu PF has appointed a Cabinet and it is clear from this that the Mujuru faction has gained the upper hand, even though it was the hard liners under Mnangagwa that delivered the election result that made it all possible.

The MDC is picking itself off the ground and coming to terms with the fact that for the 5th time since 2000, the Party has failed to achieve its goal of peaceful, democratic, lawful change. The Party now goes into opposition and must fight to maintain itself and hold the new government to account. With Zanu holding three quarters of the seats in both houses this is not going to be a simple task.

But it is Zanu PF that must take the hard decisions as they take up the cudgels of government. Their team is tired and lacks new blood and ideas. Someone referred to them as a team that is doing a victory lap before going into retirement.

They take over the Ministry of Finance with nothing in the bank and revenues that are sharply down from what was being taken in even six months ago. The decision to cancel all outstanding debts owed to local authorities and parastatals may have gained them a few votes but has crippled the affected institutions who are now unable to pay salaries. The markets have judged them wanting already and some $1,5 billion has fled the equities markets and about the same amount has been taken out of the banking system.

Less visible, but equally damaging, is the downgrading that is going on in respect to our perceived country risk. This has increased the cost of borrowing in international and regional markets for new investment and suddenly many planned investments are looking less attractive. One immediate casualty may well be the deal with ESSAR to take over and rebuild the Zisco Steel plant in the Midlands and to open up a major iron ore deposit in the Mwenezi Hills for export.

The new Minister of Finance does not engender confidence and does not have a financial background. He takes over a very competent team at the Ministry but they can only advise hard times and austerity and tough decisions. He is faced with the implementation of the economic management programme agreed with the IMF in June and signed by President Mugabe. Several aspects of this programme are already behind schedule and if they are not met in the next Quarter, this could threaten prospects for reengagement with global financial markets and the multilaterals and with it any prospect of a deal involving our $13 billion national debt.

Then there is the question of the unrealistic promises made in the campaign to civil servants and the security services for higher salaries. Promises to restore health services and education, to solve recurrent and persistent water shortages all takes money and if the economy does not start growing and growing quite fast (over 8 per cent per annum) then all such promises will go unfulfilled.

The economic quicksand that lies across the path that the government must follow includes a very fragile banking system that is not only cash strapped, but over loaded with bad debt and non performing loans, much of it to Party heavyweights. If a single bank collapses, it will have a domino effect on the rest and who knows where that will end. In addition there is the huge gap between imports and exports (close to 40 per cent) and if there is any interference with the macroeconomic system that was created during the GNU by Biti, the consequential withdrawal of commercial lines of credit will immediately result in widespread shortages and the re-emergence of queues.

As enunciated by the previous Minister of Indigenisation, the demand that all major enterprises and even many medium and small enterprises, cede 51 per cent control to selected individuals in Zimbabwe, is simply not going to work. To buy such a stake in these companies would cost nearly $10 billion and in many cases would result in the withdrawal of the investor/owner from the company. The resulting management and financial problems would simply be unmanageable.

Compounding all these problems is the declining output at the Marange diamond fields. The alluvial deposits that have yielded up to 120 million carats of diamonds since 2006 have been exhausted and what remains is hard conglomerate containing up to 9 billion carats but requiring sophisticated technologies that the present mine operators simply do not have.

And so it is decision time for Zanu PF and there are no easy options. In my view the most likely route to be selected by the new government will be what I call the “Chinese Option”. This involves the adoption of tough, market driven principles for macro and micro management of the economy, a concerted drive for growth rates above 10 per cent per annum, associated with political oppression.

The alternative is the “North Korean Option” – isolation, introspection, slow growth and the imposition of a totalitarian regime with no political freedoms. Given the nature of the new administration and the early indications, I think this is unlikely and if they go for growth with repression, then they are going to have to face up to a few economic fundamentals.

Number one, I think, will be the reality that the Mining Industry is not going to offer what seemed possible a few short years ago – annual growth figures of over 30 per cent on a sustained basis. Gold and Platinum prices are lower than expected, many other minerals are in over supply and prices depressed. The withdrawal of ESSAR from Zimbabwe will mean that there is little or no chance of rehabilitating Zisco Steel – perhaps the largest industrial firm in Zimbabwe and little chance of an iron ore bonanza.

So we will have to look to the other sectors of the economy for enhanced growth – tourism, industry and the services sector. Growth will not come easy in any of these without a restoration of investor confidence and reconnecting the domestic financial industry with global markets and financial institutions. The IMF programme is essential for this to happen. For these things to become possible, the indigenisation programme has to be modified and rationalized and made more acceptable to business.

Finally the Zanu PF will have to acknowledge that the land reform programme has been an unmitigated disaster for the country. After 16 years of trial and error, Zimbabwe faces another agricultural season with little or no land preparation in rural areas, shrinking output in all sectors except tobacco (and even this growth is not sustainable) and yet another year when the country will have to spend nearly a billion dollars on food and import over 70 per cent of everything we eat, even maize meal.

It is not possible to put the Zimbabwe economy back on a growth trajectory without agriculture and if we do not restore law and order in farming districts and do not protect productive enterprise and provide for security of person and assets in all rural areas, then we are going nowhere as a nation. The decision by the President to proceed with the Land Commission is perhaps a start to such a process, but unless the State reigns in the criminally minded minority in their ranks that right now is trying to dispossess farmers of their assets and livelihood and think they have impunity, they will not even get out of the gate in the growth stakes that lie ahead. That may be the best thing for the MDC but it’s not the best for the Nation.

Eddie Cross
Harare 19th September 2013